New Salary Floor Has Big Organizational Implications

Posted by on May 23, 2016

Most all of the news reporting on the new exempt salary floor taking effect on December 1 has focused on the financials.  The new floor will be $47,476.  The Department of Labor estimates that 4.2 million more workers will be eligible for overtime pay triggering transfers from employers in excess of $240M per year.  Set aside the logic that eligibility for overtime equals the assurance of overtime; it does not. The organizational implications of the new floor will likely be more impactful than the financials.

The progression from being a servant to the clock to an exempt role and being compensated for results rather than time has long been perceived as career progress.  Many workers consider it the key distinction between a worker and a professional.  Most importantly, it is considered earned.  The DOL is dismissive of this.  I am not.

The flexibility of an exempt role cannot be understated.  Most in one have regular hours, but can come and go as necessary.  Leave early for your child’s school play?  Arrive late due to a dental appointment?  Work from home in the morning until the plumber is finished?  No problem, no paperwork, and no permission necessary beyond professional courtesy of notification up the chain.  Why does the employer not care?  Because that individual is held accountable for results.  The modicum of time involved does not move the employer’s labor cost in one direction or the other.  Hourly workers do not have this flexibility due to very strict government record keeping rules set in the 1930’s.

Workers in exempt roles making $43,000 or less annually are highly likely to be converted to hourly pay roles and be at high risk to lose the flexibility they value. Anxiety will grow every three years.  The rule’s permanent salary escalator insures it.  What happens in 2020 when someone making $49,000 and the new floor is $51,000?  Will she make the cut or be converted to hourly?  When will she lose? It is simply a matter of the calendar now.

The “lose-lose” employees (those converted to hourly roles AND receive no overtime assignments) will be the hardest hit:  They lose the flexibility they highly value in return for nothing.  Even if employers shield them from financial loss, the emotional damage will likely be substantial.  How many disengaged employees can your organization handle?

What happens when a few workers in a role can be exempt but others in the same cannot?  Will employers let the chips fall where they may, or will they simply make all of those roles non-exempt in a benign attempt at workforce harmony?  Depending on a variety of factors involved, decisions could go either way.

Does an organization change its structure to incorporate more part-time staff in lieu of paying pricy overtime pay to formerly exempt employees?  This will be practicable for some and not for others.

Employee development is likely to suffer.  One of the best ways to both develop and reward an employee has historically been travel to a conference or professional training event.  Send an exempt employee to one of these and the compensation changes not one whit.  Send an hourly worker and you are on the hook for “portal-to-portal” travel pay, hourly tracking of their attendance at the conference, and overtime pay if it all adds up to more than 40 hours.  How many employers will want to take that added burden on?  Some will, some won’t, and it is the employee who pays the opportunity cost if they do not.  This will have organizational development implications.

The organization that needs more managers and professionals than it can afford it will have to re-invent itself, perish, or combine with another organization to obtain the size, scale and resources necessary to perpetuate the model.  This is where technology will likely make the difference, particularly artificial intelligence leveraged in the services sector.

Secretary of Labor Perez said one of the benefits of this rule is clarity.  I concur.  We now know that the cost of exempt labor will inexorably rise regardless of an organization’s ability to pay.  This rule, taken as a whole with state and local moves to double the minimum wage, paints a stark picture.

The costs of technology over time tend to drop while quality and functionality improve.  The cost of human labor can only go up.  Worse, vast disparities in talent, capability, and value of outputs are almost certain to persist, placing workers in a very disadvantageous competitive position.

The old joke about the factory of the future having two employees, a man and dog, with the man’s job to feed and water the dog and the dog’s job to bite the man if he tries to touch anything in the factory is not so funny anymore.