Friday, July 31, 2015

The real meaning of new overtime rules

The real meaning of the proposed overtime rules is quite clear: Shift the cost of government to the private sector and promote the growth of unions -

By Randy Pullen
HNN columnist 

  • The proposed regulations would affect an estimated 4.8 million American workers. 
  • Operators say the impact to the bottom line will be severe. 
  • Changing the status of hospitality industry positions will have a ripple effect.
As I pondered the 98 pages of proposed overtime regulations that President Obama blogged about on the Huffington Post, stating that “too many Americans were working long days for less pay than they deserve,” I thought of the public debate in 2014 over the Minimum Wage Fairness Act. As you might recall, the president proposed increasing the minimum wage to $10.10 over a two-year period. Of course, Congress disposed of the request.

The proposed updated and revised regulations, as issued by the Department of Labor on 6 July under the Fair Labor Standards Act, would directly affect an estimated 4.8 million workers who are now exempt under the EAP (or so-called “white collar” exemption), but would fall under the proposed 40th percentile of earnings for full-time salaried workers ($50,440 in 2016 dollars). The rules also would automatically update the salary level in future years based on 40th percentile of earnings in the workplace or on inflationary change. 

The potential impact of these rule changes greatly exceeds the impact of raising the minimum wage to $10.10 over a two-year period. It was estimated that about 3.3 million workers earn at or below the minimum wage, about 2% of the workforce. In order to increase the minimum wage and tie it to inflation required an act of Congress. What the president has done with a stroke of his pen is to authorize DOL through rulemaking, as stated in the proposed rule, “to update the salary level to ensure that FLSA’s intended overtime protections are fully implemented.” 

What this means is the overtime rules implemented in 2004 and known at the time as “Fair Pay” rules were judged by this administration as set too low and did not properly screen out enough white collar employees from exemption from overtime. Under the 2004 rule change, the minimum used to qualify as exempt was the 20th percentile. The prior rule change in 1975, using the Kantor method, set it at approximately the 10th percentile of full-time earnings.

As stated in the proposed rules, if the Kantor method as used in 2004 was applied today, it would yield a weekly salary of $657 ($34,164 annual salary). Nowhere in the analysis does it give a reason based on science or data for why it should be increased to the 40th percentile other than the “proposed salary is consistent with the Department’s longstanding goal of finding an appropriate line of demarcation between exempt and nonexempt employees.”

While the labor economists for DOL attempted to justify their proposed rules by applying the short and long tests as have been used since FLSA was passed in 1938, they essentially invalidated the tests with their own analysis. For example, the short test as presented in the proposed rule, using the CPI-U increase since 1975, would have increased it to $1,083 per week, an annual salary of $56,316 (the 50th percentile), which they rejected with no explanation. In theory, their proposed 40th percentile was not too high and not too low but just right—the Goldilocks Principle.

Overtime in hospitality
To better understand how the overtime rules might be applied in the hospitality sector, I spoke with key people in a number of management companies who would be responsible for the implementation of new overtime rules. 

It was very clear from the discussions that the disruption to operations will be severe as will be the financial impact on the bottom line of the companies. The performance of the hospitality industry has been strong in the last two years with record levels of occupancy as well as 14 straight months of record employment. Hospitality has been a leader in the growth and performance of the United States economy. The overtime rules will definitely affect the industry’s performance. 

The salaried positions that likely will require reclassification to nonexempt or substantial raises to comply with the overtime rules will include: 
·        assistant general manager;
·        night manager;
·        director of sales;
·        sales manager;
·        restaurant manager;
·        front office manager;
·        executive housekeeping;
·        chief engineer; and 
·        banquet manager. 

Of course, this will vary by size and service level of the hotel. In general, it is estimated that about 180,000 to 190,000 employees of the 1.9 million workforce or about 10% will be affected.

The strategies I mentioned above, reclassification to nonexempt and pay raises, each have their own set of problems. Starting with reclassification to nonexempt, the logic for this is to calculate an hourly rate that takes into consideration the manager’s average weekly hours worked. Many middle managers work around 50 hours a week. For example, a front office manager is making $40,000 a year, which works out to be an hourly rate of about $19.20 an hour based on a 40-hour work week. Adjusting the hourly rate to account for the overtime pay rate of 1.5 and 500 hours of overtime a year, works out to be about $14.20 an hour, a perceived decrease of $5 an hour. 

Now the front desk manager is clocking in and technically is not considered part of management for collective bargaining purposes. They may no longer view themselves as part of management. Furthermore, on an hourly basis, he or she is paid about the same rate as the front desk supervisors, who have not been working overtime. So now, the front desk supervisors may work overtime and the front office manager may have less take-home pay. The term for this would be reverse wage compression or even wage inversion.

The hotel now could have internal equity problems. The management team has shrunk because the reclassified employees may no longer view themselves as part of management. In essence, this will have overturned one of the key components of the Taft-Hartley Act in the late 1940s where middle managers and supervisors were for the first time since the passage of the Wagner Act in 1935, considered “Soldiers of Management” and were expressly prohibited from participating in union organizing. Along with the NLRB’s continued re-analysis of Supreme Court precedent in Kentucky River and other decisions from that agency and the DOL attacking employer use of independent contractors and temporary agencies, it is evident that there is a union-fueled effort to expand the number of individuals exposed to organizing. And this push works conversely to decrease the number and potency of middle managers as a force to oppose unionization efforts.

The second strategy of pay raises to keep middle managers above the $50,440 floor would be very costly, adding three to four points to labor expense, reducing profitably and resulting in a loss of equity to shareholders and a lower valuation. 

It also could cause wage compression problems. For example, do the assistant GM and front office manager both receive pay raises to $50,440, or does management give the AGM 10% more in order to avoid wage compression? If the AGM gets an additional bump in pay, then the GM now needs a raise in order to maintain a fair and acceptable differential. 

Other issues
There are many other issues that will be raised by the new overtime rules. For instance, what do you do about off-the-clock time at home or at lunch when an employee calls with an issue that needs your attention? What about telecommuting? 

As you can see, this will not be an easy adjustment for the Leisure and Hospitality supersector of the U.S. economy or for other service sectors, which will be affected by DOL’s new overtime rules.

In closing, let me mention one last important point underlying the proposed rule changes. On page 38580 of the Federal Register, Vol. 80, No. 128, under section 6, the point is made that these rules will result in a reduction in social assistance expenditures by the government. The potential increased wages will exclude many of the subsidies these workers would be eligible to receive such as Medicaid, SNAP cards, Temporary Assistance for Needy Families, WIC, Section 8 Housing allowances and school meals to name a few. 

As I pointed out in a prior column, increasing the minimum wage does not really help the workers much, nor apparently do overtime pay increases.

The real meaning of the proposed overtime rules is quite clear: Shift the cost of government to the private sector and promote the growth of unions.

Randall Pullen is President and CEO of WageWatch, Inc., which he founded in 1999 to design and implement Web-based wage and benefit surveys. Mr. Pullen‘s work experience includes over 30 years of software development and consulting to the hotel industry. Mr. Pullen is a certified public accountant and a member of the AICPA. He earned a Bachelor’s Degree in mathematics and an MBA from Arizona State University. He serves on the boards of a number of companies and associations, and is currently the Treasurer of the Arizona Housing Finance Authority.

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