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The case for overtime pay

Federal laws require that employers pay overtime pay to certain classes of employees. However, the percentage of employees who are entitled to overtime pay has been steadily declining, due to both changes in the workforce as well as Congress from time to time making changes to the laws that exempt more employees.

Contrary to conventional opinion, I have concluded that having the majority of the nation’s employees exempt from overtime actually creates an inefficient allocation of resources. This is because any resource that is free will be overused. And for “salaried” employees, the employer is paying a fixed price for the labor and is then free to use as little or as much as desired.

At an all-you-can-eat buffet, people will pig out and take more food than they’d eat if they had to pay ala carte. You will see people taking food out of the buffet and not eating all of it. Some cheapskates will even surreptitiously take extra food from the restaurant so they can have another free meal at home.

Our current employment situation is like the all-you-can-eat buffet. Just as food is being wasted at the buffet, employees’ valuable free time is being wasted because their time has been sold to the employer at a fixed price. At most companies that I’ve worked for, the employees who are entitled overtime pay are only allowed to work overtime if specially authorized. But the same company has no problem demanding that the salaried employees work overtime to complete an “important” project and meet a “deadline.” (It always seemed to me that the deadlines were artificially created by the employer as an excuse to make employees work free overtime.)

One argument in favor of the current system is that the free market is best able to allocate resources, and if employers and employees have mutually agreed to free overtime, the government shouldn’t interfere with this presumably optimal allocation of resources. The problem, however, is that the free market isn’t always efficient. With respect to employers and employees, it should be clear that the two parties have unequal bargaining power. The employer has hundreds, thousands, or even tens of thousands of employees, and the loss of one employee is inconsequential to a large organization. However for the employee, parting ways with the employer can have a devastating financial impact. Unless you’re working at a mom and pop business, or you’re being hired to be the CEO, the employment relationship is usually completely non-negotiable except for salary.

Another argument in favor of the current system is that it’s too difficult to figure out how many hours an employee is really working, or that they are hired to get their job done however long it takes. These arguments are pretty bogus. Have you ever been at a job where you are allowed to leave work a few hours early if you’ve finished all of your assignment? I sure haven’t. I’ve also spent a great deal of time working for consulting companies, which have no problem billing out management tasks at an hourly rate. That should put to rest the argument that it’s too complicated to figure out how many hours managers are working.

I concede that there might be certain jobs where it truly is not practical to determine how many hours the employee is working, but such jobs are only a tiny fraction of the labor force. Nevertheless, newly drafted labor laws could account for such jobs not by trying to define what they are, but by allowing employers to exempt a certain percentage of employees from overtime pay. Five percent seems like a reasonable allowance, ensuring that ninety-five percent of the work force would be getting paid overtime.

Changing our overtime laws so that they apply to all but five percent of employees would result in an increase in our national productivity due to more efficient use of labor resources, as well as more free time for Americans.

posted Saturday, October 30, 2004