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How To Manage New Overtime Pay Rules

Proposed changes to overtime pay rules that are scheduled to take effect at the height of the holiday season have retailers worried and angry about the impact on their labor budgets and bottom lines.

The Department of Labor rules change, which will go into effect Dec. 1, 2016, roughly doubles the current overtime pay threshold of $455 per week, or an average of $23,360 annually. The new threshold will be $913 per week or $47,476 annually. Workers making less than this amount will now be eligible for overtime pay when their work week exceeds 40 hours.

According to the Department of Labor, the new rules will extend overtime pay protections to four million workers in the first year of implementation. Under the new rules, 35% of salaried workers will become eligible for overtime, up from the current figure of only 7%. But the new figure will still be below the 62% that were eligible for overtime back in 1975, according to CNN Money.

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“Retailers are concerned, not least because this will be taking effect in the middle of the holiday season when people are working lots of extra hours,” said Scott Knaul, CEO of the consulting firm SMK Workforce Solutions. “We’re hearing from retailers that this change could affect anywhere from 50% to virtually all, 99%, of their managers.”

Knaul, who also has worked as a retail manager, explained that managers typically work more than the standard 40-hour work week. “The minimum expectation is 45 hours, so right off the bat you’re talking about a five-hour overtime hit,” he said in an exclusive interview with Retail TouchPoints, adding that it’s not unusual for some managers to work 60-hour weeks.

Widespread Impact In Retail

Retailers and their industry associations are strongly opposed to the new rules, judging by the #DOLfail hashtag on the NRF policy agenda page. The association quotes data from a study by Oxford Economics that lays out the hidden costs of an overtime pay threshold of $970 per week:

2,189,600 retail and restaurant workers affected;

32% converted to hourly from exempt salaried pay;

21% would earn about $11,600 more in overtime pay on average, but employers would lower base wages so these workers would not see any real income gain;

11% would have hours reduced, a loss of $2.32 billion to management supervisory workers;

117,100 part-time workers would be hired to fill the labor needs of business; and

$745 million would be spent by retail and restaurant businesses to comply with the new regulations.

Avoid Overtime, Or Embrace It?

If retailers are unable to convince lawmakers to amend or delay the rule changes, they will need to rethink their labor strategies. A few options include:

  • Replace full-time managers with part-timers so that fewer individual employees would exceed the overtime threshold; and
  • Repurpose or redistribute the extra hours worked by full-time managers, so that they are not working as many 60-hour weeks. “This would certainly be a positive for these managers’ work-life balance,” said Knaul.

Retailers will need to be careful, however, about the impact that cutting back on hours has on store operations and customer service. “You can’t just take 10 hours of work out of the store; you would need to cut, for example, five hours of promotional activity and five hours that had been devoted to shipping products,” said Knaul. “The alternative is changing the expectations of the customer in the store.”

Some of Knaul’s clients may embrace the changes in ways that would further professionalize their managers. Offering salaries of $50,000 or more, safely higher than the overtime threshold, along with benefits and career advancement opportunities, would give these retailers “the pick of the litter” in selecting candidates, he said. Knaul cited retailers that had already been considering such a strategy due to the changes mandated by the Affordable Care Act, which include providing health insurance for full-time employees.

Successful retailers including Costco and The Container Store already have moved in this direction. Costco pays its hourly workers more than the minimum wage, and The Container Store makes a concerted effort to turn store employment from just a job into a career. In addition, 2016 Retail Innovator Award winner Bluemercury has created an internal career path: 100% of the company’s district managers were once store managers, and virtually all store managers began as sales associates.

“This change represents an opportunity to build better expectations and hire better managers,” said Knaul. Such a strategy would go hand in hand with retailers becoming more efficient with their workforce operating models, being “clean and clear in their expectations of what stores should be doing,” he said. “They can put a lot more discipline around task activities so that they aren’t forcing managers into an overtime situation. A good, responsible organization will start to pay closer attention in order to protect themselves, their managers and their processes.”

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