Chair Jehlen, Chair Brodeur, Vice Chair Lewis, Vice Chair Hay, members of the committee, thank you for allowing me to speak with you today. My name is David Cooper. I am a senior analyst at the Economic Policy Institute (EPI) in Washington, D.C. EPI is a nonpartisan, nonprofit research organization whose mission is to research, develop, and advocate for public policies that help ensure the economy provides opportunity and fair rewards for all Americans, with a focus on policies to support low- and middle-income households.

I am testifying today in support of H. 1609 and S. 1092, which would update a grossly outdated provision in Massachusetts’s wage and hour laws that exempts many lower-paid managers and administrative workers from overtime pay when they work more than 40 hours per week. In my testimony, I will first describe the significance and purpose of overtime protections, briefly discuss the historical background for the salary threshold for overtime exemption and federal efforts to update this standard, and then describe the likely micro and macroeconomic impacts of the proposed policy change here in Massachusetts.

The significance and purpose of overtime protections

 The Fair Labor Standards Act (FLSA)—enacted in 1938—requires employers to pay their employees at least the federal minimum wage for all hours worked, and caps at 40 the number of hours an employee can work in a workweek without additional compensation. The FLSA created the 40-hour workweek in America by requiring that employers pay an “overtime” premium of 1.5 times an employee’s regular rate of pay for all hours worked beyond 40 hours. (Prior to the FLSA’s passage, it was not uncommon for workers to work six days a week.) Overtime protections ensure that employers have “skin in the game” when they ask employees to work long hours, by making it more expensive to insist upon excessive hours of work.

From the beginning, the law applied to salaried employees as well as hourly workers. Congress recognized at the outset that there’s no inherent difference between an hourly worker and a salaried worker. How they are paid is entirely up to the boss. And salaried employees need time with their families and time for themselves just as much as hourly workers do. Congress ensured that hourly workers and salaried workers alike were entitled to overtime pay, whether they were blue collar or white collar, whether they worked in a factory or in an office.

In the FLSA, Congress provided overtime protections to most workers, and directed the Secretary of Labor to exempt bona fide executive, administrative, and professional employees from these protections—under what’s known as the “EAP” exemption.1 With the EAP exemption, Congress intended to exempt highly paid employees who were thought to have enough individual bargaining power in the labor market and workplace that they did not need to be protected from exploitation. A simple, straightforward indication of this higher bargaining power was their higher levels of pay.2

For an employee to qualify for the EAP exemption from overtime under both the FLSA and Massachusetts state law, they must satisfy each of three conditions: 1) they must earn a salary, i.e. not be paid by the hour; 2) they must earn above a certain salary threshold (the “salary test”); and 3) they must pass the “duties test,” a fairly complicated test of the employee’s tasks and responsibilities that establishes them as a bona fide executive, manager, or highly trained professional. Thus, if a salaried employee is paid less than the salary threshold, the employee is eligible for overtime regardless of job responsibilities. If the employee is paid at or above that salary threshold, he or she must also pass the duties test to be exempt from overtime requirements.3

Originally, the FLSA set the salary threshold at three times the minimum wage. In doing so, the law set a bright line demarcating which workers could be considered highly paid executives, administrators, and professionals, and which could not—regardless of their job duties. Similarly, the Massachusetts overtime law set the state salary threshold at two times the state minimum wage when it was enacted in 1960.

For nearly 40 years after the FLSA’s passage, the federal salary threshold was regularly raised to ensure it still accurately delimited true executives, administrators, and professionals from workers with less bargaining power. As shown in Figure A, in 1975, nearly 63 percent of all salaried workers in the United States were automatically eligible for overtime because their salaries were below the salary threshold—i.e., they were eligible regardless of their job duties. Unfortunately, in the years that followed, the U.S. Department of Labor stopped updating the salary threshold, allowing overtime coverage to decline precipitously as nominal salaries rose over time. The threshold was updated modestly once in 2004, when it was raised to its current level of $455 per week—the equivalent of $23,660 in annual pay. That is less than the federal poverty line for a family of four and cannot possibly be thought to reflect executive- or professional-level compensation. By 2016, fewer than 7 percent of salaried workers nationwide were covered for overtime by the FLSA’s salary threshold.4

Unfortunately, the Massachusetts law on this issue is just as obsolete. The federal salary threshold of $455 per week currently applies for the EAP exemption from overtime in Massachusetts. Notably, this is less than a full-time salary at the Massachusetts minimum wage. Someone working 40 hours at the current state minimum wage of $12 per hour would earn $480—meaning that it would be illegal for a worker in Massachusetts to be paid a salary that would make them eligible for overtime based on the salary test. Thus, one of the essential tests—and arguably the most straightforward and effective test—for determining who is a bona fide executive, administrator, or skilled professional is completely meaningless under Massachusetts law.

It is not hard to imagine how this loophole in the EAP exemption could be exploited. Consider a line worker at a fast food restaurant or a discount retailer being paid hourly at the state minimum wage. If their employer decided that they wanted this employee to work more than 40 hours per week, they could easily give that employee token managerial responsibilities, convert them to a salary of $480 a week (the equivalent of a minimum wage salary), and then require them to work 50, 60, 70, or more hours a week, paying them only minimum wage for those additional hours. In other words, they could be legally denied the time-and-a-half premium pay that is supposed to compensate for, and discourage, excessive hours of work. Indeed, the DOL rulemaking record is full of stories of employees working 60 or 70 hours a week without any extra compensation for their long hours.

There is no reason why someone with a job title that includes the word “manager”—but whose job primarily involves performing the same tasks as front-line staff—should be exempt from the same overtime protections afforded front-line workers unless he or she is being fairly compensated.

Background on recent federal overtime rulemaking

As my EPI colleague Heidi Shierholz noted in recent public comments, the current administration’s rulemaking on overtime “does not go nearly far enough to protect workers.”5 As she explained, in 2016, the U.S. Department of Labor finished an exhaustive two-year rulemaking process to raise the FLSA’s salary threshold for the EAP exemption. The department met with over 200 entities, including employees, employers, business associations, nonprofit organizations, employee advocates, unions, state and local government representatives, tribal representatives, and small businesses.6 The department also received and reviewed over a quarter million public comments, and conducted a thorough economic impact analysis. The 2016 final rule would have raised the EAP salary threshold to $913 per week or $47,476 on an annualized basis, the latter being the 40th percentile of the earnings of full-time salaried workers in the lowest-wage Census Region, which was at the time, and continues to be, the South.7 Further, the rule provided that the threshold would be updated every three years to the 40th percentile of the earnings of full-time salaried workers in the lowest-wage Census Region, in order that the threshold would not continually erode over time as the wage distribution rises. EPI projects that the 2020 level of the threshold under the 2016 rule would be $982 per week ($51,064 for a full-year worker).

In November 2016—just before the 2016 rule was set to go into effect—a single district court judge in Texas enjoined the department from enforcing the rule; the court later erroneously held the rule to be invalid. Instead of defending the rigorously determined threshold, the Labor Department under the Trump administration decided to rescind its 2016 rule and promulgate a new regulation with a much lower standard salary threshold. The department’s 2019 proposal is to set the salary threshold under which most salaried workers are eligible for overtime pay when they work more than 40 hours per week at $679 per week in 2020 ($35,308 for a full-year worker), which is the projection to January 2020 of the 20th percentile of the earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, and/or in the retail industry, excluding nonexempt workers and workers who are not subject to the FLSA or who are not subject to the salary level test. The proposal does not include automatic updating.

Though an improvement over the current threshold, the salary threshold of $35,308 proposed in the Trump administration’s rule cannot possibly be construed as an executive-level salary. Moreover, when the Massachusetts state minimum wage reaches $15 in 2023, the federal EAP salary threshold will only be modestly above a full-time salary at the state minimum wage ($31,200 annually).

Updating the Massachusetts overtime salary threshold

Had the 2016 rule been implemented, this problem of severely eroded overtime protections for lower-paid managers and administrative workers would already be solved. But as is often the case, state lawmakers must now step in to fix a problem caused by decades of federal inaction.

H. 1609 and S. 1092 would reinstate the salary test as an effective labor standard in Massachusetts law, and restore protection against excessive unpaid hours for hundreds of thousands of Massachusetts workers. The legislation would gradually raise the salary threshold for the EAP exemption from overtime in Massachusetts over four years: it would be set at an annual salary of $35,000 in 2021; $45,000 in 2022; $55,000 in 2023; and $64,000 in 2024. (These annual salaries correspond to weekly earnings of $673, $865, $1,058, and $1,231, respectively.) In subsequent years, the threshold would be automatically adjusted to match either changes in the median weekly earnings of salaried workers, or two times the Massachusetts minimum wage, whichever is greater.

The salary levels specified by this legislation are well-targeted and consistent with both historical precedent and the 2016 federal Department of Labor’s rulemaking. If the 1975 threshold, which covered nearly 63 percent of the salaried workforce, were simply raised with inflation up to today and projected inflation out to 2024, it would be equal to $1,268 per week—nearly identical to the threshold proposed in H. 1609 and S. 1092. Similarly, following the U.S. Department of Labor’s methodology, the 40th percentile of salaried earnings for the Northeast Census region in 2019 is projected to be $61,048, or $1,174 per week. Projecting this value out five years to 2024 at the CBO’s projected rate of inflation would raise it to $1,322—slightly higher than the threshold proposed by H. 1609 and S. 1092. In other words, the threshold established by this legislation has a strong basis in both precedent and current regional pay levels.

The legislation smartly phases in the new threshold over several years, giving employers time to adjust employee salaries, schedules, or workloads to conform to the law. And because the threshold would be linked to either growth in median salaries or changes in the state minimum wage, the legislature will not need to revisit this threshold in the future. As nominal salaries rise over time, or if the legislature chooses to raise the state minimum wage, the EAP exemption threshold will be automatically adjusted to ensure that it remains at a level consistent with higher-paid executives, administrators, and professionals.  Automatic annual adjustment is also important for businesses, as it allows them to plan for the annual change, as opposed to wondering when the legislature will again chose to make an update.

Raising the EAP exemption salary threshold to $64,000 by 2024 would extend new overtime protections to an estimated 168,000 salaried employees in Massachusetts.8

Importantly, the change would also strengthen overtime protections for 267,000 salaried workers in the state who are likely eligible for overtime protection right now, but who may be misclassified as exempt. Thus, setting an appropriate threshold brings clarity to the rights of employees who are already covered and to the duties of their employers. Many salaried employees paid above the current $455 per week threshold are entitled to overtime pay because their primary duties are not executive, administrative, or professional. This includes workers in scores of occupations, from paralegals and postdoctoral researchers to dental assistants and copy editors. Most bookkeepers are entitled to overtime pay, for example, but many do not know it, and neither do their bosses. With a $64,000 salary threshold, this ambiguity goes away—employees paid less could be sure of their rights and employers would know their responsibilities.

Altogether, there are about 435,000 salaried employees in Massachusetts who would have their right to overtime established or clarified by a higher threshold.

How the change would affect businesses, workers, and the Massachusetts economy

As a result of the proposed change, some employers will have to adjust their pay, scheduling, and possibly staffing practices because of new overtime eligibility for some of their staff. There are several ways through which employers could adjust:

1. They can pay overtime (time-and-a-half) for the hours in excess of 40 per week worked by employees whose salaries are below the threshold.
2. They can reduce the hours of overworked employees and share those employees’ workloads with other staff. For example, an assistant manager who now helps stock shelves and cleans floors, adding 20 extra hours to her work week without any extra compensation, could have that work assigned to part-time employees, who will benefit from the extra hours and pay. Some employers may find it advantageous to hire additional staff rather than pay the overtime premium to existing staff.
3. They can raise salaries above the threshold if they want to continue working certain employees more than 40 hours a week without paying for or keeping track of overtime.
4. They can manage time more efficiently, avoiding late-in-the-day meetings, for example, and demand that employees complete their weekly tasks within 40 hours.9

It is important to understand that none of these changes would require reclassifying any salaried staff as hourly employees—although some employers may choose to do so. It would simply require that employers record hours worked when eligible salaried staff work more than 40 hours per week. Because most employers already have at least some nonexempt staff, every major payroll system can already process overtime pay, meaning that most employers will not need to adopt new payroll or compliance systems. The change would also not stop or impede employers from having flexible scheduling policies; employees could still arrange flexible schedules, they would simply start gaining additional pay when their schedules exceed 40 hours per week.

For affected workers, these changes will lead to clear improvements in their well-being. A worker who previously was required to work long hours will now receive higher pay (either as a result of overtime premium pay or a salary increase up to the new threshold), more free time away from work, or both.

This change will also benefit the broader Massachusetts economy. First, overworked employees are less productive. Research shows that employees who have adequate time to rest and recuperate each week, or between shifts, are more productive, and less prone to at-work accidents and injuries.10 Second, as employers adjust staff schedules and workloads, they may find it advantageous to hire additional staff instead of paying overtime premiums for extra hours by existing staff. In this way, raising the overtime threshold can stimulate job growth. Third, because at least some portion of affected workers are likely to receive higher pay, expanding overtime protections can strengthen consumer buyer power, particularly for middle-class households whose spending is the core driver of U.S. economic growth. Fourth, excessive work hours are linked to a variety of worse health outcomes, including increased risk of stroke and heart disease.11 Thus, reducing overwork has public health benefits.

Finally, giving workers more time away from work gives them invaluable time to spend with their families, to help their children with homework, to coach youth sports, to engage in volunteer or civic activities, or to care for themselves or loved ones. Time is the one resource that we can never get more of. Just as workplace laws protect people’s health and safety, they also need to value and protect workers’ time.

H. 1609 and S. 1092 would provide an essential correction to state law and would restore one of the core labor standards that helped build and grow the middle class through the 20th century—the right to overtime for excessive work hours. I strongly urge you to enact this legislation.

Endnotes

1. The “administrative” category refers to workers who are part of the administration of an organization. In other words, those whose work is directly related to the management or operations of an employer, and who exercise independent judgement about matters of significance. Administrative assistants (or similar clerical or support staff) would not qualify as exempt administrators under the EAP exemption unless their regular duties included consequential, independently-made decisions about the management or operation of an organization.

2. See L. Camille Hébert, et al., “Law Professor Comments Regarding ‘Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,’” submitted to U.S. Department of Labor September 4, 2015.

3. U.S. Department of Labor, Wage and Hour Division, “Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Acts (FLSA),” revised July 2008.

4. Celine McNicholas, Samantha Sanders, and Heidi Shierholz. 2017. What’s at Stake in the States if the 2016 Federal Raise to the Overtime Pay Threshold Is Not Preserved—and What States Can Do About It. Economic Policy Institute, November 15, 2017.

5. See Heidi Shierholz, “EPI Comments Regarding the Department of Labor’s Proposed Overtime Rule,” public comments submitted via regulations.gov to Amy DeBisschop, Acting Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, May 21, 2019.

6.  Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees [final rule], 81 Fed. Reg. 32396 (May 23, 2016).

7. U.S. Department of Labor, Wage and Hour Division, “Final Rule: Overtime,” revised January 2018.

8. Economic Policy Institute analysis using Current Population Survey microdata.

9. For a longer discussion of these methods of adjustment, see Lonnie Golden, “Long-overdue overtime update will give boost to workers and economy,” The Conversation. July 17, 2015.

10. See John Pencavel, “The Productivity of Working Hours,” Economic Journal 125, no. 589 (2014): 2052–2076; Lonnie Golden, “The Effects of Working Time on Productivity and Firm Performance, Research Synthesis Paper,” International Labor Organization (ILO) Conditions of Work and Employment Series 33 (2012); Allard E. Dembe,  J. Bianca Erickson, Rachel G. Delbos, and Steven M. Banks, “The Impact of Overtime and Long Work Hours on Occupational Injuries and Illnesses: New Evidence from the United States,” Occupational and Environmental Medicine 62, no. 9 (2005): 588–597; Heather Boushey, and Bridget Ansel, Overworked America: The Economic Causes and Consequences of Long Work Hours, Washington Center for Equitable Growth, May 2016.

11. Mika Kivimäki et al., “Long Working Hours and Risk of Coronary Heart Disease and Stroke: A Systematic Review and Meta-Analysis of Published and Unpublished Data for 603,838 Individuals,” The Lancet, August 20, 2015.