Wednesday, May 18, 2016

How the New Overtime Rules Will Hurt Everyone

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:

  1. 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. 
  2. Mattie will be told to implement a hiring freeze while attrition gets the company down to a manageable number. 
  3. 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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