Can Companies Avoid Paying Overtime by Granting Managerial Titles: A Closer Look

Introduction to Overtime and Classification

There is an old joke that humorously suggests, “Should we give them more money or a title? Let's give them a title.” However, this jest subtly points to a complex issue in employment law and workplace management. In the United States, companies must classify their roles as either “non-exempt”/salaried or “exempt”/hourly. The classification is crucial as it determines whether an employee is eligible for overtime pay.

Non-Exempt vs. Exempt Employees

While the title of a manager can provide some benefits and responsibilities, it doesn't automatically make an employee exempt from overtime. In fact, many roles that might not involve traditional management tasks can be classified as exempt. These exemptions are governed by the Fair Labor Standards Act (FLSA), which requires employees to receive overtime pay at a rate no less than one and a half times their regular rate of pay for hours worked beyond the standard forty-hour workweek. But not all employees are entitled to this additional pay.

The Fair Labor Standards Act (FLSA) and Exempt Employees

The FLSA has specific criteria for exempt employees:

Salary Basis Test: The employee must receive a predetermined and fixed salary regardless of the number of hours or quantity of work performed. Salary Level Test: The employee’s salary must be above a certain threshold. Duties Test: The employee must perform duties that exclude them from the FLSA’s overtime provision. This is the most complex criteria and often revolves around the job title.

Historically, job titles such as “assistant store manager” or “assistant manager” can mislead companies into classifying regular employees as exempt, even if they do not bear the true managerial responsibilities. These Title-based designations can be misleading and strategically employed by companies to avoid paying overtime.

Common Practices and Legal Implications

While the salary basis and salary level tests are relatively straightforward, determining whether a position satisfies the duties test can be more complex. Often, only the job title can hint at a position’s responsibilities, making it a potential point of manipulation. Retailers, for example, may classify shelf-stackers as “assistant store managers” despite them not having managerial duties such as hiring, firing, or promoting employees. Similarly, banks might label their tellers as “assistant managers” to avoid the requirement to pay overtime.

Benefits for Companies and Economic Implications

Companies can benefit from this practice in several ways, including reducing the overall wage bill and offering more operational flexibility. We estimated that avoiding overtime can result in a 13.5% reduction in salaries and save companies in the United States about $4 billion annually in wage expenses. However, misclassifying employees is illegal, and it is subject to scrutiny under the FLSA.

Current Prevalence and Official Data

Despite the illegality, this practice is not uncommon. Data from the National Bureau of Economic Research (NBER) shows that FLSE violations rank among the top corporate violations, after workplace safety violations, and are about twice as common as environmental violations. Here is a figure illustrating the distribution of corporate violations by offense type.

Key References:

Good Jobs First, Corporate Violations Data, 2004-2019. National Bureau of Economic Research. “Too Many Managers: The Strategic Use of Titles to Avoid Overtime Payments,” Lauren Cohen, Umit Gurun, and N. Bugra Ozel, November 2023. (Download PDF)

Companies often strategically use managerial titles to circumvent the FLSA's overtime provisions, but this practice is illegal and subject to audits and fines.