The steep cost of junior-manager overtime

by Walter Olson on July 9, 2014

Writing checks for overtime (or sending managers home before they reach the point of being entitled to it) is only the more visible cost to business of the Obama administration’s scheme to reclassify layers of junior management as hourly employees. Small businesses told the Wall Street Journal this spring (summarized) of the forbidding morale cost of discouraging ambitious employees from upwardly mobile, which usually means salary-oriented, thinking:

Emo Pentermann, owner of Bell ATM Service Inc., a distribution and repair shop for ATMs and other money machines in Centennial, Colo. …worries that making more people eligible for overtime pay could remove the inherent incentive for lower-level managers to hustle to earn a promotion.

“You work hard, develop the maturity for a salaried position, and then move up,” he says. “It takes away that whole level of maturity and freedom of choosing to get the job done in the time allotted. So for all practical purposes, they just might as well be on a time card.”

Jeffrey Harris has 70 salaried employees at his Chicago-based Inte Q, a marketing firm that specializes in customer-loyalty programs for brands such as Reebok and Office Depot. … He has tried to create a workplace environment that de-emphasizes keeping up with a time clock. For instance, employees can take time off work to attend a child’s performance in school….

…when he heard about the proposal, he said he immediately thought it would affect the type of work culture that has yielded results for him in both profits and employee retention. Only 2% of workers have voluntarily chosen to leave the company in the past three years, he says.

Whole piece here, and earlier on the manager-overtime scheme here and here.

P.S. Proposed regulations anticipated by November 2014, final regulations “unlikely to arrive until Spring 2015″ [Wage and Hour Insights]

{ 15 comments… read them below or add one }

1 Erik H. 07.09.14 at 10:11 am

There is no question that the law will have some consequences. But the existing status also has some serious consequences.

Right now it is surprisingly common for salaried employees to be given extraordinarily long hours for relatively low pay. It isn’t uncommon for them to earn less per hour than the employees they are supervising.

Of course, this doesn’t necessarily mean that the situation is improper. People can take a job for low pay (or long hours) if they want. But the problem with salary is that it is extraordinarily poorly defined. When you take a salaried job, you basically have no bargaining power regarding your hours. And you have have no information regarding your hours–or, more accurately, you have no ability to complain if the hours turn out to be different as promised.

In other words, the problem isn’t one of contract. It’s an information gap. The employer holds all of the information as well as all of the control.

Paying someone hourly doesn’t mean that they get more money. It’s a simple thing to adjust “about 50 hours/week for $40,000/year” into “$13.33/hour base pay, with overtime pay above 40 hours/week.” But what it DOES do is to clearly set out the mutual expectations of both sides. And it makes it crystal clear that changes have financial consequences: if you wouldn’t take a overtime-eligible job for $11.42/hour then you probably shouldn’t sign on to a job requiring 60 hours/week for $40k/year.

You are viewing this as an employment issue. It’s not. What it is is functionally an information gap issue. And what the government is mandating will functionally lead to more informed, better, contracts.

2 Walter Olson 07.09.14 at 11:26 am

Erik — No, helping reach better contracts through information is not a tenable rationale for the edict. The essence of the overtime restriction is to forbid certain contracts (those without 1) hours kept track of; 2) hourly wage rate prescribed; and 3) separate, artificially high rate for overtime prescribed) whether the employee would be happy to take such a deal or not. One important reason is that the origin of overtime laws is not merely paternalistic (saving people from walking into jobs where they didn’t think through the issue of long hours) but also anti-competitive (preventing the worker willing to put in long hours from “doing his mates out of a job.”

When a junior manager says “thanks for all the new information, I’m happy to go on with the previous arrangement,” the employer will need to say, “Sorry, you can’t, Washington has made that illegal.” This is not a matter of filling anyone’s information gap.

3 Hugo S. Cunningham 07.09.14 at 1:27 pm

I buy many market-libertarian arguments, eg against high minimum wages, but not this one. After the great hollowing-out of the middle class in the last generation, the overwhelming majority of these junior so-called “managers” are never going to graduate to a well-paying career that will pay them back for the loss of their family life. It is one thing to starve for entry into a glamorous field like journalism, politics, or the arts– quite something else for run-of-the-mill retail “associates.”

A possible compromise would be to waive the time-and-a-half, while still requiring payment at full rate for hours actually worked. And to the extent extra hours are a subterfuge to avoid the extra health-care insurance premiums for new employees, they should be assessed an equalizing percentage to cover health care. (An better solution, however, would be to divorce health insurance completely from employers.)

4 MattS 07.09.14 at 3:15 pm

“A possible compromise would be to waive the time-and-a-half, while still requiring payment at full rate for hours actually worked.”

I don’t think many libertarians would object to this if the government actually proposed it which I think is exceedingly unlikely. The reason that I don’t think the government would agree with your proposal is that salaried employees are for the most part exempt from unionization. I think there is an ulterior motive here to allow unions to try to organize mid level management.

“An better solution, however, would be to divorce health insurance completely from employers.”

Are you aware that the government itself created the current system of employer paid health care? This is largely the result of wage caps enacted during the tight labor market created by WWII. In fact, you owe all the non-case, and deferred portions of your compensation package to those wage caps.

5 MattS 07.09.14 at 3:29 pm

“After the great hollowing-out of the middle class in the last generation, the overwhelming majority of these junior so-called “managers” are never going to graduate to a well-paying career that will pay them back for the loss of their family life.”

Most of the junior managers that have no chance of graduating to higher paying positions simply aren’t going to put in the extra hours that would cause a loss of family life above what you get for working a straight 40 hour week anyway.

One of the existing requirements for classifying an employee as salaried – overtime exempt is looser controls on the hours worked by the employee. For example, a salaried employee’s pay can not be docked for absences of less than a full work day.

An employer that is forcing salaried employees to put in more than 40 hours on a regular basis is going to run into trouble under the existing rule.

I am an IT professional, I have been working on a salary basis for 17 years. I started at around $30K/year and I am now making around $100K/year. The employer I was with for most of that time offered straight time for the extra hours in situations where it was required.

6 Hugo S. Cunningham 07.09.14 at 3:32 pm

Hi, Matt–

I was aware of the WW2 wage freeze origin of employer-provided health insurance. I read somewhere that the real damage did not come until the 1950s, when Congress granted tax exemption to both employers and employees for employer-provided health insurance, while making no provision for those who got health insurance from other sources.

You raise an interesting point about unionization, but I don’t think they would get any more mileage here than with other private-sector employees.

7 DensityDuck 07.09.14 at 5:23 pm

“Most of the junior managers that have no chance of graduating to higher paying positions simply aren’t going to put in the extra hours”

Dilbert is not fiction, bro. It is quite common for salaried employees to put in those extra hours involuntarily.

8 DensityDuck 07.09.14 at 5:25 pm

American productivity will see a sharp drop if this passes; not because people will work less, but because their work will no longer be calculated on an assumed eight-hours-per-day basis but instead be calculated on hours actually reported.

If I go from “assumed eight hours” to my actual 10 hours, then my reported productivity drops 20%…

9 worker_bee 07.10.14 at 9:12 am

On one job I started as a “contractor.” Of course the firm charged double time for hours worked over 40. As pawns in a “urination contest” we did mandatory 50 hour weeks to see if “we could catch up” on deadlines that were years out. We got paid straight time, the owners pocketing the difference. As this was a small, closed market complaints would mean no more jobs anywhere in that city. The next step was a “conversion” to salary and even here the math was shaky. Where normally you would multiply the rate by 2080, the sterling firm said 1950 “because we give you days off for holidays.” Anytime a firm tells you that you are ‘making more money’, check your wallets. With the new arrangement, it was astounding that I was now the “designated” parent when our child was ill.

10 Erik H. 07.10.14 at 11:04 am

The picture you paint–an eager junior manager looking to work hard hours as a means of rapidly climbing the ladder, whose dreams are dashed by a paternalistic government–is about as rare as a blue zebra.

Most of the folks working at salaried jobs who would be eligible to climb a ladder are either people who are high enough up the ladder that they would retain their jobs; or people whose jobs are very amenable to being converted to alternate pay types (hourly, commission, bonuses, etc.) thus preserving most of the benefits of salary.

However, most of the people who are actually salaried are people like, say, yesterday’s client. Who was hired at salary basis to work about 45 hours/week. Which was all well and good until her assistant left (with notice) and never got replaced for a year, so she had to work 60 hour weeks. For a year. Surprise!

Now, you might say “why is this our problem? can’t she quit?” And of course she can… provided that she gives up unemployment. Since salary is paid without account to hours, a change to more hours doesn’t often qualify for a “material change” which would let her move on and collect the UE benefits which she should be able to get.

What functionally happened is that the employer hired her, got her to move here, made her an (unenforceable) promise, and then functionally stole 20 hours/week of her time, for a year.

11 Ed 07.10.14 at 2:29 pm

I can give a real life example. A good friend of mine where I last worked (lets call him Bob) started off as an hourly employee. He migrated to a position that was made for him to continue doing the job that he had mutated into. (he was initially a worker that had slowly started doing more and more data management and procedure writing)

Bob’s new position was salaried, and was at a rate that allowed his annual pay to remain at what he was making on average with overtime. All was good in the world. Then our engineer quit. Well, that salary not being paid is adding to the bottom line, so the engineer was not replaced. Someone has to do the work that the engineer was doing…. so it was added to Bob’s workload.

Then we needed someone to cover the plant safety program. Here you go Bob…
Oops, chemist quit. Bob can handle that…
What about the training? Oh, Bob…

Bob is now working 10-12 hours a day, 6 days a week, just to keep his head above water, and is doing 4 jobs for the pay of 1.

And to add insult to injury, he is required to submit timesheets for his hours. Oh, but he is only allowed to put down 40 hours on his timesheet.

I can see this law maybe helping in a situation like that.

12 Ron Miller 07.10.14 at 3:21 pm

Ed, that is exactly how it happens. There is no doubt. The question is whether the law should stop it or whether it should defer to Bob’s free will. If there is value for his labor, he can find a job that has terms and conditions or employment more to his liking if he does not like his current situation. Conversely, his employer has to make Bob happy somehow so he does not quit. People are ever increasingly mobile to get out of situations don’t like. Not many of us are working in one town coal mine jobs anymore.

The flip side is this does not reflect the difficultly and risk involved in changing jobs and maybe the law ought to protect Bob from the abuses of his own employers.

I take the more progressive side on most issues. But on this, I took too many economics classes not to argue for the former approach. Bob can get another job and the less the government intervenes in the free market the better. But I am mindful of your point.

13 Richard Nieporent 07.11.14 at 1:39 pm

Bob is now working 10-12 hours a day, 6 days a week, just to keep his head above water, and is doing 4 jobs for the pay of 1.

Just a little hyperbole, Ed? If Bob can do 4 jobs in 60-72 hours a week, I can see why the other people were let go. More seriously, if someone allows himself to be taken advantaged of this way, I have little sympathy for him. There is nothing keeping Ed from first telling his boss that he has been given too much work to do, and if they insist upon making him do this extra work, he should find a new job. If you find your working conditions unbearable, why would you stay with that company?

14 Hugo S. Cunningham 07.12.14 at 6:04 pm

Ron writes like a former associate who uncomplainingly worked 70-80 hours a week in an era when associates who kept their noses clean had a good chance of making partner, and now has associates working similar hours for him. But most jobs no longer have that quid-pro-quo, if they ever did.

To put a more devious interpretation on his views:
to the extent employees are denied bright-line standards for enforcing promises made about reasonable work weeks, the more they will be tempted to underhanded methods, eg disability suits, expansive family leave claims, etc. The endless uncertainty, though poisonous to workplace morale, would substantially increase employment opportunities in Ron’s profession.

15 Hugo S. Cunningham 07.12.14 at 11:15 pm

There seems to be a split in opinion between those who are confident they can easily get a new job if they quit, and those who are not– those who enjoy job hunting as an exhilarating challenge, and those who hate and fear it.

Some other random observations.

The time-and-a-half overtime requirement was designed not simply to enrich employees, but also to cancel out the savings in overhead (workmen’s comp, health insurance, etc) of making one employee cover two jobs rather than hiring a second employee.

It is a public good when a burnout-track 80-hour-a-week job paying $100K/year is broken up into two challenging professional 40-hour-a-week jobs paying $50K/year each.

@DD’s remark on “productivity”:
Back in the 1980s, a proposal to measure “productivity” per dollar of wages was quickly discarded when it was pointed out that a “productivity increase” could be achieved by simple wage cuts.
About the same time, someone noted that our supposed greater wealth than France disappeared if you measured it by hours worked; we worked longer, but the French worked smarter. (Since then, however, the French seem to have gone a bit too far, eg with the 35 hour week, and making it too expensive and risky to take on new employees)

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