Mixed Feelings About The FLSA

It may be Memorial Day, but my thoughts are currently more in a Labor Day mode.

The Fair Labor Standards Act primarily sets the federal minimum wage and imposes overtime requirements on "non-exempt" employees.

FLSA cases tend to be small

The Department of Labor pursues some of the most serious cases it can locate, usually in an effort to change the customary practices of an industry or a large employer.

In several recent years (before new regulations under the FLSA) the number of actions (and the number of employees impacted) has been as follows:

2003 - 29,425 (342,358)
2002 - 40,264 (263,593)
2001 - 31,772 (195,257)

Average number of employees per action:

2003 - 12
2002 - 7
2001 - 6

Average back wages per employee (per action):

2003 - $621 ($7,222)
2002 - $666 ($4,361)
2001 - $569 ($3,497)

Average civil penalties as a percentage of back wages awarded:

2003 - 1.5%
2002 - 1.3%
2001 - 2.7%

Of course, most of these cases would not be cost effective for private attorneys to pursue. There is a private cause of action under the FLSA, and a win can provide attorneys fees awards, but in a private action there is also a risk of a less than the anticipated outcome, such as an attorneys' fees award for an amount less than actually earned on a billable hour and expenses basis.

The largest half a dozen settlements over the past few years (involving millions or tens of millions of dollars), largely involve misclassifications of low level employees who are called managers as exempt rather than non-exempt for overtime purposes at major franchises or national companies.

Most FLSA actions involve agricultural workers, day wcare workers, restaurant workers, garment manufacturing workers, private security guards, health care workers, hotel and motel workers, janitors, and temporary help.

A good share of the actions have roots in overtime regulations that are not always clear regarding how an employee is classified, coupled with employers taking aggressive stances knowning that the consequences of getting it wrong are modest.

The Economic Impact of the FLSA

Something on the order of 90-160 million U.S. workers are non-exempt, and the vast majority make well above the minimum wage (since the minimum wage is so low), so overtime is the only major benefit that they receive from the FLSA.

Since overtime is simply 1.5 times base pay, and the FLSA does not regulate base pay, any employer who wants employees to work more than 40 hours a week on a predictable basis can control total compensation to the employee simply by adjusting base pay. Employers who pay a base rate more than 1.5 times the minimum wage are capable of restructuring their affairs to avoid the economic impact of overtime entirely.

Overtime only has mandatory economic effect that can not be eliminated by juggling base pay based upon hours worked, for employers who pay less than 1.5 times the minimum wage and have employee who work more than 40 hours a week. This group of employees turns out to be quite small, perhaps because low wage jobs have been structured to avoid any risk of overtime pay. Suggestive of this fact is the knowledge that in 2005, about 1% of workers who worked full time or overtime were paid no more than the minimum wage (and some were tipped employees who actually made quite a bit more after tips). In contrast, about 6% of part-time employees (less than 35 hours a week) made the minimum wage or less. In raw numbers, there were 67,000 workers paid overtime who were paid minimum wage or less in 2005, of whom about three-quarters were tipped employees, out of 75.6 million hourly employees for the nation as a whole in the same data set.

The FLSA's tendency to encourage employers to fashion low hourly wage jobs as part-time also tends to give workers, like teenagers and people working "second jobs" for their families, who have the luxury of being able to work part-time and survive economically an edge in the labor market over those people who need to have a full time job to get by, possibly increasing unemployment for low skilled primary breadwinners. (Although, teen employment, in a long term trend, is at record lows, with only about one in three teens working, compared to almost half a few decades ago).

The FLSA is a bit like the laws which prohibit discrimination on various prohibited grounds in hiring (as opposed to wrongful termination and failure to promote for discriminatory reason). Enforcement is absolutely anemic, and is hardly enough to overcome major economic opposition to its policies. But compliance has a negligible negative economic effect (other than the costs of figuring out the law itself) on employers, and establishes social norms that probably have far greater effects than the legal rights established by the laws themselves.

I'm not entirely sure that the norms created by FLSA overtime rules help those whom it is designed to help at a macroeconomic level. Despite the fact that it is easy to pay overtime without increasing overall payroll, employers do tend to avoid employing rank and file workers more than forty hours a week in practice, while the norm for managerial and professional employees who are exempt is far greater, probably on the order 50-70 hours a week. More hours means, on average, greater productivity per employee, and greater productivity per employee means, on average in a competitive market for the services an employee offers, greater compensation.

Thus, the exemption for managerial and professional employees leverages even modest per hour differences in productivity between exempt and non-exempt employees into big differences in productivity per employee. This, in turn, may be an important reason why there are meaningful social class divideds in the U.S., rather than merely gradual gradations. A 25%-50% difference in hours worked can greatly amplify the effect of even a dollar or two difference in productivity per hour.

An employee making $14 an hour will earn $28,000 a year working full time at 40 hours a week. If that employee is equally productive and works 60 hours a week and is classified as exempt, a $42,000 a year salary will have the same economic impact on the employer and will create less fuss, since there is no need to keep track of hours and there are two-thirds as many employees to manage, so there may be room to pay the salaried employee even a little more than that amount, perhaps by matching 401(k) contributions of the salaried employee to some extent. This is the difference between a working class life and a middle class life.

If, in fact, the hourly employee's productivity gives rise to a $13 per hour rate of pay, while the exempt employee's productivity gives rise to a $15 per hour rate of pay, the non-exempt employee may make $26,000 per year, and the exempt employee may make more than $45,000 per year and probably a few extra benefits as well.

It isn't that non-exempt workers a lazy. They simply have employers reluctant to put them to work for the kind of hours that they do exempt employees, and as a result, non-exempt workers produce less per year (indeed, non-exempt workers frequently have productivity that is more obviously a function of hours worked than exempt workers).

The tendency of employers to honor the forty hour a week expectations for hourly workers also leads to the greater frequency with which working class families have bread winners who work two or three jobs. Yet, working multiple jobs generally doesn't produce overtime pay. Instead, someone who works two jobs usually earns less per hour at their "second" job than they do at their first one, essentially earning negative overtime pay, and must endure a more complicated life as a result of juggling more than one work schedule.

The forty hour week for non-exempt employees may also help explain why self-employed constructive and maintenance contractors like plumbers and carpenters are often economically comfortable compared to employees in big companies and government agencies doing comparably skilled work.

The fact that employers tend to structure jobs that require only a high school education as hourly, while structuring jobs that call for college educations as managerial or professional, a division more or less embedded in the FLSA regulations, which look to education as a key factor in a "professional" designation, also impacts how employees are managed. The route of least resistance for a work place that has hourly employees under the FLSA is to micromanage work hours and breaks in a way that can manifest itself as a paternalistic lack of trust that can be socially demeaning. A salaried workplace, in contrast, almost necessitates a more hands off management style that implicitly trusts the worker. This puts one more brick in the wall of class separation between the working class and the middle class.

Overtime, ironically, is one employee benefit that economically rational people stuggle to be denied.

Limitations

This post isn't an economics journal article and includes only intuition, not econometric estimates, although I have no doubt that there is a whole literature out there that attempts to quantify these amounts and, in all likelihood, not much consensus within that literature.

But there is real reason to wonder if the FLSA doesn't contribute to, rather than mitigating, the serious problem of the social class divide in the United States.