Firms Inflate Job Titles to Avoid Paying Workers Overtime

Featured in print Digest

Overtime wages are a core component of labor protections for workers. In Too Many Managers: The Strategic Use of Titles to Avoid Overtime Payments (NBER Working Paper 30826), Lauren CohenUmit Gurun, and Naim Bugra Ozel find that some firms avoid paying overtime by giving managerial titles to employees whose jobs are equivalent to nonmanagerial positions.

The Fair Labor Standards Act (FLSA), enacted in 1938, includes a set of overtime pay regulations to discourage companies from overworking their employees and to encourage additional hiring. Employees, unless they are exempt, must receive overtime pay at a rate of at least one and a half times their regular rate of pay.

The FLSA requires that for employees to be exempted from those guarantees their positions must be salaried, rather than paid hourly, must be paid at least $455 per week, and must be in positions primarily involving executive, administrative, or professional duties. All states follow these rules except for Alaska, Connecticut, California, New York, and Maine, which impose their own thresholds for the salary test.

Bestowing managerial titles on workers enabled firms to avoid paying overtime
that would have cost $4 billion in 2019.

The researchers obtain data on job postings from 2010 to 2018 from Burning Glass Technologies. They select full-time positions in the US with valid data on salary, title, employer name, and pay frequency that are posted by corporations. They remove the ground, rail, and air transportation industries and nondepository credit intermediaries because they are subject to different labor regulations.

Exploiting the fact that there is a strict salary test threshold at $455 per week, the researchers examine job postings just surrounding this regulatory threshold, finding a nearly fivefold increase in managerial job postings just at $455. [See figure]

These include postings for jobs such as “Director of First Impressions,” with job duties otherwise identical to nonmanagerial workers — in this case, a front desk assistant. There is no such discrete jump at alternative thresholds or when examining hourly or daily paid positions, where the titles would not aid directly in overtime avoidance. The jump persists after controlling for education and experience requirements. The researchers estimate that 30.7 percent of managerial titles above the threshold are offered to avoid overtime.

Data from the Bureau of Labor Statistics show that in 2019 there were approximately 2.65 million salaried managers with a salary of less than $50,000. In 2018, the average number of overtime hours per week was 3.6. The researchers combine these data to estimate that in 2019 firms used managerial titles to avoid paying overtime wages on 151 million employee-hours, worth about $4 billion. For the average affected workers, this was equivalent to 13.5 percent of salary in lost overtime. In contrast, Department of Labor compliance actions in 2019 resulted in only $226 million in back wages.

Firms with greater labor market power are more likely to avoid overtime payments. The researchers construct a firm power index that accounts for union membership, the unemployment rate, the job opening rate, and right-to-work laws. The probability of observing overtime-avoiding positions in the state with the highest firm power index, Florida, is 62 percent higher than that with the lowest, Minnesota. The researchers also find statistically significant and positive results using two alternative state rankings, one based on its worker rights protection laws as measured by OXFAM America and the other an indicator of whether a state has enacted a right-to-work law. Even within the same firm, overtime avoidance is greater when a position is in a state with more power.

— Whitney Zhang