After New Overtime Rule, Employers Will Seek Ways to Lower Labor Costs


By Allen Smith May 22, 2015

A big concern HR professionals have with the upcoming proposed overtime rule is how their employers will afford overtime for so many additional people, assuming that the salary threshold for exempt positions is raised and many more employees become eligible for overtime.

But research has found that realistically, no matter how much the salary threshold is increased, employers will adapt and use various strategies to keep employees’ overall pay relatively the same, according to a May 19, 2015, National Retail Federation and Oxford Economics study.

Raising the wage threshold from $455 to $984 per week, or to more than $51,000 per year, would mandate overtime pay for an additional 2.2 million workers in the retail and restaurant industries alone. “Assuming, unrealistically, that employers do nothing to alter workers’ hours, benefits or hourly rate of pay to compensate for their increased costs, this would cost restaurant and retail employers $9.5 billion per year,” the report stated.

However, businesses likely would adjust compensation schemes to ensure they do not absorb additional labor costs by:

  • Lowering hourly rates of pay to leave total pay amounts largely unchanged.

  • Cutting bonuses and benefits to increase base salaries above the new threshold.

  • Reducing some workers’ hours to fewer than 40 per week to avoid paying overtime, cutting compensation proportionally.

Employers likely would counteract those lost hours by hiring new, lower-wage and largely part-time hourly workers, the study predicted.

In jobs with back-office activities, employers would turn to automation to increase efficiency. And workers in lower-level professional and managerial jobs would find their status jeopardized, the study added.

“The net results of these changes would be an accelerated ‘hollowing out’ of low-level professional and administrative functions, as firms centralize their management structures to rely on a smaller number of genuine managers and professionals,” the report stated. “Workplaces would become more hierarchical and inequality would increase. Lower-level employees, currently covered by overtime law, would find it harder to rise into the professional ranks as the number of midlevel salaried positions contract. Companies would encounter difficulties developing talent and promoting internally because of a narrower pipeline of talent.”

Transitional Costs

The proposed rule also will result in transitional costs, the report predicted.

Some of these will be small, as with identifying workers whose base salaries will be raised to keep them exempt, but whose benefits and bonuses will be cut. For these workers, there will simply be the low transitional cost of identifying them and making and communicating these adjustments.

The transitional costs will be higher for converting workers to nonexempt hourly employment. These employees will need to be added to the time-tracking system. Disruption to normal business operations is likely as HR communicates and implements the change, the report said. The more people who are tracked, the more IT support will be needed for the time-tracking system. The added complexity of managing and scheduling people’s time will add to supervisory costs.

“Considerable HR cost will be required to consult with each employee in establishing an hourly rate (lower than existing base salary) that is calculated so that overall compensation (including new overtime payments) will leave current total compensation unchanged,” the report predicted.

Operational Costs

There will be operational costs, as well, from converting professional salaried positions to hourly rates, the report noted.

For example, recruitment costs may rise as young professionals hesitate to accept hourly positions.

In addition, first-line supervisors who find incentive bonuses reduced to fund their overtime pay might lose the motivation to innovate and excel, the report stated.

“Essentially, employers are concerned that the professionalism of the junior managers and supervisors who manage store, restaurant and back-office operations would be greatly diminished if these positions were converted to hourly status,” it added. “For example, simple generally accepted business practices—such as managers occasionally checking e-mails after hours—may become problematic when managers are converted to an hourly pay structure.”

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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