- Companies are getting away with not paying their workers for overtime, a new NBER paper shows.
- That's because of a loophole in federal law where employers don't have to pay managers overtime.
It's not just workers who can exaggerate their job titles — their employers are doing it too, and it's to avoid paying them for their work.
That's according to a new paper from the National Bureau of Economic Research, which found that companies avoid paying their employees overtime by taking advantage of a loophole in federal labor law, in which managers are paid their fixed salaries even when they work beyond their prescribed hours. That loophole involves misclassifying workers as managers, even if they don't have actual managerial duties.
The researchers highlighted some particularly egregious examples they found, including barbers who are classified as "grooming managers" and front desk attendants who are hired as "Directors of First Impressions."
The paper also cites a 2008 lawsuit involving the Family Dollar Store chain, in which store managers argued that they spent 60 to 90 hours per work performing manual labor tasks while being classified as managers, even though they rarely performed managerial tasks. They weren't getting paid for overtime, and an Atlanta court awarded them $35 million in addition to unpaid overtime. The court found that more than 1,400 store managers were owed more than $17 million.
Class action lawsuits like the one at Family Dollar aren't rare, the researchers point out — nearly three-quarters of wage theft violations that resulted in fines or back wages involved "overtime-related charges," they said. And such violations are becoming more commonplace.
The issue is widespread, the authors of the paper, Lauren Cohen, an economist at Harvard Business School, Umit Gurun, and N. Bugra Ozel, finance professors at the University of Texas, concluded.
Between January 2010 and December 2018, the researchers found that there was a 485% increase in the use of manager titles on online job postings, for employees paid at or "just above" the Federal Labor Standards Act's salary minimum of $455/week that exempts workers from overtime pay.
"Our central finding is that there is a systematic, robust, and sharp increase in firms' use of managerial titles around the federal regulatory threshold that allows them to avoid paying for overtime," the researchers said.
In contrast, the researchers did not find a similar increase in assignments for roles in which the federal government does not have overtime rules, which they use to highlight that such classifications are used to evade paying employees for their work.
"Overtime avoidance" is more common at workplaces where workers have fewer bargaining rights, they said, and the research comes as bosses misclassifying other employees as contractors is becoming a more visible issue — and as workers' bargaining power is the highest it's been in decades, thanks to a persisting labor shortage.
"In recent decades, several industries have been characterized by concentratingly large firms growing even larger in size and scope – seen, for instance, in their increasing share of overall profits," the researchers wrote. "While this changing dynamic might be optimal economy-wide, we believe it is important to keep careful track of the balance of power between sides, and the potential transfers between firms and employees which occur as a result."
And that balance of power is especially fraught in some parts of the country.
In states where laws are less protective of worker rights, the manipulation of managerial titles is 52.8% to 91.8% higher, the researchers said. And that kind of manipulation is most common in the retail, food, janitorial, and hotel sectors.
It's as firms have been using the classification of "gig workers" to underpay employees as well in the last few years. A recent study from the left-leaning Economic Policy Institute (EPI) found that workers were losing out on thousands of dollars in lost pay and benefits because of it.
The EPI found that these kinds of misclassifications were common in many of the same industries that the NBER study highlighted. For instance, according to EPI's calculations, janitors and cleaners lose about $5,000 to $7,400 a year due to employers classifying them as gig workers. And for construction workers, the cost is between $10,177 and $16,729 per year.
Michael Murphy, a Philadelphia lawyer who represents workers in employment-related disputes with their employers, advised in an article for HR.org that workers pay attention to their classification as exempt or non-exempt under the Fair Labor Standards Act, whether or not their time is being reduced for "non-work activities," or if their employers are explicitly refusing to pay them time-and-a-half for overtime.
"Often, this action is accompanied by intentionally confusing explanations," Murphy said. "For example, an employer may claim that a pay period was altered, or that the overtime hours were offset by hours worked during a different week."