Overcoming overtime

Nov. 22, 2004
A lean operation brings a new world of thin bankrolls and vicious cycles

[The scenario presented here is based on a true story; only the names have been changed to protect the innocent.]

One year ago Acme finally began restructuring its manufacturing operations to squeeze a few more pennies out of each dollar of sales revenue. For years, management had been threatening to transform the company into a lean manufacturer. This time, they did more than merely spout pompous-sounding management-guru platitudes.

It was at a special employee meeting held in the lunchroom just before last year’s holiday party that management announced, with great fanfare, the formal lean initiative launch. In a style reminiscent of some bygone presidential hopeful, a string of executives came to the podium, each toting at least one large poster, the content of which was intended to help explain some facet of the future state of being that management desired to see in place within the next calendar year. By the time the talking was done and the partying began, the north windowless wall of the room became an impromptu easel for nearly a dozen of these visual aids.

The center of attention near the left end of the wall was a poster displaying the new company org chart. It was clear to everyone that management used a clean slate, totally dismantling the plant’s old chart and building it anew. It was about time. The changes certainly reflected the reporting realities everyone knew should have been acknowledged ages ago. There was a palpable collective sigh of relief as everyone was able to locate their own name on the revised chart. But the new structure also made it clear that management’s expectations had changed.

And change they did this year. The four manufacturing cells the plant now has in place feature all the trappings of a successful lean initiative. The pace of the fully cross-trained worker teams is now regulated by a functional Kanban system that pulls material from Acme’s suppliers, through the cells and out to Acme’s customers. Work-in-progress inventories are nonexistent. Production workers perform autonomous maintenance. Each cell sports its own bulletin board that proudly displays its hour-by-hour performance using easily understood charts and graphs. Yes, Acme management is happily gathering those pennies by the handful.

But, some employees are unhappy. Those who formerly made a good living as production planners and expediters, for example, are no longer needed and have been reassigned to unfamiliar duties and struggling with new learning curves.

And a lean operation with its load leveling doesn’t leave much opportunity for earning overtime pay. Mary Oldinglen, a full-time engineering intern, is working to pay for her last year of undergraduate education. In her third consecutive semester-long stint with Acme in as many years, she’s currently assigned to the maintenance department. Her job is to serve as a sort of liaison between maintenance and two of the production cells, where she’s trying to implement greater levels of autonomous maintenance. But Mary is miffed. She’d been counting on the overtime pay she’d earned in previous years, but has been classified as exempt this year.

Then, there’s the case of Moe Sombeake, an instrument technician on the plant floor. During his last performance review, he received a pay raise that kicked him up to $24,000 per year to offset the fact he was reclassified as nonexempt. That status change degraded his benefits, including vacation, sick leave and participation in the retirement plan. But, Moe is thinking he’ll start being compensated for the extra hours he has been working each week for the last several months.

The pay structure for lower-level managerial types also has changed. Many, like Morrie Tayneah, a foreman in the plant, have been taken off a fixed salary and, just like their direct reports, are being paid by the hour now. Morrie and his peers grumble about having to punch the clock again, interpreting the change as a demotion that has derailed them off the management track. Not only that, they’ve lost certain perks, such as prime parking slots, flexible vacation time and some health benefits -- concepts that most managers elsewhere take for granted.

What’s more, they feel they’re now more likely to get caught in another layoff, of which there have been several in response to normal seasonal fluctuations in demand for Acme’s products. It’s a lean operation, after all. Easy come, easy go. It’s difficult for a laid-off, clock-punching manager to convince another employer that one is a true professional. Meanwhile, Acme just goes into mass hiring mode every time business picks up.

As they say, it rolls downhill. The entire Acme hierarchy is compensating for perceived personal injustice with a classic case of mass delegation to someone of lower rank. Those who’ve managed to avoid being reclassified as hourly are now saddled with expanded job duties formerly performed by their immediate supervisors. Of course, in the lean Acme world, there’s no pay increase associated with those administrative and professional duties being pushed downhill. The cycle repeats itself as it spirals right down the chain of command.

Lately, the plant grapevine has been carrying stories, mentioned ever so discretely, that several employees have been, and are, talking to a representative of a labor union down at the local watering hole three blocks from the Acme plant. Mary, Moe, Morrie and several others are wishing they could get in on the discussions that are taking place over pints of Guinness.

[i]How could this situation have been avoided? Can employees be reclassified and be required to punch a clock? Are the worker’s gripes justified? Would a labor union really be of any help?[i]

An academician says:

Acme’s problems are a good reason why most companies prefer introducing a new plant design at a greenfield facility, rather than trying to redesign an existing facility. A greenfield design allows one to start from scratch with a new plant layout, new equipment, as well as a new organizational structure. It’s obviously a lot easier that way.

I would have recommended that Acme hire a good consultant (may I recommend one of my fellow responders in this column), because it appears that they may have botched the design. A typical redesign of this type wouldn’t cut salaries, nor play some of the other pay system games Acme is now playing. Rather, average salaries usually increase because everyone would have an expanded range of responsibility. While average salaries may increase by, say, 10% or 15%, headcount usually decreases by 20% or 30%. The net result is that overall labor costs decrease by 20% or so, and usually productivity increases by 15% or 20%. Not bad –- reduce costs while increasing productivity. The real question is why so many manufacturers have been so slow to adopt the new design. Maybe it’s because they don’t want to go through the hassle that Acme is now going through.

As to whether employees can be reclassified, the answer is definitely yes. It’s not only occurring in manufacturing -- many nonmanufacturing companies are slowly redesigning themselves as they introduce SAP or PeopleSoft or some other enterprise-wide system.

Are employees gripes justified? It depends what you mean by justified. It looks like some people received a lousy deal, and if I were them, I would complain, too. But do they have a legal case? I think not, but will defer that question to our attorney friend.

Would a union help? Well, first one has to appreciate that many unionized companies are moving toward lean manufacturing designs. Consider, for example, the auto industry and its collaboration with the United Auto Workers. The advantage of a union is that it gives the employee some representation and, through the union, some level of fairness might be introduced into the change process. So, if the employees think they’re getting screwed, they should be thinking union or some other recourse.

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

An attorney says:

Acme isn’t alone in reclassifying many of its workers from exempt to nonexempt and vice versa. On Aug. 23, 2004, the new regulations defining the so-called white collar exemptions from overtime pay under the federal Fair Labor Standards Act went into effect. The most sweeping change from the old regulations is the requirement that an employee must be paid a salary of $455 per week, in addition to performing certain duties, to be exempt from the overtime pay requirements.

Acme was required to reclassify employees if they no longer qualified for the overtime pay exemption. In addition, the law change caused many employers to review how they classified employees and, in so doing, many corrected preexisting erroneous classifications.

With respect to Mary, the only exemption she would qualify for is the exemption for administrative personnel; those with expertise in a particular area who exercise independent judgment and discretion in connection with significant matters and who act as advisers to management. Moe, the instrument technician, likely doesn’t qualify under the administrative exemption and wouldn’t qualify for the exemption for learned professionals if he doesn’t have an engineering degree. Morrie may have lost his exempt status because the new wage-hour regulations require that to be exempt as an executive, the employee must have the authority to hire and fire or be someone whose recommendations in that regard are given great weight. He also could have lost his exempt status if he was not paid $455 per week.

Unfortunately for the employees at Acme, voting in a union would not solve their discontent about their pay status. While a union represents employees for purposes of negotiating with the employer concerning wages, hours and other terms and conditions of employment, an employer is required to comply with applicable laws and no amount of bargaining with a union can change that requirement.

Julie Badel, partner
Epstein Becker & Green, P.C.
(312) 499-1418
[email protected]

A corporate consultant says:

Realizing that my opinion is likely to be tremendously unpopular, my analysis follows. First, I see only one injustice in this case. When one's duties are expanded, some facet of one's compensation package should reflect the increased work. Acme has apparently increased the scope of work for some employees without making the appropriate adjustments to compensation.

Otherwise, Acme is making the right business decisions. Unless the business is a charity, it must subordinate parental-like concerns for its people to ROI. Acme is not responsible for paying for Mary's degree. As for Morrie's reclassification to hourly status, Acme made no promise that the same job would be available forever. This case is no different than the thousands of jobs that have been reclassified or lost during past 50 years as new technologies have been adopted. Are corporations to be held responsible for taking care of people whose jobs have become obsolete? Of course not. Corporate America is not Welfare.

It's not surprising that workers are complaining. Most of us would do so if our situations were deteriorating. Complaining about what's happening is one thing; blaming Acme and taking the company's business decisions as personal abuse is another, and it's absurd. Companies don't guarantee jobs for life. If one's job is outsourced, reclassified, eliminated or otherwise affected by business decisions, that's life. If companies are deceitful and usurious, that's another story. But that's not what we have in this case. If Acme‘s employees don't want the jobs they now hold, they have the option to find other work. If they want to invite in a union, that’s their right. But it's not Acme’s job of to maximize employees’ financial gain. It's Acme’s job to do what's necessary and honorable to retain the right people to do the right jobs for fair market compensation such that shareholders are satisfied and the future of the company is best assured.

Francie Dalton
Dalton Alliances Inc.
(410) 715-0484
[email protected]

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