Question

It is estimated that labor costs are between 50 - 75% of the costs of a business. On December 1, 2016, a new labor law was supposed to take effect that would have likely made millions of salaried workers eligible for overtime pay. Certain salaried workers who earn below $47,476 would have been entitled to time-and-a-half wages for each hour they work beyond 40 hours a week. Currently salaried workers $23,660 and above earn no overtime pay even though many work 45, 50 or more hours in a week without extra pay. The increase in wages would also have affected increased costs in Social Security and Medicare taxes employers must pay on all of an employee's wages. Some business solutions that have been suggested are: raise an employee's salary above the proposed threshold to avoid paying overtime; instruct employees to not work more than 40 hours a week; hire part-time workers to pick up the slack; change a salaried worker to an hourly worker; and/or cutting your business budget costs in marketing, advertising or other areas to pay for the overtime.

Answer the following scenario questions: (a.) You have worked hard to complete your education and have moved up in your company from a hourly worker to a salaried employee: if you were an salaried employee, describe the impact of the law on your job, budget and lifestyle; and (b.) if you were the employer who has to pay the overtime rate plus increase in taxes and worker's compensation insurance to all of your salaried employees, describe the impact of the new law on your businesses’ costs and your solution to minimize the impact on your business.

Answer 1

Solution

a)

On completion of education and moving up from hourly worker to a salaried worker will bring more autonomy, freedom, flexibility etc with it. The Major drawback of salaried employee to hourly worker in respect to finance, is the overtime payment received by the hourly workers , since they are paid as per the number of hours worked which is not paid to the salaried workers.

however, with the new law in place , even the salaried employees with income less than $47,476 are eligible for overtime. Thus the new law will financially increase the benefit to salaried employee which was previoulsy not passed by the management for putting extra hours to work.

The new law thus will increase earnings, which will increase the budget and also will raise the lifestyle.

b)

Since, the business is labour driven, as labour cost consists of about 50-75% of costs of business, following steps needs to be taken to review and control the labour costs in light of new law.

i) Steps needs to be taken to mechanise the business process as far as possible and reduce the inefficiency and duplication of work. Mechanisation will reduce the number of hours required for a particular tasks.

ii) Review the projects in hand, for one time projects , hourly worker should be hired instead of salaried employee..

iii) Compensation structrue should be reviewed, if the current level of salaries are high then the current market scenario, salry hike/raise should be limited.

iv) Reviewing the other components of labour costs like perquisites and trying to control it , like the pension plan can be converted to profit sharing plan and so.

iv) Reviewing costs other than labour costs and controlling them.