"Director of First Impressions": How corporations use phony titles to dodge billions in overtime
The restaurant host is now the "Guest Experience Leader." The front desk clerk is now the "Director of First Impressions." The coffee cart attendant is now the "Coffee Cart Manager." Across the country, corporations are giving workers in low-wage jobs fancy-sounding titles. It's part of a scheme to evade the requirements of the Fair Labor Standards Act (FLSA) and deny these workers overtime pay. And it's working. According to a new study by the National Bureau of Economic Research (NBER), these tactics are allowing corporations to avoid $4 billion in overtime payments annually.
The FLSA, enacted in 1938, is the bulwark of legal protections for American workers. Passed in response to the Great Depression, the FLSA established a national minimum wage and a 40-hour work week. Workers laboring for more than 40 hours are legally entitled to overtime pay, "a rate not less than time and one-half their regular rates of pay, except for exempt employees."
What is an "exempt employee"? Under the law, an exempt employee must pass each of these three tests:
1. The "salary basis test." An exempt employee must receive a salary and cannot be paid hourly.
2. The "salary test." Currently, an exempt employee must receive a salary of at least $35,568 annually or $684 a week. (During the time period analyzed by the NBER paper, 2010 to 2018, an exempt employee had to receive a salary of $23,660 annually of $455 per week.)
3. The "duties test." An exempt employee's work must "primarily involve executive, administrative, or professional duties."
The first two tests are straightforward. Further, satisfying the "duties" by performing "professional duties" is well-defined. Jobs with "professional duties" are "learned professions such as teachers, professors, doctors, dentists, registered nurses, lawyers, and clergy, which require advanced knowledge acquired through a prolonged course of intellectual instruction."
But satisfying the "duties test" by claiming an employee's work is "executive" or "administrative" is subject to abuse. An "executive" position's "primary duty must be to manage the business
or a customarily defined department or subdivision," including supervising at least two employees. An "administrative" position "involves office/non-manual work directly related to management or business operations and requires judgment and discretion about significant business decisions." Whether a position meets either of these criteria "depends on the employer’s assessment of the position’s responsibilities and is difficult to verify externally."
The only external signal of whether a position is "executive" or "administrative" is the job title itself. The Family Dollar Store, for example, gave a large number of employees the title of "Store Manager." But typically these positions "spent 60 to 90 hours a week performing manual labor tasks such as 'stocking shelves, running the cash registers, unloading trucks, and cleaning the parking lots, floors and bathrooms.'" A class action lawsuit was filed against the Family Dollar Store and the company ultimately was ordered to pay $35 million in unpaid overtime pay to 1,424 employees.
Misclassifying workers to evade overtime pay laws is illegal but not uncommon. The NBER study analyzed hundreds of thousands of job listings that were posted between 2010 and 2018. The study found 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." Specifically, there was a "485% increase in the usage of managerial titles for salaried employees just above the salary threshold set in the Federal Labor Standards Act."
While you'd expect, in general, for the percentage of managerial positions to go up as salary ranges increase, there is only a pronounced jump right at the threshold established by the FLSA. Further, five states (Alaska, Connecticut, California, New York, and Maine) have established a different, higher threshold to exempt employees from overtime pay. In these states, there is no jump in managerial titles at the FLSA threshold. This suggests that the increase is driven by corporations seeking to game the system.
Based on the data, the study estimates that "that firms avoid paying for over 151 million employee-hours by strategically using managerial titles." The stolen pay "equates to roughly $4 billion in overtime payments avoided per year." It costs the average affected employee $3,194, or 13.5% of their total salary.
If misclassifying workers is illegal and can result in large penalties, why is it so pervasive? Because it's still very profitable. The study notes that "compliance actions for FLSA violations resulted in $226 million in back wages in 2019." So, overall, companies are paying $226 million to pilfer $4 billion in wages. That's an 18x return on investment.
The major companies stealing workers' overtime pay
The misclassification of workers to evade the FLSA is not something that only happens at obscure corporations. Major firms in nearly every industry engage in the practice. In 2017, JPMorgan "agreed to pay $16.7 million to resolve a lawsuit accusing it of violating federal law by misclassifying assistant branch managers at its banks across the country and failing to pay them overtime." In 2016, Avis Budget Car Rental agreed to pay $7.8 million to settle a lawsuit brought by "shift managers" who were not paid overtime. In 2012, Walmart was ordered "to pay $4.8 million in back wages and damages to thousands of employees who were denied overtime charges." The money went to "4,500 vision-center managers and asset-protection coordinators" who were improperly classified as exempt.
The study was able to identify the companies with the highest percentage of "overtime avoiding positions." These are companies that are listing salaried positions within $50 of the weekly FLSA exemption threshold. The list includes Arby's, Sonic Drive-In, Pizza Hut, Domino's, Jiffy Lube, Burger King, GNC, H&R Block, Dairy Queen, Subway, Jimmy John's, Little Caesars, Office Max, and KFC.