Are hourly engineers profitable?

In this edition of In the Trenches, Acme considers turning its engineering department into a non-salaried division.

Acme's flagship product, trimethyl flubdub, is that shiny, purple, gelatinous miracle goo that's been used in everything from foods to water softener resin and oven cleaner. The product and its many derivatives represent about 75% of the company's traditional revenue stream. For the past eight months, though, sales on this cash cow have been as soft as a Dali clock.

In the Admin Building, three executives with urgent issues on their minds huddle in the ostentatious conference room.

Louis Jange, Acme's CFO, opened the discussion. “Sales are down; profits are down. We need to focus on more cost-cutting measures to make up the difference.”

“Sure, and when sales are down, production goes down. Go figure,” replied Teddy Beare, the plant manager. “We've downsized the staff already. Too much, in my opinion. Even with the reduced production schedules, the plant people are working nearly 46 hours per week. They're complaining about it, but they're certainly not complaining about the overtime pay. The folks in the engineering department are working even more hours than that.”

“Nevertheless,” crowed Jacques Boute, the human resources manager, “my records show that overall productivity is up and profitability per labor-hour worked has risen 12% during the past year, I'm sure we could do even better than that.”

“Yeah, sales are down,” said Teddy. “What do you expect when we lay off nearly a third of the sales force? Don't you think we're entering a vicious circle, spiraling into a mad crash and burn?”

“Forget the business philosophy, guys. It doesn't matter,” answered Louis. “You know very well what Old Man Acme meant by that comment at the executive staff meeting last Friday. In case you missed it, he wants profits to go up, no matter what. I think he feels his stature in the local business community is on the line, and he's not going to take a fall.”

“What significant cost is there left to cut?” asked Teddy. “You want to start slashing everyone's pay?”

Jacques's eyes lit up. “You might be on to something there. After all, we don't have a union to worry about.”

“I was joking,” replied Teddy. “You can't do that to the people in the shop. They'd never stand for it. This place will be swarming with union organizers the minute you try it.”

“Not the production people,” answered Jacques. “I meant the engineering and support staff. Why are they getting overtime pay? They're supposed to be professionals, right? They're supposed to be paid by the job, not by the hour. Isn't that what's behind the meaning of the word salary? I'm just suggesting we freeze this labor expense at a lower level. Put them on straight salary, no overtime, no pay increases for the foreseeable future, at least until business picks up.”

“That's going to improve your hourly profitability figures even more,” chirped Louis. “Although it's not going to solve the whole budget crunch and put us on the road to Acme's profit goals, it'll help to fill in the larger potholes. I like it.”

“Wait a minute here, guys,” choked Teddy. “That's not going to work. The engineering effort out in the plant is the only thing separating us from disaster. That equipment is highly specialized, as are the people running it. These folks know how to make it work and work well. If they decide to walk, it'll be impossible to train a new crew rapidly enough to recover.”

“Don't sweat it,” replied Jacques. “If you think the economy is bad, the job market is worse. Where are they going to go? Most of what they learned here probably won't transfer to anywhere else. They might beef a bit, but they won't leave. Trust me on this one.”

“OK, folks, let's make it happen,” concluded Louis as he rose to leave. “Old Man Acme will be pleased.”

A plant engineer says:

Poor Acme, with people in executive positions who are making quick decisions without much thought that the total possible outcome profits might be down for a while. A quick unplanned meeting with no forethought to the subject is called to make a major decision. Acme has a problem like many other companies — sales and profits are down. The work that needs to go into a plan to raise profits and cut cost should be only one part of the overall plan. Good companies always will be looking for ways to cut costs. Seldom are those ways based on the wages of the employees who are still working.

Teddy is the person closest to the people in the plant. He said downsizing has gone too far and the existing staff is working too much overtime to make up the difference. His point was mostly ignored. Teddy’s statement of fact that the sales force has been cut by a third was mostly ignored. Facts aren’t important to Louis; his only concern is that profits must rise to meet the owner’s expectations. He forgot the part about “no matter what.” If these executives would take time to think, they might find many better avenues to greater profits than on the backs of the staff that provide the production skills to make the profits they have now. Teddy tries to bring up a final point when he suggests the importance of the engineering staff to the overall process effectiveness. He’s once again shot down. So, how viable is the solution? I think it’s doomed from the start.

The potential short-term problems are many. Too much overtime often can cause employee fatigue that can lead to mistakes and injuries. These alone place Acme at a greater short-term risk. In the long term, the fatigue can cause quality problems that might not show up for months and might not show on the books for a year.

To cut the salary of those responsible for making quality products seems like a poor way to increase profits. The three executives failed to look at options other than wages. Jacques seems to know the numbers of the workers very well. How about the numbers for the sale force? How many sales would be generated if half the laid-off sales force were put back on the street? Does the HR manager know the crossover point between hours of overtime and the equivalent in additional personnel? Maybe adding a few folks back on the payroll will get the existing staff out of an overtime situation, relieve some stress and increase productivity. I don’t believe the plan that these three hatched will prove to be a good one for Acme in the long run. If followed through, the profit reported for the next quarter might go up slightly, but look out for the following quarter.

Jeffrey L. Strasser, Bacova Guild,
540-863-2656, strasser.jeff@bacova.com

An academician says:

There are two issues here. The first is whether the action is legal. My opinion is that this is really a lawyer question. In fact, I’m surprised that the engineers aren’t salaried already. They’re usually classified as professional, and exempt, and usually in salaried positions. The second question is whether it’s a good move, and how to make the move. Will it save money? Probably, yes, given that the engineers are paid a reasonable hourly wage and are clocking in a lot of overtime. If you’re salaried and exempt, you don’t have to be paid overtime.

A wage action, and liability for violations of wage-hour law, can be the most expensive kind of lawsuit an employer can face.

However, the move isn’t going to be without controversy. The engineers will probably see a pay cut, which won’t set well with the group. Acme will have to decide whether the money saved is worth the hassle — that is, if the actual money saved is relatively minor, then maybe it’s not worth it. Are there other options? Many companies have gone to a four-day work week or have limited overtime, or put some employees on temporary leave or reduced inventories or a variety of other means of cutting costs. The important point is to have a well-thought-out strategy for the next six to 12 months, to keep costs below sales revenue.

Professor Homer H. Johnson, Ph.D., Loyola University Chicago,
(312) 915-6682, hjohnso@luc.edu

A maintenance consultant says:

These executives are guilty of some shoddy “seat of the pants” planning. Without much thought or analysis, they’ve agreed to implement a strategy that could easily backfire. The decision to cut the salaries and freeze the pay of the engineering support staff will cause dissension among the ranks and could have a negative effect on this group’s productivity.

The HR manager is gambling that the engineers won’t leave the company because of economic conditions. This might be true for some engineers, but there will be key individuals who will find employment elsewhere. The loss of several key people would be damaging to Acme. The non-union production workers could think they’re next in line for salary cuts and decide to unionize.

As to how the situation can be remedied, the simple answers are better planning and communication. The plan to cut back on the engineers’ salaries should be discussed with their management before being implemented. There might be alternatives short of cutting salaries that can produce the desired results.

The effect of downsizing the sales force should be evaluated. If production is up and sales are down, the problem could be with the sales force and not the production group. Someone also should look at why production is working overtime, while sales are going down. What effect will that have on inventory?

The options should be discussed with the owner before implementation. His support is needed for any plan that is adopted. Companies need to continue using the basics of good management, even during difficult times.

Dean A. Wallace, CPE, Applied Facility Solutions,
(610) 630-7414, dean@appliedfacilitysolutions.com

A labor and employment analyst’s response:

I’m with Teddy. Setting aside the strategic and morale issues of slashing employees’ salaries en masse, I fear his colleagues on the executive team aren’t giving potential wage-hour law liability its proper due. And Old Man Acme’s cherished reputation in the community won’t be well-served by a collective action wage suit.

While it seems natural to draw a distinction between the “plant people” and the engineering department when thinking of overtime eligibility, job titles or divisions alone do not determine whether employees are exempt under the FLSA or the applicable state law. True, changing the compensation structure to move the engineering and support staff from an hourly pay basis to a salaried position would be the first step toward making them overtime-exempt; to be exempt, employees have to be paid on a “salary basis.” But there’s more to it than that, as Caterpillar, EDS and other employers that have endured wage suits by their engineers can tell you.

The engineers would be expected to qualify as exempt under the FLSA’s “learned professional” exemption. Under this provision, an employee must, as his or her “primary duty,” perform “non-manual” work that requires “advanced knowledge in a field of science or learning.” While such learning is “customarily acquired by a prolonged course of specialized intellectual instruction,” what matters here is the employee’s knowledge, and how it is used in his everyday work, more than the particular educational path that was followed to obtain that knowledge. For example, some engineers may have acquired their advanced knowledge through a combination of college coursework, on-the-job training and work experience. The engineers must be engaged in work that is “predominantly intellectual” in character and requires the use of discretion and judgment.

There is little information here about the actual job duties performed by Acme engineers. But before summarily reclassifying them to deny them overtime pay, Jacques must evaluate the precise nature of the work they’re doing. And that doesn’t just mean reviewing their generic job descriptions, because the duties performed by an individual engineer may vary from those on paper; job descriptions alone are not the determining factor for FLSA exemption purposes.

Examining the exempt status of “support staff” will be an even tougher endeavor. Again, we don’t know what specific duties are performed by the Acme employees who have been lumped into this category, but determining whether they are exempt “administrative” professionals or “executives” will take a careful analysis of their particular job functions and the extent to which they conform to the FLSA’s criteria for one of those “white collar” overtime exemptions.

Another point worth noting as the company pursues aggressive cost-cutting: Even if the Acme brain trust determines that engineers and support staff can lawfully be reclassified as exempt, they’ll need to tread carefully when deducting pay for full or partial days off. If an employer has a practice of making improper pay deductions, then all employees in that job classification under the same facility manager can “lose” their exempt status. Such a strategy can be adopted lawfully, if carefully executed. The Department of Labor allows for the use of a shortened work week if the employer has not adopted the practice in an attempt to circumvent the “salary basis” requirement of the overtime exemption. For example, Tellabs successfully defended a lawsuit filed by engineers who contended they lost their exempt status after the company imposed mandatory days off without pay in the face of trying financial conditions. The court found the furloughed days were prospective reductions in future pay, not current deductions, and therefore, the engineers kept their overtime-exempt status.

But if Acme gets it wrong, either in determining that their employees are exempt under the FLSA or in imposing time off for cost-cutting reasons, the company will have more than falling sales to contend with. A wage action, and liability for violations of wage-hour law, can be the most expensive kind of lawsuit an employer can face. And wage-hour suits continue to be the most heavily litigated employment class actions.

It’s also foolhardy, by the way, for Jacques to dismiss out-of-hand a possible union organizing drive. He seems to mistakenly believe that unions are just for “the production people.” But lawyers, doctors, teachers and other professionals join unions. Surely Acme’s HR manager would be red-faced upon receiving an election petition from the International Federation of Professional and Technical Engineers (IFPTE, www.ifpte.org).

Lisa Milam-Perez, J.D., Labor and Employment Analyst, Wolters Kluwer Law and Business
(773) 866-3908, lisa.milam-perez@wolterskluwer.com

Reader responses:

Sure, let's hammer the engineers again. What a great idea. As a Plant Engineer for the past 41 years, I have been through no less than 5 plant closings and associated layoffs in this so-called "career." For some reason, engineers in the past have been quite expendable. Why do you think there is now a "shortage" of experienced and
trained/qualified engineers in the work place? One guess. I will tell you that many of those engineers who had children told them not to go into engineering because it is not a stable job. Finally, after the past 35 years of this, and with current engineers now retiring in big numbers, there are no large amounts of back-up people to this situation. Could this have been avoided?  I suppose, with some foresight - which the U.S. seldom has much of.

Jon Sentry

(1) Focus on the problem and evaluate the situation. The problem appears to be the sales volume of their main product. Why are sales down? Can it be turned around? Is the product becoming obsolete or being replaced by competitive products or another technology.

(2) Evaluate the situation. What are the company's financial restrictions, capabilities, and cash position? Can they weather a period of losses or negative cash flow while they fix the real problem. If they can they won't need to savage their workforce just to make short term profits.

(3) If there is no financial slack, cost reduction actions by management become unfortunately necessary. They could start by getting rid of the dead wood, if applicable. This is a frequent exercise during hard times. (This should include all levels of employees.) The next is to intensively coopt the entire work force to improve operational efficiency at lower production levels. Leadership is needed to form a sense of togetherness and team spirit and rally the workforce to victory. (Hopefully the company's fixed cost is not to large relative to variable cost. That could present a more serious structural problem that could be untenable during a severe prolonged downturn.) As for the "engineer's" involvement: Are we referring to technicians or engineers? Generally, engineers are accustomed to rising to the challenge, working long hours when truly needed, and are most times salaried exempt.  

Lee Beard

Fire old man Acme or cut his pay and perts.

Gerald Pippin

I interpret this as an incompetent management team who will run the company into the ground. Running a company based on cost reduction with only superfluous consideration of the long term ramifications of their actions does not work. This "Recession" that we are struggling with has given us examples of both good and bad management. The winners are those where respect and mutual support for the whole team is present. Shared gain or pain from the top to the bottom.

Chuck Montgomery