Phony Managerial Positions Created to Avoid Overtime Pay, New Study Shows

The research shows that employees might want to think twice before accepting that big promotion.

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Businesses are using manager positions to avoid paying overtime
Image: Miha Creative (Shutterstock)

Employers are promoting workers to managerial positions in an attempt to avoid paying for overtime, a new study shows. Managers are expected to take on additional responsibilities that go above and beyond for the company without having the increased payout of overtime work.

The promotion is reportedly a phony attempt to save more than $4 billion in overtime payments each year, a study conducted by economists at Harvard University and the University of Texas-Dallas said.

According to the study, employers are exploiting a loophole in the Federal Labor Law that says businesses are not required to pay overtime to salaried managers who make more than $455 per week or $23,660 per year. The economists found that employers are using “fake managerial titles and future DOL compliance actions” to avoid potential labor law violations.

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The study found that in the 2010s, there was a 485% increase in companies using misleading managerial titles to avoid paying their employees overtime which would amount to one and a half times their regular hourly wage.

Lauren Cohen, a professor of finance and innovation at the Harvard Business school told TIME Magazine that he and the other co-authors of the study “were surprised by the prevalence and magnitude of this.” He continued, “People should be paid for what they actually do, not who they are or what they’re called.”

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When the Fair Labor Standards Act was enacted as part of the New Deal in 1938, paid overtime was included to discourage employers from overworking staff while allowing workers to benefit from extra hours. However, there was a loophole in the Act that allowed employers to avoid paying overtime to salaried managers.

Employers have now begun to take a “systematic” and “robust” stance on increasing misleading managerial titles, according to the study, which suggests workers should question their promotion prior to accepting the position.

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The researchers found that the bogus manager positions were more prevalent in states and companies where the workers were paid a lower-than-average wage, and had fewer rights, such as in the retail, food, and drink industries. By promoting workers to managerial positions, the researchers estimated that the companies are pocketing approximately 13.5% in overtime payments.

However, the study states the findings may just be the beginning of a bigger problem and that overtime avoidance is also likely to occur at higher levels in the company, but are more difficult to trace.

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“It’s not just one kind of firm or just some random small institutions that are doing this. These are the biggest firms that are doing this and doing this again and again,” Cohen told Vice.

The lack of overtime pay has been a recurring problem in recent years, prompting legal action against companies that denied workers overtime pay. The U.S. Department of Labor filed a lawsuit as recently as August against a home healthcare provider in Minneapolis seeking to recover back wages and damages on behalf of employees who did not receive overtime pay.

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Companies across the country have been cited as underpaying their employees, including Facebook. Bloomberg Law reported in 2020 that the social media giant would pay $1.65 million for a case in which 63 of its client solution managers claimed they were placed in those positions to be exempt from overtime pay.