Today, the Obama administration
took the long-expected step of amending the overtime regulations as they apply
to all labor. In a quaint video uploaded
to Facebook, they outline
just how this will work: that by doubling the threshold over which individuals
are exempt from overtime, they will magically relieve all of those over-worked
and underpaid Americans of their burdens, using Sam and Mattie as avatars of
Americans facing such challenges. But the
video also goes to great lengths to ignore practical reality and the
fundamentals of economics, which tell us simply that in the face of increased
costs, employers will simply employ fewer people.
The video seems to think that
now, because it will be more expensive to pay Sam or Mattie overtime, the
number being fixed nationwide regardless of regional cost of labor variations,
employers will just either a) raise their pay so they aren’t overtime eligible,
or b) shift the extra workload to other employees to keep their workload down. Let me tell you what will really happen,
because you see: I’ve done both Mattie and Sam’s jobs before.
Mattie works as the head of human
resources, which suggests that she has a staff under her. Let’s forget the fact that a head of HR with
a salary of $40k is getting paid well below market in just about every
geographic region, and accept the number at face value. When Mattie’s employer is faced with
implementing this new rule, they are going to take a look at their balance
sheet and say that they need to maintain profitability. They will then call Mattie in to the
president’s office and have a conversation which will result in one of three
things happening:
- Mattie will be told to cut benefits, which are often a cost proportionate to wages because many are driven by the employee’s wage – think life insurance, 401k match.
- Mattie will be told to implement a hiring freeze while attrition gets the company down to a manageable number.
- Mattie will be told to build a lay-off plan, and instructed to discuss with leaders how those employees who are now better compensated can pick up the duties of the dismissed staff.
This exact scenario has already
happened once in the last decade, when almost every employer in 2008 faced
reduced profitability in the face of an unexpected economic downturn. My experience in HR has shown me that the
easiest thing for management to do is let people go. I say that because, in option 1, you are often
faced with breaking contracts that will cost the company money - though one
company with which I was associated eliminated 401k match to compensate, and
then paid record executive bonuses. In
option 2, when you rely on attrition, the first people to leave are often your
best, because they are always able to find better options.
Option 3 lets you separate the
wheat from the chaff and cut the people who aren’t providing the most value. Executives frequently choose option 3 when 1
and 2 are still on the table because it lets them keep the best people, and
give them a good package of benefits. You
can also typically write it off as a restructuring cost and not take a hit to
your earnings. But the net effect is
that the same amount of work gets redistributed to a fewer number of employees,
because maintaining profitability requires the same revenues be received, and
the same productivity levels maintained.
So Mattie will have to fire a lot
of people, and she will have to start in her own department. Because to offset the 20% cost increase in Mattie’s
wage, which probably has a 30% fringe benefit value associated with it, Mattie is
going to have to let an HR assistant go.
Which means that Mattie isn’t in fact getting the benefit of this
change: she got a 20% wage increase – just enough to get her over that exmption
threshold - but just got 40 hours’ worth of work dumped on her. Or maybe she spreads that out across the
employees remaining in her department, but since they all get paid less than Mattie
(remember, she’s the head of HR), I’ll
bet there will be a ‘no overtime’ directive from management, meaning Mattie
really is going to be the one doing all the work. If I were Mattie, I would be less than
thrilled.
Now if I were Sam, I would be
even more upset though. Because where Mattie
likely works a 9-5 job, Sam’s gotta keep the lights on and fully staff the
store seven days a week from 9am to 9pm.
Or does he? Unlike Mattie, Sam’s employer has one other option: reducing
everyone’s work hours. Because they already did that once in the
last ten years: when Obamacare (the PPACA) was implemented, retail employers
saw the hours threshold and made sure their part timers would fit under it. Because those major retailers see no
difference between paying 20 people and paying 15 if that total gross wage
number is the same. And Mattie’s problem
of fringe benefit value isn’t an issue here, because none of these folks will
have benefits anymore.
All this leads to a tougher job for
Sam, who now has to manage more people, on more shifts, which means that there
is a higher probability that on some of those shifts, Sam is going to end up
short-handed. And Sam’s people are
probably now having to work two jobs, because he can’t give them full time
hours, meaning they are going to be tougher to schedule, and likely less
productive. And despite the notion that
some of Sam’s work will get redistributed to others, which sounds so darn reasonable
in the video, the reality is that Sam is the store manager: there isn’t anyone else to do his work. If anything Sam may have to cut an assistant or
two, just like Mattie did.
The video does get one thing
right: employers have always had a tough time figuring out who qualifies for
exemptions. However, the re-write doesn’t
change the exemption tests enough to make a difference, it really only changes
the salary number under which a person still qualifies for overtime. And let me tell you from experience: the
majority of managers asking about overtime exemptions weren’t trying to follow
some ‘test’, they were trying to keep costs down.
The video gets one other thing
right: the white-collar rules are outdated.
They applied to a workforce that typically came to the office from 9-5
and worked extra hours on either side of that.
Now, those folks work 24/7. Employers have them on an electronic tether, and
a good number of employees - *gasp!*- don’t
mind!! This will force companies to write new policies and enforce
restrictions on off-hours work that honestly doesn’t really bother people to
perform.
In addition, though these rules
were first written when health benefits weren’t even the norm, compensation
packages today feature a good deal more than a base wage in many companies. As Jeffrey
Tucker of FEE correctly states, organizations that have a compelling future
value that they can sell to employees may offset the interim low wages that they
can barely afford with the potential of future equity in their eventual success. That equity still has a (much lower) cost
associated with it, but when these rules go into effect, start-ups will take
one look at that new number and cut the number of people getting equity. Who gets hurt? The ones who could benefit the
most – no more millionaire secretaries, like Microsoft could once boast.
And that last part brings us back
to Mattie. Her job heading HR just got a
lot harder. A lot more policies to write
and enforce, a lot more challenges hiring and retaining people without equity
as a lever, a lot less time spent trying to build a better company culture and
a high-performing organization. That’s
the role I’m in.
It gets tiresome trying to keep
up with every new rule that comes out of the federal government, especially the
ones made without legislative involvement – just executive branch dictates or ‘recommendations’
that carry the implied or explicit threat of some kind of retaliation. We need a government that understands how
difficult it is running an organization in which incoming revenues are what actually
pay the bills, not the incalculable debt that adds up every hour the federal
government is at work. We need a
government that shows its support of the worker by allowing for more
opportunity and flexibility, not by dictating the terms of every employment
relationship. And mostly, we need a
government that doesn’t look at the economy as something that they can tinker
with and manipulate.
Because Sam and Mattie
are real people, with real jobs, and they are the ones that have to deal with the consequences.
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