When I last worked in an office (many moons ago) I was one of the millions of workers who are exempt from overtime. I did have some managerial responsibilities but I would not have characterized my job as “executive” or “professional.” Anyone with some common sense and a calendar could have effectively done the work I was doing. But because I was above the $23,660 per year threshold I was not eligible for overtime pay for the extra hours I worked. Depending on the season (my work ebbed and flowed dramatically based on the school calendar), I could work 60 hours a week and still be scrambling to get it all done; I could also be hunting for projects outside of my department just to make up a full work day. I started to think that I MIGHT be better off as an hourly wage worker because then at least I would be getting paid for how much I was working. But under the system, I was sometimes working 20 hours a week for free.

The recent changes in overtime rules are designed to address this concern for many employees who find themselves in a peculiar middle place. They are working more than 40 hours a week, but instead of being paid time and a half for the time they put in over 40 hours, they are barred from compensation for those hours because they make more than $23,660 a year or $455 per week. They are working for free. The recent changes to overtime rules–which will go into effect late this year–will raise the threshold from 23,660 to $47,476 per year. Meaning that all the workers who earn between $23,660 and $47,476 will now be eligible for time and a half–one and a half times their regular wage–for each hour they work beyond the 40-hour work week.

Are these workers going to be better off? Or are we going to place such a burden on employers that we actually do harm to these employees?

All About That Base

Nothing is more exciting than the phrase “let’s do some math!” but to understand the debate surrounding overtime we have to look at the numbers.

The previous $23,660 threshold, which was established in 2004, works out in the following way. Let’s say you have a job where you are right at the $23,660 and not eligible for overtime. If you are working 40 hours a week then the magic of math breaks that down $11.38 an hour gross ($23,660 a year divided by 52 weeks per year divided by 40 hours each week). That’s better than the federal minimum wage. But if you are working 60 hours a week for that same salary with no overtime eligibility, you’re only making $7.58 an hour. That’s barely more than the $7.25 federal minimum wage and in many states it’s actually lower than the required minimum.

If your $23,660 a year job is being a manager at a retail store and you’re working 60 hours a week with no overtime, there is a good chance that you are making less than the employees that you manage. Which seems inconsistent with the whole idea of managers being worth extra pay for their expertise and responsiblities and unfair that you are working for less than the minimum wage or working for free. Either way, you slice it that’s a fairly raw deal.

Under the new rules, which raises the threshold to $47,476 per year or $913 per week, many salaried workers are now entitled to overtime pay. In the same scenario as before–with a worker earning $23,660 per year–he or she would be paid the same 11.38 for a 40 hour work week. But for a 60-hour work week, that worker would make an average of 13.27 per hour, when you include the 20 hours of time and a half pay. That is a considerable improvement from the $7.58 per hour that he or she would earn without overtime.

In the video below, PBS NewsHour gives a brief explanation of how the overtime regulations currently work and what the proposed changes will do for workers.

How Businesses Might Respond

There are a few points to unpack from that video in terms of the arguments and counter-arguments for overtime. The reason that some people don’t think this is a sound policy is because employers are likely to react in several ways which could have negative consequences for employees.

The first way they might react is by reducing hours for workers who would be newly eligible for overtime and hiring multiple part-time workers instead in order to keep their labor costs about the same as they were before the change in the rules.

But is this necessarily a bad thing for the existing workers? Maybe not. Currently, a worker who is putting in 60 hours a week for a salary of $36,000 a year won’t be losing any money if their company reduces them to 40 hours a week and then hires someone else to work for 20 hours a week to avoid paying overtime. In fact, if you think about your time as having a monetary value you are getting more money because you are getting 20 extra hours a week back in time. The trickier scenario is a company that decides to change from one employee working 60 hours a week to two employees working 30 hours each–while also reducing the salary of the original employee or paying them on an hourly basis. This would, in fact, be a reduction in that worker’s total wages from $36,000 to about $27,000 per year (assuming that the hourly rate was the same).

That’s a significant decrease and a trade that many employees might not want to make for 30 extra hours a week. In a job market that had more positions available, those individuals would be able to get a second job for 30 hours a week. If it had a comparable salary they would actually be doubling their income. But in an economy where there isn’t a second job to take on with your extra time, this could be financially devastating.

In fact, some economists argue that increasing the threshold for overtime eligibility would be a good thing overall because it will help create jobs. Some employers will choose the second option of splitting one job into two. This change could be a mixed blessing for workers–a source of more jobs even if it might depress wages.

Another way employers might respond is by increasing salaries for workers to the new $47,476 per year cap, thereby rendering them ineligible for overtime. For workers who are close to that level, it may just be cheaper for employers to pay an extra few thousand dollars a year than to deal with the added hassle of calculating overtime pay or the added expense of paying it. Workers in that situation will get a raise.

In the video below, the Department of Labor explains the history of overtime as well as the recent rule change:

Obviously increasing labor costs places a burden on employers and some employers will have difficulty accommodating. The argument against increasing the overtime threshold essentially boils down to not wanting workers to lose what they already have in an effort to get a deal that is fairer. Instead of elevating worker wages, changes in overtime may decrease worker pay overall and alter the flexibility that some workers enjoy.

One of the benefits of being overtime exempt, some argue, is that you have more freedom from your employer to work a 30-hour week to make up for the 60-hour week you had to work. That was my experience when I was working–although culturally at the office it may breed resentment when other employees see you leaving early or not working Fridays if they don’t also see you working late or doing some of your tasks from home on the weekends. But for many workers, the mythical 30-hour work week never comes and so employees have essentially just charitably donated hundreds of hours of their time to their employers. Or they have worked as “managers” for less than the minimum wage.

The greatest danger that this change in overtime rules presents is that employers may cut workers and not replace them, making the unemployment situation worse. For some companies that will undoubtedly be the case and these businesses will take hits in productivity and be run by skeleton crews. But it is unclear whether, on balance, the changes will do more harm than good or more good than harm. And it is hard to anticipate how many workers will be cut versus how many will get raises. It’s even harder to know beforehand whether this change will be worth it for the overall health of the economy.

Conclusion

If you look at the numbers an increase in overtime benefits is undoubtedly helpful for those workers who currently are putting in more than 40 hours a week at their jobs. They will be more fairly compensated for the hours they work. But the larger effects on the economy are tricky to determine. Depending on how employers react, and how much of an increase in labor costs employers can absorb, this change can have serious negative impacts as well.

There will undoubtedly be some job loss and wage depression, as well as job gains and wage increases. As we get closer to the December 1 deadline when this change will go into effect, there will probably be more predictions about how this will ultimately shake out. But the fairness argument that workers should be paid for the time that they work when they aren’t actually making the high salaries for an executive or professional role is hard to refute.

Resources

U.S. Department of Labor: Final Rule: Overtime

U.S. Department of Labor: Questions and Answers

US News: Are The New Overtime Rules About To Boost Your Paycheck?

The Atlantic: Overtime Pay For Millions of Workers

Bloomberg: Obama’s Overtime Rule Defies Econ 101

The Hill: Senate GOP Files Motion To Roll Back Obama Overtime Rule

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post Overtime Changes: Is it Time for More Time and a Half? appeared first on Law Street.

Tipping is a cultural practice that is deeply ingrained in the American service industry, particularly food service, that most of us have not stopped to consider. If we eat at a restaurant, we leave a tip for the person waiting on us. There are dozens of social rules about how and when to tip and being a “good tipper” is considered a positive social trait.

Tipping also allows restaurant owners to defray some of their labor costs onto the customers who use their services. The rules in each state are different but organizations like the National Restaurant Association lobby for a lower minimum wage for wait staff, which is then supplemented by tip income. Their rationale is that lowering the costs for employers allows them to hire more wait staff and increase their profitability, which in turn puts their workers in a better position.

So what are we actually doing when we leave a tip for a waiter at a restaurant? Are we encouraging efficient service or subsidizing the profits of restaurant owners?

Topping Off

The most common tipping scenario we come across is tipping wait staff at a restaurant, so let’s use that as an example for how tipping actually works in practice. In many states, wait staff employees are exempt from being paid the usual minimum wage. Instead, they are paid a much lower wage by their employer, the restaurant, and make the rest of their money in tips. In theory, the restaurant is supposed to pay the waiter more if their tips plus their base wage do not equal the minimum wage. For example, if the minimum wage is $7 an hour and the restaurant pays $2 as the base wage, if the employee isn’t getting $5 an hour in tips the employer is supposed to “top off” and pay them extra. For a breakdown of which states require employers to “top off” and how much take a look at the Department of Labor chart here.

There are basically three kinds of states: full credit, partial credit, and no credit. These terms indicate whether employers are able to get a tax credit for topping off their employees’ wages to meet the minimum requirements. Full credit states follow the federal minimum wage for tipped employees, which is $2.13 an hour and then rely on customer tips to raise the wage of those employees to the state minimum wage. Workers in partial credit states earn somewhere above the federal $2.13 minimum but below whatever that state’s minimum wage is. So the cost of labor is still being subsidized but not quite as much. In no credit states (there are seven including D.C.) tipped workers and non-tipped workers are paid the full minimum wage, meaning that employers cannot take a credit for topping off their employees’ wages because their base wages already meet the state requirement.

Poverty Among Tipped Workers

How do these policies affect the actual workers involved? Nationally, the poverty rate for all workers, in general, is 6.5 percent but for tipped workers the poverty rate is 12.8 percent. The subcategory of tipped workers who are waiters and bartenders experience a poverty rate of 14.9 percent.

But when you break this down for the three different kinds of states (full, partial, and no credit) there is a difference in poverty rates. According to the Economic Policy Institute, tipped workers, waiters, and bartenders fare much better in the no credit states–where base wages for all employees must meet the state minimum. For example, in no credit states the poverty rate for waiters and bartenders is 10.2 percent and in full credit states, the poverty rate for these workers is 18 percent. The poverty rate among waiters and bartenders in partial credit states falls in between at 14.4 percent. The evidence suggests that tipped workers, which includes waiters and bartenders, experience less poverty when employers pay a higher percentage of their wage and experience the least poverty when employers are responsible for the full amount.

The chart below from the Economic Policy Institute shows how poverty rates correlate to state requirements for tipped workers.

So while raising the minimum wage may be a worthy goal to help non-tipped workers, doing so will not actually affect tipped workers in most states. Even though these workers may be the people who need an increase the most, given that they experience higher rates of poverty and receive higher rates of government assistance than non-tipped workers.

An added problem with the “topping off” policy is that it doesn’t always happen. A compliance sweep of 9,000 restaurants by the U.S. Department of Labor’s Wage and Hour Division found that 83.8 percent of these restaurants were in violation. This resulted in $56.8 million dollars being collected in back wages for the employees at these businesses. Because employees have to insist upon it and the actual calculations are complicated, businesses may not consistently pay these employees what they are supposed to and these employees end up earning less than the minimum wage.

For a more thorough explanation of the concept and how it can affect wait staff, take a look at this segment from PBS:

Is Tipping Fair?

For a waiter in a state that allows this practice there are a lot of potential problems. Tipping is often based not on the quality of service but on race and perceptions of attractiveness. This can lead to employees who are working the front of the house on the same shift–covering the same amount of tables with the same level of efficiency–making vastly different wages because one is white and one is black. There is also a $4 per hour wage gap between white workers and workers of color in the restaurant industry due to the positions workers of color can get–they may work as bussers versus servers, for example.

The restaurant industry has, by far, the highest rate of sexual harassment in the workplace. For women, the rate of sexual harassment in restaurants is five times the rate of sexual harassment in other industries. This can lead to servers being subjected to unwanted sexual advances that they feel obligated to put up with because they’re working for tips. This motivation is also present in states that pay the same minimum wage for all types of employees but is particularly strong when the tips are necessary to even earn the minimum wage.

Most restaurants do not split the tips that are received between “front of house” (the wait staff) and the “back of house” (the kitchen staff). So the people who prepare the food are not rewarded at all in the tip. They aren’t given a higher base salary to compensate for this either. In fact, there is a gross disparity in pay between workers in the front and back of the house, even though working in the kitchen requires training and is arguably just as difficult as working in the front of the house.

This is even stranger when you consider that the tip for the wait staff is calculated as part of the cost of the meal, which typically depends on the quality of the ingredients and the cooking. But the staff responsible for that increase in quality doesn’t get rewarded. If a restaurant runs a special on a particular dish, reducing its price and therefore the tip, it does not make the waiter’s job any easier yet they are paid less. Tipping and the wage disparity that it creates can lead to a shortage of labor in the back of house and resentment between the staffs.

Why Do We Still Tip?

If tipping is so unfair to the wait staff and to the back of the house why are we doing it? Basically, tipping is a subsidy for the restaurant business. It allows restaurants to offer their potential wait staff less money than they otherwise would have to in order to attract workers. Restaurants are also able to pay their employees below the minimum wage because they are supposed to earn the difference in tips. And if tipped employees still make below the minimum wage, restaurants can get a tax credit for paying the difference.

Requiring that restaurants pay their workers a higher base wage rather than relying on tips to make up the difference would, according to advocates of the current structure, cause restaurants to close, cut staff, or increase prices–all of which have economic consequences. The restaurant industry supports many Americans and their families. If they are forced to pay the full minimum wage they would need to cut labor costs by firing workers or raise their prices to make up the difference. Raised prices would ultimately reduce their profits because a reduction in demand and that would be catastrophic to the families that rely on these restaurants.

However, the restaurant industry is also not supporting many American families. When workers aren’t taking home a reasonable living wage they end up relying on government services to meet their needs or foregoing those necessities. This effectively creates a second subsidy by the public for the restaurant industry, allowing them to pay their workers less than they need and then having taxpayers pick up the rest of the cost.

Conclusion

Tipping industries effectively split the responsibilities of the employer between business owners and their customers. It creates a divided loyalty from the staff to please their bosses and their customers, which sometimes leads to conflict and sometimes to abuse and discrimination. Tipping artificially lowers the cost of operating the business so that employers will be able to make a profit in a competitive industry, rather than letting capitalism take its course and eliminate an industry that may not otherwise survive.

That may not be a bad thing. Or at least not entirely a bad thing. An effort to eliminate tipping to help the workers in the restaurant industry, and correct the unfairness that tipping creates, might help them right out of their jobs. And deciding that you no longer wish to tip at restaurants will only get you some dirty looks. Even if tipping is unfair and a system of a higher base wage would be preferable for workers, it would only be preferable for employees who work for businesses that can afford to pay their employees more. Others could potentially lose their jobs because of an increase in labor costs.

Resources

Economic Policy Institute : Twenty-Three Years and Still Waiting For Change – Why It’s Time To Give Tipped Workers The Regular Minimum Wage 

Department of Labor: Minimum Wages for Tipped Employees

The Washington Post: I Dare You To Read This And Still Feel Good About Tipping

Freakonomics Podcast: The No-Tipping Point

Slate: What Happens When You Abolish Tipping

Economic Policy Institute: Twenty-Three Years and Still Waiting for Change

Department of Labor: Tipped Employees Fact Sheet

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post The Trouble With Tipping appeared first on Law Street.

President Obama signed a bill this week that closes a nearly 85-year-old trade loophole allowing the import of slave-produced goods into the United States. The new regulations, which will affect a long list of goods known to be created by child or forced labor, will go into effect in about two weeks.

The loophole allowing goods made by child or forced labor into the United States is found in the Tariff Act of 1930. While these types of goods are traditionally prohibited under U.S. law, there’s an exception in the tariff–“consumptive demand.” Essentially what that means is that if it’s impossible to supply the domestic demand without importing products made via child or forced labor, those products are allowed to be imported.

The list of products that these new regulations will affect most heavily are cotton, sugarcane, tobacco, coffee, cattle, and fish. The Department of Labor’s list of goods produced by child labor or forced labor also includes things like gold, diamonds, electronics, and pornography–depending of course on the producing country.

There’s been a particular focus on the use of forced labor in the Thai fishing industry, after a number of exposes written over the last year have exposed the use of trafficked Rohingya migrants as slave workers on Thai fishing boats. According to the Guardian:

Hundreds of people are thought to have been traded as slaves to support Thailand’s $7.3bn seafood industry. Costco and CP Foods are facing a lawsuit, filed in California, to prevent the sale of Thai prawns/shrimp tainted by slavery. In January, European Union investigators visited Thailand to see whether it had made enough progress on the issue of slavery to avoid an EU-wide ban on seafood imports from the country.

Senator Sherrod Brown (D-Ohio) proposed the amendment that closed the loophole, and now his office is asking the U.S. Customs and Border Protection agency to begin enforcing the new roles as soon as they go into effect in 15 days. Brown stated:

It’s embarrassing that for 85 years, the United States let products made with forced labor into this country, and closing this loophole gives the U.S. an important tool to fight global slavery.

Brown is right–while this may mean less choices for consumers in the U.S., it will be a comfort to know that we no longer lend such support to forced labor.

Anneliese Mahoney

Anneliese Mahoney is Managing Editor at Law Street and a Connecticut transplant to Washington D.C. She has a Bachelor’s degree in International Affairs from the George Washington University, and a passion for law, politics, and social issues. Contact Anneliese at amahoney@LawStreetMedia.com.

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