$23,660-a-Year ‘Executives’ Will See a Raise From Obama Rule

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U.S. President Barack Obama
U.S. President Barack Obama is acting amid concern over the stagnation of middle-class income, which six years into the economic recovery still hasn’t recovered to pre-recession levels. Photographer: Andrew Harrer/Bloomberg

President Barack Obama is preparing to do what the U.S. economic recovery has been slow to accomplish: raise the wages of millions of Americans.

His administration is drafting new rules on who qualifies for overtime compensation, forcing more businesses to pay time-and-a-half after 40 hours of work. Many employees now earning as little as $23,660 a year -- below the federal poverty line for a family of four -- aren’t entitled to overtime pay because they are considered managers.

While Republicans in Congress have blocked proposals to raise the minimum wage, Obama can change the overtime rules through executive authority. Some officials at the Department of Labor are urging the president to lift the threshold as high as $51,000 before someone could be called an executive exempt from overtime. A group of 26 Democratic senators has asked him to push it even higher, to $56,680.

“This is absolutely one of the best practical ways to give people the on-ramp to the middle class,” said one of the lawmakers, Sherrod Brown of Ohio. “When you strip people of their overtime pay, which is what’s happened over the years, they really don’t have a chance to get ahead: They’re working harder and harder and not seeing real pay increases.”

Opponents argue that pushing the level too high could force fast-food restaurants, retailers and other enterprises to cut employment or even go out of business.

Lamar Alexander, the Tennessee Republican who chairs the Senate Labor Committee, has condemned Obama’s anticipated move as part of an economic strategy seemingly “engineered to make it as unappealing as possible to be an employer creating jobs in this country.”

Stagnant Wages

Obama is acting amid concern over the stagnation of middle-class income, which six years into the economic recovery still hasn’t rebounded to pre-recession levels. The median U.S. household income of $54,500 in February remained $1,500 short of the December 2007 level, at the start of the recession, according to inflation-adjusted estimates from Sentier Research.

When the latest personal income statistics are released next week, economists surveyed by Bloomberg predict they will show the smallest gain in six months, continuing a sluggish trend even as unemployment has dropped and the stock market has soared.

75-Hour Week

Gassan Marzuq, a 58-year-old Kuwaiti immigrant who used to be a manager at a Dunkin’ Donuts franchise in Kingston, Massachusetts, is typical of the kind of worker who would be affected by Obama’s order, though the regulatory change would come three years too late for him.

Marzuq said he often had to work as many as 75 hours a week covering other employees’ shifts without any pay above his $42,900-a-year salary, regularly missing holidays, his children’s birthdays and even his son’s high school graduation.

“I worked my butt off for them,” he said. “I ruined my life with my family because I never saw my kids growing up.”

The franchise owner, Cadete Enterprises, dismissed Marzuq after he complained -- he says in retaliation, the company says because he violated a state law that prohibits managers from sharing in employee tip pools. Nicholas Carter, an attorney for Cadete, said the company encourages managers to hire enough staff to avoid working overtime; Marzuq disputed that.

A federal judge ruled that Marzuq wasn’t entitled to overtime pay because he was a “bona fide executive” under existing regulations, even though the judge found he may have spent 90 percent of his time serving customers.

‘Fewer Managers’

Business lobbyists argue that changing the rules might actually hurt people like Marzuq, prompting employers to rethink their supervisory structures, reducing flexibility for managers to directly serve customers and cutting entry-level management jobs.

“It’s likely you would see fewer managers and assistant managers and more hourly workers,” said David French, senior vice president of government relations for the National Retail Federation. “Fewer slots for restaurant managers would limit career advancement.”

1938 Law

The 1938 New Deal-era law establishing the federal 40-hour workweek and requiring overtime for additional hours exempts professional, administrative and executive employees.

Labor Department regulations define those categories, in part, through a minimum salary level. The threshold, eroded by inflation, has only been raised once since 1975, a readjustment in 2004 under President George W. Bush that was criticized as too modest by progressives.

The overtime cutoff salary of $23,660 now only covers 11 percent of salaried workers compared with 65 percent in 1975, according to an analysis by Ross Eisenbrey, vice president of the Economic Policy Institute, a research group partly funded by labor unions.

Within the administration, officials have discussed a range of possible overtime thresholds. A $51,000 trigger favored by some Labor Department officials would cover an additional 6 million workers, said a person familiar with the internal discussions.

But some on the White House economic team have expressed concern that too sharp a shift could be disruptive to employers and endanger the economy’s recent strong job growth, the person said, adding that there is also a push to index the level to inflation.

An increase in the salary threshold to $51,168 would bring the threshold back up to the inflation-adjusted equivalent of the level set in 1975 under Republican President Gerald Ford. Eisenbrey estimates that would cover about half of today’s salaried workers.

‘Only a Name’

The definition of a manager is ambiguous enough under current regulations that restaurant or retail workers like Marzuq who spend most of their time doing manual labor or serving customers can be deemed “executives” exempt from overtime, Eisenbrey said.

“I was serving customers, making coffee, washing floors, cleaning the parking lot, shoveling snow, you name it, whatever other employees did,” said Marzuq. “Management is only a title, only a name, to get you in a trap: responsibility without authority.”

The administration is examining whether to tighten the definition of a management position in ways other than salary. Under the Bush administration’s 2004 rules, exempt executives must supervise at least two employees and management must be their primary duty, though there is no requirement covering the amount of time they spend on management tasks. California state regulations, by contrast, require more than half of an employee’s time be spent on management duties.

Daniel Hamermesh, a University of Texas economics professor who has studied the impact of changes in overtime rules in Japan and South Korea, said the likely impact of stricter overtime standards would be higher overall pay for affected workers.

Larger businesses would probably hire additional workers to reduce the amount of overtime paid, he added. In some cases salaried workers would see their hours reduced to avoid any overtime payment, he said.

Labor union officials and leaders of the Democratic Party’s progressive wing have been pressing for a stricter standard and higher threshold.

Democratic donor Nicolas Hanauer, a wealthy Seattle-based venture capitalist and early investor in Amazon.com Inc., has taken up the cause for a stricter standard, personally lobbying members of Congress and White House advisers.

Hanauer, co-founder of Second Avenue Partners, argues that the erosion of legal protections for overtime pay has been a key contributor to a decades-long transfer of income from workers to corporations.

Corporate profits’ share of U.S. gross domestic product has nearly doubled, to an average 10.5 percent over the past two years from 6.4 percent during the 1960s and 1970s. During the same period, the share of GDP going to employee compensation has declined to 42.5 percent from 49.4 percent.

“It’s this super-corrosive feedback loop,” Hanauer said, adding that if employers can get two people to work 60 hours a week without overtime, they wind up doing the jobs of three people, which means less employment for others.

“The more I soften the labor market, the more leverage I have over you,” he said.

The administration’s deliberations on the rule have stretched on longer than anticipated. After Obama announced last March he had asked the Labor Department to revise the overtime rules, the department forecast it would act by last November, then moved date back to February of this year.

Obama has promised action “relatively soon.”

(An earlier version of this story incorrectly quoted Hanauer.)

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