Violating labor laws to cut costs

Nov. 15, 2002
In this edition of In the Trenches, Acme wonders if its corporate environment strongly influenced a supervisor's unethical behavior.

It was almost quitting time when Mr. Greed, the manager of Acme's Chicago plant, paid his loyal supervisor of maintenance, Mr. Frankenstein, a visit.

"I've been looking at the numbers, Frankenstein, and they don't add up," said Greed.

"How do you figure that?" asked Frankenstein.

"Your maintenance department is costing us too much money. The cost of maintenance per unit of production is 25 percent higher than the plants in Dallas and Houston. Why is that, Frankenstein?"

"They're newer plants. They've got newer equipment. That all factors in, you know," said Frankenstein. "Much of the equipment in this plant is 10 to 15 years past its prime. Furthermore, a lot of it's technically obsolete, which complicates its maintenance. Finding parts and supplies is becoming problematic. Besides, this is fifth time I've had to cut my expenditures to satisfy the suits in New York City."

"Well, I am not buying your excuses," remarked Greed. "Every company in America is under profit pressures. And there isn't a person in this plant, or company, that wouldn't like to have up-to-date equipment and systems. But you've got way too many hours of overtime. That tells me you're not doing a good job of planning. You better get your act together, and soon."

The next day, as Frankenstein made his rounds, he considered his options. There wasn't much he could about his out-of-date equipment or the technicians assigned to his department. The plant's maintenance management software didn't offer much help either, it consisted of a pencil, legal pad and a small hand-held calculator. No, solving this problem required a much more creative solution, he reasoned.


"I've got it," he said to himself. "Suppose I ask some of my more gullible employees to work off the clock. That way, I won't have to pay them time-and-a-half. To make up for the lack of overtime pay, I'll just give them some extra time off when things are under control."

Looking over his employee roster, he determined that nine of his 27 maintenance technicians were prime candidates to be conned. He then proceeded to call each one in his office and gave this spiel.

"Listen [fill in the employee's name], things are getting really bad at the Chicago plant. Corporate management is all over me to reduce costs, but you know how much time it takes to keep this place running." At that point, he would pat the technician's shoulder.

"So, I've got to ask you for a favor," he would say. "I need to go off the clock for a while. That means I can't pay you for overtime."

When some technicians questioned this move, Frankenstein responded, "If we can't save some money, and improve the profits, the corporate management will close this plant. You see how poorly the company's stock is performing in the market. And you know how tough the job market is right now because of the economy. Good-paying jobs like this one are hard to find, my friend. You've got kids, car payments and a mortgage. You don't want to jeopardize that for a few extra bucks, do you? Besides, I'll make up for it next year when the budget loosens up. And I'll be working extra hours myself."

Sure enough, all nine technicians followed his request. When overtime hours approached, they punched out and then resumed their work. After three weeks, Greed was quite happy with the results. Overtime wages had decreased by 32 percent.

"Tell me, Frankenstein, how did you do it?" asked Greed.

"Well, boss, I just give the technicians a little motivational speech, that's all."

A few weeks later, Greed got wind about how the cost savings were being obtained. He immediately fired Frankenstein for violating labor laws and company policies. Meanwhile, the company endured countless days of bad publicity from local newspapers, radio stations and television stations.

Greed found himself receiving a call from Mr. Bigshot, the company's president and chief operating officer. "I don't know what you're doing out there, Greed, but you better get it straightened out,and fast."

Did Acme's corporate environment, with its lack of capital investment and demand for improved profits, create Frankenstein? Or is Frankenstein simply a victim of his own creative thinking?

An academician's response:

Hey, this case sounds like some stories out of last week's newspaper. Salespeople in a pharmaceutical company, under extreme pressure to increase sales, are paying kick backs to physicians to prescribe their drugs. Auditors and accountants look the other way on questionable financial practices to keep a lucrative client contract. And a construction contractor who seriously underbid a project is caught using substandard materials to cut his losses.

My point is that many ethical problems look like Frankenstein's. Someone or some company is caught between a rock and a hard place, and one way out is to bend the rules a bit. Frankenstein probably isn't a bad guy. If Greed had not applied pressure, Frankenstein probably wouldn't have pulled this nonsense. He just got stuck in the middle and didn't know how to get out. He may be ugly, but he's not evil.

This is not to excuse his behavior, however. Should Frankenstein be fired? You betcha! His behavior was both unethical and illegal. Yes, he was put in a difficult situation, but welcome to life. It is what we do when the going gets tough that really counts. Instead of asking his maintenance people to do something illegal, he should have shown some leadership and engaged them in analyzing the problem and working on solutions. What Frankenstein did was not only illegal, but it was ineffective. The maintenance costs are the same as they were before Greed issued his edict. Nothing has changed except that he was fired and Acme got a lot of bad press.

But in my book, Greed also must go. I think it was in the last issue of this magazine that I wondered whether they were passing out stupid pills in the executive lunchroom at Acme. Actually, I don't think they need any pills. Acme executives seem to be naturally inept. So, let's cut costs by canceling the order of stupid pills.

Greed should have worked with Frankenstein and the maintenance group to look at the problems and options for cutting costs. What is causing the high costs? How might we bring them down? A variety of options are possible, including quality processes, GE Workout, process redesign, outsourcing, changing materials, new equipment and software and probably 20 more. What's the cost/benefit of each option? How quick is the return on investment? This is Greed's problem as well as Frankenstein's, particularly since Greed controls the resources. If reducing maintenance costs is one of this year's initiatives, then Greed and Frankenstein and others must figure out how to do it. That is what real leadership is all about. Instead, Greed is playing "boss" and issuing orders. Acme doesn't need any "bosses" to improve its Chicago facility. It needs some leadership. And Greed doesn't fit the bill.

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

A corporate consultant's response:

Let's not mitigate Frankenstein by entertaining a philosophical debate about the degree to which one's environment influences behavior. Buy that and you justify any employee blaming the work environment for any type of unethical behavior.

Economic pressures often are used as an excuse for unethical behavior. It's easier, after all, to blame some outside force than to stand up and take responsibility for one's own actions. This case isn't a "Les Miz" story; it's an ordinary workplace issue, and the excuse of environmental pressure isn't mitigating in the least.

Frankenstein didn't even attempt to identify other options, and there are several.

First, he should investigate less-costly alternatives to overtime. Possibilities might include a second or third shift, an outside subcontractor, a few employees who might be interested in moving to "contractor" status, or perhaps a decrease in pay or benefits for every employee.

Second, he should conduct statistical process studies on each operation within the plant. These often identify hidden opportunities for efficiency and effectiveness.

Next, he should gather his technicians together to identify possible opportunities to reduce costs. They might have some great ideas.

Finally, Frankenstein admitted he'd had to cut his budget for each of the preceding five years. Why hasn't he already developed evidence-based reports to analyze increasing costs, together with recommended solutions?

If readers believe these suggestions reflect expectations that surpass the abilities of the typical plant supervisor, let's observe that he still could have reached out for help in any number of ways.

He could have contacted others in his profession who've faced the same difficulties, researched case studies on the Internet, put together a focus group of local plant supervisors to discuss the matter or suggested to Greed that a group of internal folks get together to examine the possibilities. Any of these efforts likely would enable Frankenstein to produce recommendations for Greed's consideration. Instead, it sounds as if he did nothing.

It can't be overlooked that Greed also could have implemented any or all of these measures. The fact that he didn't, however, does not justify his preying on the goodwill of others, or his deceiving Acme regarding actual costs.

Francie Dalton, Dalton Alliances, Inc.
(410) 715-0484

An attorney's response:

Acme certainly fostered an environment where Frankenstein was permitted to foist his scheme off on his employees, to the detriment of both them and Acme. Frankenstein also was not particularly creative. Most employers run afoul of federal wage hours laws either by allowing employees to work "off the clock," as Acme did, or by not properly classifying them as not exempt from the overtime pay requirements of the law to begin with.

Frankenstein's "comp time" scheme equally violated the Fair Labor Standards Act (FLSA), the major federal law governing wages and hours. It requires covered employers to pay nonexempt employees (those who do not qualify for an exemption from the overtime pay requirements) at one-and-one-half times their hourly rate of pay for all hours over 40 worked in a work week. With respect to private sector employees, comp time, that is, the practice of giving the employee equal time off during some other week, generally is illegal.

Why? If an employee works 44 hours during one week and his normal rate of pay is $10 per hour, the employer owes him $460 in wages for that week. If the employer instead pays the employee only $400 and lets the employee take four hours off the following week, the employer essentially has given the employee $40 worth of time off, not the $60 he was owed.

Frankenstein has created a serious liability for Acme. If an employer engages in a "willful" violation of the FLSA, it can be liable for double damages, that is, twice the amount it otherwise owes in back pay, plus costs and attorneys fees for the wronged employees.

Perhaps Acme should examine its corporate culture, one in which a manager is given an ultimatum with no guidance, no guidelines and no assistance to solve the problem. Frankenstein also was not blameless. He could have consulted human resources, other managers or even the employees who reported to him for suggestions on how to avoid overtime hours by working more efficiently.

Julie Badel, Partner, Epstein Becker & Green, P.C.
(312) 499-1418

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