The following originally appeared on the WSJ.com on March 25, 2014.
President Obama on March 13 signed an order directing the Labor Department to expand the class of employees entitled to overtime pay. Currently, if a salaried employee makes more than $24,000 a year and is part of management—if he manages the business, directs the work of other employees, and has the authority to hire and fire—that employee is exempt from overtime coverage. The president wants to raise this salary threshold, perhaps as high as $50,000, demoting entry-level managers to glorified crew members by replacing their incentive to get results with an incentive to log more hours.
At issue is a growing inequality problem in the United States. Increasingly, Americans don’t have the career opportunities most took for granted a decade ago. Many are withdrawing from the labor force, frustrated because they’re unable to find a job and lured to depend on government rather than on themselves.
Rewarding time spent rather than time well spent won’t help address this problem. Workers who aspire to climb the management ladder strive for the opportunity to move from hourly-wage, crew-level positions to salaried management positions with performance-based incentives. What they lose in overtime pay they gain in the stature and sense of accomplishment that comes from being a salaried manager. This is hardly oppressive. To the contrary, it can be very lucrative for those willing to invest the time and energy, which explains why so many crew employees aspire to be managers.
As the chief executive officer of CKE Restaurants—the parent company of Carl’s Jr. and Hardee’s, among other chains—for the past 13 years, I’ve seen this phenomenon in action every day. I’ve watched young men and women enter the labor force in our restaurants. I’ve seen the pride and determination that leads to success in their careers and lives. Some move on to other jobs and challenges equipped with the experience you can only get from a paying job. Others stay, aspiring to move up to managerial positions. There’s nothing more fulfilling than seeing new and unskilled employees work their way up to managing a restaurant.
On average, our general managers each run a $1.3 million business with 25 employees and significant contact with the public. They’re in charge of a million-dollar facility, a profit-and-loss statement and the success or failure of a business. If that business succeeds, they benefit just as the owner of a small business would.
Our company-owned restaurant general managers earn a management-level salary starting around $36,000 and going as high as $65,000—the average is around $45,000—plus benefits. They also have the potential to earn a substantial performance-based bonus, up to 28% of their salary. They can progress through our management ranks as high as their ambition may take them. Our executive vice presidents responsible for Carl’s Jr. and Hardee’s both started as crew employees who worked their way up to general managers. Rather than overtime pay, they got an opportunity to prove themselves.
Many businesses offer incentives for managers. Public companies may have stock options or stock-purchase programs. The idea isn’t to squeeze labor by compelling managers to perform physical tasks and work long hours without overtime pay. The idea is to encourage managers to increase their compensation and improve their lives by running profitable businesses as if they owned them—regardless of the hours or tasks required.
Mr. Obama claimed that the individuals covered by the Labor Department change in overtime coverage would include employees who “mostly [do] physical work like stocking shelves.” This assertion is, at best, misleading.
To be exempt from overtime, the Fair Labor Standards Act requires the employee to be a “bona fide executive” whose “primary duty” is “managing” the business, according to a Labor Department fact sheet. Managing the business must be the “principal, main, major or most important duty that the employee performs.” The employee must also supervise “two or more full-time employees” and have authority to “hire or fire” employees. Stocking shelves won’t make you a manager and won’t exempt you from the law’s overtime requirements.
Managers may help their employees stock shelves or perform other “physical work” while performing their “primary duty” as a manager, which is hardly something to disdain. Each manager is entitled to decide whether to perform such tasks, just as small business owners may decide to perform nonmanagerial “physical work” to increase their profits or to show the crew that they too can perform those tasks. That’s what effective owners and managers do.
Perhaps this misunderstanding is what led Mr. Obama to believe that government should compel employers to pay managers hourly overtime. Unfortunately, the move would hurt the very managers he intends to help by turning them into hourly employees, depriving them of the benefits that come from moving into management. Overtime pay has to come from somewhere, most likely from reduced hours, reduced salaries or reduced bonuses. It’s easy to attack businesses when they employ these cost-cutting measures. But, unlike government, businesses must generate profits to grow.
Mr. Obama did say that in pursuing the rule change the administration was “going to do this the right way” and would “consult with both workers and businesses.” Maybe he should begin the process by asking managers who make below the new threshold whether they would prefer to keep their current salaries and incentive compensation or, in exchange for this overtime “opportunity,” go back to being hourly employees without bonus potential or equity incentives. Their answer might surprise him.