Just days before new overtime rules were to go into effect on December 1, a federal judge in Texas blocked the Obama administration’s update to overtime pay from taking effect. That means that millions of workers who should receive time-and-a-half pay when they work more than 40 hours a week are now at risk of losing that extra income.
According to recent analysis by the Congressional Budget Office, canceling the rule will lead to the loss of $570 million in earnings for affected workers in 2017 (and $2.6 billion between 2017 and 2022, assuming it were to last that long).
First, a bit of background on what’s at stake in this case. All the way back in 1938, the Fair Labor Standards Act established that workers covered by its overtime provision would get paid 1.5 times their hourly wage (“time and a half”) when their weekly hours at work surpassed 40. As with other labor standards (the FLSA also introduced the minimum wage), the overtime provision was intended to prevent employer exploitation of workers who lack substantial bargaining power. Advocates of the law believed that by raising the price of overtime labor, workers would have more time with their families and employers would have an incentive to hire more workers, rather than overworking the ones they had.
The reasons for a “salary test” are sound
The vast majority of hourly workers are automatically covered by the FLSA, on the assumption that hourly workers have little autonomy. But a law that covered only hourly workers would have an absurd loophole: Employers could avoid having to pay OT simply by declaring a worker to be salaried, without altering that worker’s responsibilities or pay. Therefore, the law specified that the jobs that were exempt from overtime rules included “bona fide executive, administrative, and professional capacit[ies].” And from the beginning of the law's implementation, the Labor Department has used a "salary test" as one measure of whether a job meets that standard: a threshold below which salaried workers must be paid OT, just like hourly workers.
In addition — this part is a bit more complicated — salaried workers who earn above the salary threshold have to be paid overtime if their duties at work are non-supervisory, non-routine, or non-independent. This “duties test” is another attempt to protect workers who have little independence in their jobs. (Those who have more extensive job responsibilities fall under the “white-collar exemption” from the FLSA’s overtime rule. The idea here, which does not always match reality, is that white-collar workers have independent responsibilities and schedules; their work simply wouldn’t fit into an hourly schedule; and their salary implicitly compensates them for any overtime.)
The final bit of background — and this part is crucial to understanding where Judge Amos Mazzant went so badly wrong — is that the salary level for the salary test was not indexed to inflation, and so the Labor Department has stepped in to adjust it at various points since the original law was passed.
The rule would expand the proportion of salaried workers eligible for overtime from 7 percent to 35 percent
After years of deliberation and commentary from stakeholders, including businesses, academics, and worker groups, the Obama administration updated the salary threshold from the current level of $455 per week (or $23,660 a year) to $913 per week ($47,476 a year). As shown in the figure below, which plots the threshold since 1950 in inflation-adjusted dollars, this update merely restores some, not all, of the threshold value that has been eroded by inflation.
That erosion of the overtime threshold by inflation has been very costly for workers. In 1975, more than 60 percent of full-time salaried workers earned salaries that qualified them for overtime. Today, only 7 percent of salaried workers do. Under the new $913 cap, this share rises to 35 percent of full-time, salaried workers.
Judge Mazzant blocked the rule based on legal reasoning that, given historical precedent, makes no sense. He argued that Congress’s original intent was to establish an exemption for workers in certain kinds of jobs, with no reference to salary — quoting the language about “bona fide executive, administrative, and professional capacity.” Since a salary threshold was not explicitly part of the law Congress passed, the Labor Department, he argued, lacks the authority to establish a salary threshold, since doing so would go beyond Congress’s intent.
But the implication of the judge’s logic is that the federal government has been breaking the law for a very long time. If his reasoning is correct, the government violated the law when it set the first salary threshold in 1938, and it violated it every time it subsequently adjusted the threshold. (Every uptick in the figure below represents just such an adjustment.)
In work that helped lay the groundwork for the Obama administration’s rule change, Ross Eisenbrey and I noted how the Labor Department has always seen salary as a key indicator of a worker’s status in his or her place of employment — and therefore as a key indicator of whether overtime pay is required. In 1940, for instance, Labor regulators wrote that “the final and most effective check on the validity of the claim for exemption is the payment of a salary commensurate with the importance supposedly accorded the duties in question.”
Later, in 1958, the department called the salary test “an index of the status that sets off the bona fide executive from the working squad leader, and distinguishes the clerk or subprofessional from one who is performing administrative or professional work.” It’s a simple but powerful point: Salary typically has a rough connection to the amount of responsibility a worker is granted.
Unlike other standards, a salary test has the advantage of simplicity
But the salary test also has another advantage, both for regulators and for businesses: It’s straightforward to implement. As Eisenbrey and I argued in 2014: “However difficult it might be to judge whether an employee’s primary duty is truly that of an executive or exempt administrative employee, an employee and her employer can easily determine the level of the employee’s pay. The salary level is the clearest, most easily applied test of exemption.”
Those of us who worked on updating the salary threshold did due diligence to set it at a reasonable level. In Eisenbrey’s and my earlier work, we evaluated the management and supervisory responsibilities of workers by salary level and found that those with genuine management duties consistently earned well above the new threshold; conversely, those earning below the threshold had largely nonsupervisory roles.
The duties test recognizes that some workers above the threshold should also get OT, based on what they do on the job. But it was never intended to preclude or preempt the salary test.
In fact, while many employers are understandably unhappy with the administration’s decision to increase the threshold — it does, after all, potentially raise their labor costs — they generally value the salary test precisely because of its bright-line clarity. Lobbyists for the nation’s retailers predictably opposed the rule, but even their senior vice president for government relations, David French, told the New York Times that his group and many other business organizations were open to some increase in the salary threshold. “We’re 12 years past the last update,” he said.
In fact, several companies, including Walmart, having already invested the “sunk costs” to comply with the new rule on schedule, plan to do so. Presumably, they and the many other firms that have said they will abide by the new overtime rules despite the judge's decision, including Staples, Starbucks, Lowes, Home Depot, and Rite Aid, find the update to be somewhere between unobjectionable and a worthy investment in their workforces.
Strangely, in a footnote in his recent decision, the judge appears to realize that his attack on the salary threshold implicates every Department of Labor salary-threshold adjustment since the OT rule was introduced. He tries to back out of that corner by arguing that his unprecedented view on the salary test refers only to the new rule: “The Court is not making a general statement on the lawfulness of the salary-level test for the EAP exemption. The Court is evaluating only the salary-level test as amended under the Department’s Final Rule.”
This footnote makes no sense. Either the salary test is now and has always been a valid part of the law or it isn’t and it never has been.
The salary test’s history clearly shows that it is central to the understanding of the overtime standard. Millions of workers — men and women who were just about to get paid for working extra hours for which they should have been paid a premium for years now — depend on a higher-level court reversing this nonsensical ruling on appeal. (Consider how much time and energy could have been saved if the salary threshold had been indexed to inflation from the start, a sensible move whenever government benefits or protections are tied to salary or wages. Another obvious case is minimum wage laws.)
Of course, whether it survives the Trump administration is another question. Members of Congress, including some Democrats, have been trying to stall the update for quite some time already. Had Hillary Clinton won the election, she would likely have been able to block any such delay. President-elect Donald Trump hasn’t said he’ll repeal the rule outright, and doing so would certainly undermine his populist posture as a champion for working Americans. But he did say he wants to see “a delay or carve-out of sorts for our small business owners.”
But none of these political considerations change the fact that the judge got this one wrong, at significant cost to the living standards of millions of workers.
Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. His most recent book is The Reconnection Agenda: Reuniting Growth and Prosperity, and he blogs here.