Overtime - Past, Present and Future

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

Comments

[Scott B]

I asked my Magic 8-Ball, and continue to get the same answer: "Reply hazy, try again." I'll take a shot anyway.

I don't believe that reductions in executive pay (I read C-level with this statement) will cover all the cost increases for companies beyond a certain size. As you suggest, that approach is likely a non-starter anyway. Most of the costs will ultimately be passed on to consumers in the form of higher prices, less services/availability, or both.

Profit margins are also unlikely to be cut, especially for publicly-traded companies.

Companies will look at roles that pay close to the new threshold that were otherwise Exempt and often give the employees a small increase in pay to the new threshold or just above. The expectation they have for the employees’ workweek will continue. Some employees who work well over 40 hours will be upset by this. Since their small increase will be less than their projected overtime earnings, some may make a call to their local labor attorney or the DOL. Class action lawsuits abound, companies often make the economic decision to settle rather than contest the action, and labor lawyers are the only ones getting rich.

Companies will look for ways to automate more processes formerly done by workers, costing some number of lower-level jobs.

There will be more outsourcing of call center/customer service positions to places like the Philippines. This will also cause some domestic job loss.

For new non-exempts, overtime will be heavily controlled, and more output will be expected from existing workers. Some companies may lower their pay ranges for new hires, and wait for higher-priced current workers to move up or move out.

In summary, I don't foresee the increase in the wage threshold leading to widespread increases in employee income as the policymakers assume it will, particularly in our still-sluggish economy. Companies will make every effort to control costs and pass what they can on to their customers.

[Jacque Vilet]

Amid all the controversy about PPACA, new minimum wages and other recent changes/proposals in labor laws and often think --- I'd like to have been a "fly on the wall" and watch the reactions to the very first laws that were enacted regarding these very same issues. Do you think reactions then were much the same as reactions now?

[E. James (Jim) Brennan]

Good summary of probable outcomes, Scott. Agree with all your detailed points. Politicians who never ran businesses or made payrolls tend to be weak on labor economics. Suspect the proposed OT changes will principally benefit two big donor groups: unions and lawyers.

Any contrary guesses?

[E. James (Jim) Brennan]

Jacque: many old books and some new ones may have answers to that stimulating relevant question. Predictions almost never turn out to be exactly accurate. The future usually unfolds as a vector, moving off at an angle from the anticipated path. The worlds forecast for 1984 and 2001 by the eponymous movies never came to pass.

Sure, every government initiative to regulate power has always been opposed, from the dawn of recorded history. Entrenched interests with much to lose always resist changes presented by supporters as justified to benefit other groups. Both sides are usually wrong in their most extreme claims... but not always. Time will tell.

[Annika L]

Great post. It makes me wonder which roles in the US will see the shift?

If producers such as farmers and manufacturers are already paying overtime to vast majority of their work force, how does this apply to domestic output?

If it is white collar and skilled labor that will be affected directly by new overtime rules, it could create more net opportunity. At least trigger upper management to invest in streamlining processes and consider how these roles add most value. (Let alone what the time for rest and relaxation would do for employee longevity and wellbeing). It could also raise demand for business applications such as ERP software which currently US takes a large portion of the market. I'm assuming these would be the first steps before outsourcing or offshoring efforts.

[Jacque Vilet]

As with all new things ---- there will be good and bad outcomes. It is so easy and the media reinforces the belief that any extra cost will drive companies to hire more people overseas. That's not the major reason why companies hire as much here today.

People scream about offshoring but the reality today is that it is not because of "cheap labor" as much as it is the fact that most consumption and markets for U.S. companies are overseas now --- like it or not ---- and you can't do that business from the U.S. --- example sell, market and design products. Products, marketing and selling are different overseas. To quote an age-old saying that's a favorite of compensation pros: One size does not fit all.

The messages I hear remind me of pictures showing the map of the world with the U.S. taking up about 50% of the world and the other countries crowded into the remaining 50%.

[E. James (Jim) Brennan]

Annika: thanks for the thumb's up. Concur that squeezing out more productivity efficiency will be the first priority. But software systems are less costly than laborers, so employment may stagnate. More R&R might be appreciated by exhausted workers, but will incomes grow or shrink if companies refuse to pay more OT?

Jacque: you are quite correct that increased foreign trade requires foreign operating units, both here and there. Will global firms choose to open or expand U.S. plants under these new labor laws? Will higher wage costs discourage foreign investors or so stimulate our economy that we buy more products/services? Whose GNP will grow?

Many questions. Time will tell.

[E. James (Jim) Brennan]

By the way, in the interest of full disclosure for those few who did not check the reference link before the initial quote, the bold type appeared in the original union article. I did not add the emphasis; it was theirs, supplied for their membership's understanding.

[Karen Kervick]

So much to say, so little time. One thing stands out...it is the employers' fault for everything. Damned if they do, damned if they don't.

How is "equal distribution of overtime" even possible? You can't be equal when people have different needs and wants. Some want to work overtime, some don't. Some employees prefer to work the weekends due to family schedules, some don't. Why automatically pay more to someone who WANTS to work on Saturday or Sunday? No, one size does NOT fit all. So why do we keep making rules to try and fit everyone in the same box?

Those who grab the overtime or stay late on their own, do so because they want to (or they spend too much time reading and writing responses to blogs). Those who are forced to work overtime may do it grudgingly but are happy on payday. I don't say there aren't issues in some industries, but I would go out on a limb to say some of the problems are enhanced by employee demands and expectations.

Working less should be a cultural ideal, however, currently that is not in favor. I believe millennials will lead that change.

But anyone self employed knows that you have to put in the time, long days, because you can't afford to pay staff. You don't hear complaints about overtime from those who work for themselves. Perhaps in the future we will have more self employed individuals. (Independent contractors but that's another topic...)

I think we can also expect more phased retirements which will pick up some of the overtime needs as the last of the baby-boomers have to work longer to maintain their current lifestyle or even just to live modestly. Not just for the money though, I think phased retirements will be of interest to a generation that is accustomed to working and the feeling of being involved. Of course those who can afford to will end up volunteering to get the same satisfaction.

More part time workers with limited benefits will be used to fill in gaps. Where that is not possible, in order to contain costs, employers will modify compensation packages to achieve the same levels. In some cases, they will agree to the higher payroll costs and either absorb the cost by cutting in other areas or they will increase their product costs.

Not matter what they do though, employers will never please everyone. Employees including management and the CEO need to drive the culture change they wish to see.

[E. James (Jim) Brennan]

Sensible predictions, Karen. Must agree that conventional wisdom is usually wrong, to some degree.

You are right that long hours have never appeared on the usual list of reasons for quitting. But OT is used as an excuse for family neglect and regularly cited as justification for "unreasonable compensation" by CEOs who set their own pay. Yet such overworked folks fret if they feel unneeded.

We're a funny breed, people. Big on gesture politics, too.

[SunnyinCA]

Three points.

First, Justice Hugo Black (when he was still a Senator) originally drafted the FLSA to require 1.5x pay after 30 hours per week, but a compromise was eventually struck at 40 hours. Just something compensation folks should know.

Second, anyone who works over 40 hours per week without additional compensation is giving away free labor to the business owner/shareholders. Why would anyone act against their own economic interest that way? Because of the soft labor market. Get unemployment down to about 3% and people will stop checking the "willing to work overtime" box on the job application.

It's also important to note that working very long hours is not universally considered evidence of commitment and hard work. In many European countries, anybody who can't get their work done within the regular work week is considered incompetent and would be the least likely to be considered for increased responsibility or promotion.

Third, Uberization is real. And the "sharing" economy is a huge social problem. As we move to a contingent / independent contractor workforce, fewer workers will be covered by the FLSA at all. Unless we change existing laws, there will soon be no OT (and no minimum wage and no benefits) for the vast majority of working people in this country. And that is a recipe for riots in the streets.

[E. James (Jim) Brennan]

Appreciate the participation, Sunny! Wonder if exemption is similarly against the economic interest of employers who pay a full salary for http://www.compensationcafe.com/2014/10/hr-in-2022-1.html and elsewhere about Gen Y Millenials. Change is the only constant, but its rate and direction is never totally consistent.

[E. James (Jim) Brennan]

Please excuse the garbled comment above where the middle paragraphs were torn out and sent into the ether somewhere. The hosting system is searching for the lost parts.

[E. James (Jim) Brennan]

Appreciate the participation, Sunny! Wonder if exemption is similarly against the economic interest of employers who pay a full salary for under 40 hours worked? The law does cut both ways, although agree that more exempts work longer than shorter hours, these days.

Quite right, too, about the contrasting European attitudes which tend to be shaped by dramatically different labor laws affecting job security.

American (including nations to the North and South of USA) work customs truly are changing, as discussed here http://www.compensationcafe.com/2014/10/hr-in-2022-1.html and elsewhere about Gen Y Millenials. Change is the only constant, but its rate and direction is never totally consistent.