By: ProcurementIQ Analyst, Syed Ali Khan
During the past few years, there have been numerous discussions with regard to updating labor laws, specifically minimum wage and overtime rules. On May 18, 2016, a new federal overtime rule was announced, which is expected to impact at least 4.2 million workers. This regulation (which goes into effect December 1, 2016), along with increasing minimum wages in cities and states across the country, is driving changes in labor markets that could increase costs when procuring business services, while also impacting businesses’ own workforce and internal wage costs.
Federal Overtime Rule & Regional Minimum Wage Increases
The new federal overtime rule establishes that overtime protections now cover salaried workers making up to $47,476 annually. This is a significant increase from the previous threshold, which only ensured overtime protections for salaried workers making less than $23,660 per year. Businesses must be cognizant of the fact that this new rule does not simply institute a one-time increase to the salary threshold, but also creates a mechanism to update these benchmarks every three years. Businesses will find some relief, however, in their new ability to use bonuses, commissions and other incentive payments to meet up to 10% of the salary requirement under this new regulation.
In addition to new overtime regulations set on a federal level, many states and local jurisdictions have implemented, are planning to implement, or are considering implementing increased minimum wages. For example, on January 1, 2016, 14 states raised their minimum wage. Alaska, California and Massachusetts had the largest minimum wage increases with an entire dollar raise given to the lowest-paid hourly workers. Many large cities are increasing their local minimum wage, as well. Seattle and Los Angeles are both phasing in a $15 minimum wage, while Chicago is phasing in a $13 minimum wage. With these regulations impacting how much workers are paid, several markets will be affected.
Rising minimum wages and the extension of overtime to millions of Americans will impact large swaths of the economy, with the potential to affect pricing for many services. For example, many foodservice businesses, including restaurants and catering services, pay many of their employees minimum wage or close to minimum wage. Companies that conduct shipping, courier services and general transportation work also pay their workers around the minimum wage. As a result, buyers of such services should not be blindsided if rising wage costs result in these vendors raising prices. In general, companies offering products and services that employ low-waged administrative and sales personnel will generally have to reorganize, taper their workforce or raise prices as a result of higher wage costs. ProcurementIQ expects the new overtime rule to also contribute to rising prices. As a greater number of employees become eligible for overtime, vendors will have to find a way to conform to this regulation while maintaining their bottom line. In response to affected vendors considering increasing service prices, buyers can attempt to lock in prices at current levels. They can also go out to bid in order to place market pressures on suppliers and discern whether their price increases are in line with others offering similar services.
Management’s Choices in Addressing New Labor Regulations
Businesses have many options when deciding how best to mitigate increases in their own labor costs. For example, employers looking to avoid overtime costs have the option to raise salaries above the $47,476 threshold. This is especially applicable to businesses that have employees currently earning salaries close to the threshold. Depending on how much overtime their employees work, raising salaries slightly can be less costly for businesses than paying overtime. Businesses can also keep wages the same and allocate resources to ensure overtime work is decreased. To do this, firms may consider investing in tools such as Time Card Machines or Human Resource Software with timekeeping functionalities. However, it is important to note that limiting work hours and adding HR procedures such as time cards may cause employees to become disenfranchised.
Businesses may also consider increasing or decreasing their workforce in reaction to overtime and minimum wage regulations. If a business assesses that a large portion of their workforce is working overtime, it may be prudent to convert employees to non-exempt and hire additional employees rather than increasing a large portion of their workforce to salaries higher than $47,476. Additional employees can reduce the overtime workload of the current employees, saving more than if a business was to increase salaries or pay time and a half for the same amount of work. Permanent Personnel Recruitment firms and Job Posting Services can assist businesses in their search for additional workers. Finally, businesses may find that reducing their workforce is the best strategy moving forward. In many instances, businesses can invest in automating processes formerly done by staff. For example, many large fast food restaurants are implementing automated cashier machines in response to rising wages. Letting employees go can be a difficult company event and can cause morale for those who stay on to deteriorate. To help employee morale and to ensure that those let go are less likely to spread negative sentiments about the company, businesses can use Outplacement Services. Additionally, businesses can keep remaining staff at exempt status while increasing their workload or keep them at non-exempt status and pay them overtime as needed; whichever option is less costly. According to ProcurementIQ, businesses that are considering significant shifts in their compensation strategy may benefit from the use of Compensation & Benefits Planning Services, which can help companies as they navigate regulatory changes.
Businesses can take solace in the fact that they have many options when considering how to react to regulatory changes. With this knowledge and a plethora of services to choose from to ease the transition process, businesses can minimize the negative impact of changing regulations on profit and operations.