Unions frequently understand overtime better than management:
"Keep in mind how overtime pay came about. In the 1930's …unions fought to get a law passed mandating time and one-half pay for all hours worked over 40 hour per week. The original purpose of premium overtime pay was to stop employers from working people overtime and to make employers hire more workers instead. In those days, it was more expensive to pay time and one-half to a number of people than to hire another worker at the regular straight time rate.
"Today, because unions have won many fringe benefits like pensions, health insurance, sick pay, vacations, etc., it is cheaper for an employer to pay overtime than it is to hire more workers."
With benefit packages that can add another third to labor spends, it is now more cost effective to work a few employees with fixed burden rate some extra hours than to hire a new full-time person to handle the occasional overflow workload. PPACA may change that, but its ultimate effects are not yet clear.
At present, employers have allowed or even encouraged exempts to dedicate over 40 hours a week to their work. In the future, they might instead ban such extra efforts lest they be compelled by the new regulation to pay overtime at a much higher rate than ever experienced in the past. Overtime for a $16/hr job is $24/hr, while 1.5 OT for a $24/hr job is $36/hr. While the employer may have budgeted for an $8/hr OT premium in the past without too much strain on their profit margin, suddenly being faced with the need to pay an extra $12/hr premium for the same block of work output can cause problems. In a state with mandatory OT for hours in excess of 8 in a day (or double-time on weekends), labor costs will soar even more.
Will employers be able to pass on the additional cost to maintain the same productivity? Customers will not see any extra value from a suddenly more expensive product or service whose quantity or quality has not otherwise changed except for a higher price. Will customers still buy the domestic product when a cheaper foreign alternative exists? The success of cost-cutting big box stores that buy cheaper foreign products to sell locally proves otherwise.
It is doubtful that extra labor costs for identical or even diminished productivity can be absorbed or avoided without harm. All else being equal, when payroll increases, something else has to decrease.
Owners have not shown any willingness to cut their profit margins or reduce their executive incomes to balance greater expenses. On the contrary, when American operating costs (labor rates, raw materials, taxes, etc.) become unsustainable for the established business model, employers automate, move offshore or reduce their production costs in other ways. Temporary workers or outside contractors assume tasks previously done by regular employees, for example. How many companies still have their own janitors and security guards? The already immense contingent workforce with its consequent continuing loss of job stability and income security could get a lot worse if employers refuse to follow the optimistic projections of political policymakers.
How many executives do you know who will passively reduce profit margins or cut their personal incomes to absorb the new extra costs of maintaining exactly the same productivity as before? Few will simply accept the productivity losses associated with millions of formerly exempt workers being limited to the maximum hours permitted before overtime kicks in. Most companies will seek workarounds to avoid the new requirements. Some will wink at newly overtime-eligible workers toiling unpaid extra hours… until they get caught. Then unions will flourish again.
What does your crystal ball predict?
E. James (Jim) Brennan is an independent consultant with extensive total rewards experience, specializing in job evaluation, market pricing and pay budget distribution. After HR corporate jobs in chemical/pharmaceutical manufacturing, he consulted at retail, government, energy, IT, tax-exempt and other industries throughout North America before becoming Senior Associate of pay survey software publisher ERI until 2015. A prolific writer (author of the Performance Management Workbook) and speaker, he gave expert witness testimony in many reasonable executive compensation cases both for and against the Internal Revenue Service. Jim also serves on the Advisory Board of the Compensation and Benefits Review.
Image "Past Present And Future Keys" courtesy of Stuart Miles / FreeDigitalPhotos.net