Running a Shop

The Minimum Wage Debate and Overtime Updates to the Fair Labor Standards Act

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With 2016 being an election year, one of the most highly debated topics nationally is that of minimum wage, which is just one aspect of the Fair Labor Standards Act (FLSA) — also referred to as the Wages and Hours Bill. First introduced in 1938, the FLSA was responsible for creating a 40-hour workweek, guaranteed time-and-half for overtime in certain jobs and the establishment of a national minimum wage.

The FLSA has become a hot-button issue this political season, and there have been developments in a couple areas that could have auto service operators doing a double take when it comes to employee compensation.

At present, there has been a push for a drastic raise in the minimum wage. Two states — California and New York — and the city of Seattle have approved a $15 minimum wage, while lawmakers in several other states and cities have proposed similar measures. This is a major concern for lube operators, as most of the industry is comprised of employees who are paid hourly.

However, there are a handful of employees — mostly managers — who are salaried. And a more recent development affects their paychecks.

In May, the Department of Labor (DOL) issued a final ruling governing changes to overtime rules under the FLSA.

Beginning December 1, 2016, employees who are considered “salaried,” and therefore exempt from the FLSA and do not receive overtime pay, must earn a guaranteed minimum salary of at least $913 per week ($47,476 per year) in order to be treated as such. Under the changes, this new threshold is approximately double that of the current minimum salary requirement of $455 per week ($23,660 per year), which has been in effect for 12 years. In other words, going forward, if an employee’s salary is not at least $913 per week, he or she must receive overtime for all hours worked over 40 in a week.

In comments submitted to the DOL, the Auto Care Association stated that, “This unprecedented, industry-wide reclassification of a significant portion of our workforce will be severely disruptive to current levels of employee wages and benefits, and the very real probability of the consequent change [negative] in employee morale will affect every aspect of our day-to-day business functions.”

“Members fortunate enough to be aware of the coming changes are already beginning the reclassification of many employees as well as revisiting overall wages and benefits,” said Bill Hanvey, president and CEO of the Auto Care Association. “One association member has already advised us he ‘has had to inform 10 percent of his employees that they are now hourly, not salaried,’ and he doesn’t know how to deliver that message. Even more troubling is the large number of companies in the auto care industry who remain unaware of the change in regulation and its consequences.”

 

Is It the Cost of Doing Business?

Groups such as the Fight for $15 have marched and rallied for a raise in the wages, but at issue is the rate at which wages should increase.

Small business owners, including those in the quick lube industry and those in franchise-heavy industries such as fast food, have voiced concerns on labor costs rising too quickly.

“This concern is reasonable depending on how fast the minimum wage is boosted to $15 an hour,” said Gary Burtless, senior fellow for economic studies at the Brookings Institute.

“The minimum wage raises their costs,” added Professor Jeffrey Miron, senior fellow at the Cato Institute and senior lecturer and director of undergraduate studies in the department of economics at Harvard University. “[Shop owners] will adjust by trying to reduce costs elsewhere. This could mean substituting capital, hiring fewer hours, raising prices or hiring off-the-books low-wage labor.”

In other words, the cost of doing business will go up as the minimum wage increases, but with economic uncertainty a problem, for many businesses it could mean they may not be ready to offset increased labor costs with higher prices.

“Businesses may be forced to let people go, and for shop owners this could mean operating with a smaller staff,” warned Michael Saltsman, research director at the Employment Policies Institute.

However, some small business owners have accepted and even embraced an increase in the minimum wage, arguing that an increased labor cost shouldn’t be viewed as a problem but rather an opportunity. One such shop is British American Auto Care in Maryland, where owner Brian England called a national raise to the minimum wage, “a brilliant idea.”

Instead of worrying about increased labor costs, he said it is a scare tactic used by politicians and economists — and that higher wages mean more money in consumers’ pockets.

“When you look at the research where the minimum wage has been drastically increased, only good things have come out of it,” England added. “If you pay a small wage, you aren’t looking after that employee.”

One immediate benefit of paying more than the minimum wage is that British American Auto Care hasn’t had a great deal of turnover. England further added that the fears are really an American concern of being told what to do.

“I know a lot of shops are already paying over the minimum wage, but they like to say that they are doing it on their own,” England noted. “They don’t like being told they have to do it. Of course, the trouble is you need to have this regulation to bring the other people up.”

Economics counter such an argument by suggesting that in highly competitive businesses it isn’t really a race to the bottom, nor is it really about driving higher profits. Instead, for many shops, it can be about merely keeping the lights on and the business running. This is especially true where consumers have more choices when it comes to getting their cars serviced.

“A raise in the minimum wage can really hurt low-margin businesses, which is why we have these debates,” Saltsman noted. “In some cases, one alternative is to have fewer people on staff, but in some cases, businesses close if they can’t work out the increase in labor costs.”

As a result, the debate is one that has created protests and even strikes amongst some workers. How widespread the move to an increased minimum wage would be won’t likely be fully felt until after November’s elections.

“Unless the GOP [the Republican Party] loses control of both the House and Senate, the minimum wage is unlikely to rise to $15 an hour [nationwide] very soon,” Burtless said. “If the minimum wage is raised to $15 an hour over a more lengthy period — say six or seven years — employers may find the cost increase to be more manageable.”

Different parts of the country will also be affected differently, Burtless warned. He added, “if the minimum wage is raised to $15 an hour in just a couple of years, I expect there will be a loss of employment, especially in low-pay industries and low-pay parts of the country.”

While groups such as Fight for $15 are calling on a living wage for employees, one aspect that isn’t being debated is how businesses, including quick lube shops, should address the issue of a fair raise for workers already paid more.

According to the 2015 Fast Lube Operator Survey conducted by National Oil & Lube News, the average technician was being paid $11.25 an hour, while the starting wage for a newly hired technician was $8.57. A raise to $15 would almost double the starting wage for the industry. So, what does that mean for those making near or more than the current minimum wage?

“In an industry with wage distribution where the seasoned employee is paid more, it is another issue, one that isn’t being discussed,” Saltsman said. “This is the less-discussed consequence of what happens when you raise the entry-level wage and, therefore, have to raise wages across the board for everyone.”

The higher paid employees will expect to see a wage increase as well, Saltsman added.

“What happens in this situation is that shop owners can face a substantial increase in a short time and, as we discussed, those labor costs need to be offset,” Saltsman explained. “It comes down to what customers might be willing to pay. If they are willing to pay the higher cost for services, we [might not] even be having this discussion and there would be no debate.”

 

Commissions, Exemptions and Salary Employees

What also isn’t as clear for shop owners is how commissions and various exemptions fall into place. At present, there are various criteria for employees to be exempt — with 12 primary exemptions and some 18 secondary exemptions.

One key point with the FLSA is how commissioned sales employees of retail and/or service establishments are considered. These employees are exempt from overtime if more than half of the employee’s earnings come from commissions and the employee averages at least one and one-half times the minimum wage for each hour worked.

“The minimum wage law requires employers to ensure that the wage paid during the first 40 hours of work per week must average the specified minimum wage, and that includes commissions,” Burtless explained. “If I were an employer, I would re-jigger the commission schedule so only workers with truly exceptional productivity receive a commission.”

In addition, partsmen and mechanics employed by automobile dealerships are exempt from the overtime pay provisions of the FLSA, which could further allow dealerships to more aggressively compete with quick lube shops on some jobs.

“Some workers are exempt from the overtime rules,” Burtless noted. “This could depend on their management responsibilities.”

There has been discussion that one way around the increasing minimum wage would be for business owners to offer a salary instead, but that could be harder to achieve than it sounds. While in theory it could be good for the business, in practice it could add other complications, especially considering the new overtime rules that go into affect December 1, 2016. The final rule issued in May by the DOL increases the salary threshold for overtime eligibility to $47,476, which is a 100-percent increase.

“Salaried employees would not be affected by an increase in minimum wage,” Miron explained. “Yes, switching employees from hourly to salaried statuses could be a way to avoid the minimum wage, but I doubt the regulations would allow that to happen.”

To move employees from hourly to salary would likely require a change in responsibilities beyond a change in status or even title, and owners would have to keep an eye on the amount of hours worked per week — given that salaried employees making less than $47,476 would need to be paid overtime.

 

The Road to Automation?

One other aspect of a raise in the minimum wage that supporters of the measure often fail to take into account, is whether automation or other automated systems could replace workers. The ubiquitous ATM — or automated teller machine — that banks introduced in the 1970s was partially to provide greater flexibility so consumers could have access to their money when the bank was closed, but in recent years it has allowed banks to operate with fewer tellers.

Grocery stores and big-box retailers have followed suit with kiosks that allow customers to self-checkout, while more recently fast food restaurants have introduced similar systems that allow customers to place and pay for orders themselves — again all to reduce labor costs.

“If you look at the steps businesses take as labor costs rise, [they are usually] automating,” Saltsman said. “We’ve seen it for more than 30 years. Customers at grocery stores didn’t mind bagging their own groceries, and McDonalds is testing an iPad-style kiosk to take orders. This is acceptable to consumers, as it means prices don’t have to go up to pay for increased labor costs.”

Will the quick lube industry follow suit with similar technology? It depends on whether the human element can be replaced.

“At an oil and lube shop, it could be what technology allows,” Saltsman suggested.

 Higher-tech cars could be one part of the equation. Already, sensors are allowing drivers — and techs at the shop — to know of potential issues. As the cars become more high-tech, this could improve the turnaround time for some processes.

Looking at a similar industry, carwashes became automated decades ago. The first semi-automatic carwash was introduced in Detroit, Michigan, just after World War II. In 1959, Dan Hanna created the first mechanized car washing system — and with it the turn-around time for a carwash was greatly reduced from several minutes to just under three minutes to wash an entire car. Today, you’ll find most carwashes are highly automated and have low labor costs.

Other aspects of vehicle care may be harder to automate, however.

“Fortunately for the workers in our industry, it still takes people to turn the wrenches and tighten the nuts and bolts — just fewer of them,” said Ragan Holt, industry analyst. “[This is] unlike the manufacturing process where ‘robots’ put a vehicle together.”

Yet, it must be remembered necessity is still the mother of invention. As shop owners have to deal with increased labor costs, new thoughts on how to do more with less people and advancing technology may fill the void.

“It could mean operating on a smaller staff,” Saltsman said. “Or it could spur technology that puts people out of jobs. Business will go one of these directions.” 

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