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Overtime Pay - No longer meeting its original purpose?

This article for AIM by Marion Edwyn Harrison, points out that overtime has wandered far from its origins. Many hourly paid workers now consider it an entitlement as part of their job. This is far different than its original purpose, which was to encourage employers to hire more workers instead of working their existing workforce longer hours.

Mr. Harrison make some valid points about general productivity as work hours increase, that I can confirm from my own experience over the years. Knowing how closely most management teams monitor productivity vs labor expenses, I don't imagine that much of this is news to many employers. So what changed? Why are overtime laws no longer an effective inducement to hiring? Is overtime no longer an effective means for incentive to full employment?

I believe, from my personal experience, that our tax laws and workers compensation requirements may be partly to blame. The overtime equation itself has not been updated since the law was enacted by FDR, which may be another significant factor.

I grew up in a self employed business, in a semi-rural area (so there were other factors at work). In my father's business, my first memories are of a relatively large work force (for the area) of 3 to 4 men that worked for him on a continuing basis, and part time fillers as necessary. However, as I grew up, the work force shrank, so that by the time I was in High School, there was just one other employee.

The amount of work had not decreased, but the hours worked had increased, so that having an entire Sunday off was something more unusual than not. The thing(s) that had changed were the costs of having an employee. At the time that the labor laws concerning overtime were implemented, the hourly wage was the most significant cost of having an employee. Other costs (medical/liability insurance, etc) were a relatively minor expense and there was not a significant amount of administrative overhead. In this environment, increasing the hourly labor cost by half would be, and was, a significant incentive to add an employees vs working the workforce longer hours, if such overtime expense could be controlled or minimized by the additional workers.

Fast forward to today (or even 30 years ago). Now, the hourly wage is a relatively 'minor' piece of the overall expense of having an employee. The administrative overhead to track and maintain the required records for SS/Income tax withholding, Workers Comp and Liability costs can easily double the real expense of an employee to an employer. In this environment it can be, and often is, more cost effective to work an employee two or three times the federally mandated work week (40 hours) than it is to add additional employees.

Some employers have gotten around this by having more employees, but working them all at part time hours, thus avoiding many of the 'expenses' that are required for full time employees. Others hire workers as 1099 employees; essentially as independent contractors rather than full time employee, putting most of the administrative onus on the employee.

Currently, since our 'real' national employement is almost at full theoretical utilization, this isn't a crises question. But the issue does remain - if overtime is no longer fulfilling its intended function, then what can be done to restore that function?

One option may be to update the overtime equation (say to 2x or 2.5x) so that the hourly compensation for overtime once again becomes the primary expense. However, this option may tend to slow down the economy by increasing the overall labor expense without providing any increased productivity - perhaps actually decreasing productivity.

The 'ideal' solution would be to reduce the 'hidden' costs of having employess so that the hourly wage returned to its 'normal' proportion of the expense in having employees. This would entail a massive overhaul of the tax, workers comp, and liability systems to reduce these overhead and administrative burdens. It is not clear to me how this could be achieved in a coordinated fashion so that the desired end result could be achieved. A disjointed, piecemeal approach could do more harm than good.

Any changes to this system would likely be fought tooth and nail by organized labor and other groups that view overtime as an entitlement program or 'right' for the employee. If FDR could see what many of his ideas have evolved into, I doubt he would be terribly happy...

posted by Clayton @ 7:54 AM