This Single Labor Rule Hurts Business Owners, Colleges, and Habitat for Humanity

Rodney Kloha feels like he has been backed into a corner by the federal government.

Kloha, of Midland, Michigan, prides himself on running a clean and honest business, Circle K Service Corp., that has grown for nearly 30 years.

But after the Obama administration issued a regulation last month raising the salary threshold for employees eligible for overtime pay, he’s found himself in a bind.

Under the Department of Labor’s new rule, beginning Dec. 1 any employee making up to $47,476 a year must receive overtime pay.

Kloha and his father, Alan, started Circle K Service Corp. in 1987. The company services and maintains fleets of trucks, and also manufactures trucks sold to local fire departments in Michigan.

The elderly Kloha retired last year, leaving Rodney Kloha and his wife to run the Midland business. For nearly 30 years, Circle K Service has been family owned and operated, and today employs 19 workers.

Of Circle K Service’s 19 employees, five are salaried. Of those five, the Obama administration’s new rule affects two.

And that, Kloha said, has left him in a no-win situation.

“I’m now afraid I might lose a guy who said he’s worked too many years to go back to being an hourly person,” the business owner told The Daily Signal, adding:

But what do you do? Those decisions were forced upon us, and they’re not decisions we want to make. It’s either that or I have to violate the law. I’ve been a clean, honest-running business for that long, and I don’t want to start breaking the rules now.

To abide by the new rule, Kloha said, he’s likely going to have to switch the salaried workers making less than $47,476 to hourly, something he doesn’t want to do.

His other option—raising those employees’ salaries to more than $47,476—isn’t feasible.

“There’s a disconnect between Washington and the rest of the country and what reality is,” Kloha said:

I’m in Michigan. It’s a rural area. We have [industry] and everything, but it’s not urbanized like Washington, D.C., or New York City. Salaries in the range of 35, 40, $50,000 are good wages. With my salaried people, we have an agreement that we come together on what the salary is and what’s expected to do the job. I don’t abuse them, and they don’t abuse their salaried position. My employees are seeing [the switch to hourly] as a demotion.

‘Unusually Far-Reaching and Abrupt’

The Department of Labor introduced its proposed rule in July 2015, revising the Fair Labor Standards Act’s overtime regulations.

Prior to the Obama administration’s rule, the Fair Labor Standards Act exempted workers making more than $23,660 annually from overtime pay. The law was last updated in 2004.

The administration’s proposed rule originally would have raised the threshold to $50,440—more than double the salary ceiling set more than a decade ago.

When the administration announced the proposed rule last year, James Sherk, a research fellow in labor economics at The Heritage Foundation, found that affected employees likely wouldn’t see a difference in their take-home pay, as employers are likely to offset the higher labor costs with lower wages.

“These regulations will limit workplace flexibility without improving pay,” Sherk wrote. “Expanding overtime regulations to more salaried employees will hurt the workers the White House intends to help.”

In response to the administration’s announcement, nonprofits, colleges, universities, owners of small and large businesses, and employees likely to be affected submitted nearly 300,000 comments to the Department of Labor.

Habitat for Humanity stressed that it and other charitable organizations “will be disproportionately impacted by the proposed rule and unable to comply without reducing access to products and services.”

According to Habitat for Humanity, which builds houses for the poor, the majority of its CEOs or executive directors make less than the proposed $50,440 threshold. In effect, all Habitat employees would be eligible for overtime pay.

“Because charitable organizations have very limited abilities to increase donor support to respond to such increases, increased labor costs will inevitably result in fewer households receiving desperately needed support,” Christopher Ptomey, Habitat for Humanity International’s senior director of government relations, wrote.

The University of Texas system, which includes 14 institutions with more than 217,000 students enrolled, also protested the proposed rule.

In a letter submitted to the Department of Labor, Lars Hagen, a senior attorney with the system, warned the schools likely would have to curtail incentives for meritorious work, compress salaries, and address low morale among employees should the administration implement the $50,440 threshold for overtime pay.

“In the eyes of many, the proposed changes are unusually far-reaching and abrupt,” Hagen wrote.

Kloha, meanwhile, first heard about the Obama administration’s proposed changes to overtime pay from the National Federal of Independent Businesses, of which he is a member.

After researching the changes, Kloha dialed in to a conference call with the NFIB and Obama administration officials to discuss the impact of the new overtime rule. Kloha told The Daily Signal he was the only small business owner who participated in the call, during which he outlined how the rule would hurt Circle K Service.

“The words I was thinking was, ‘What are they thinking?’” Kloha said. “They don’t understand the relationship we have with our employees.”

The administration officials, he said, didn’t listen.

Nearly one year after the Department of Labor issued its proposal, the Obama administration announced the final rule regarding overtime pay. The regulation extended overtime pay to employees making up to $47,476 annually, beginning Dec. 1.

According to the White House, the higher threshold would extend overtime pay to approximately 4 million workers.

Analysis from the Economic Policy Institute, a left-leaning think tank based in the District of Columbia, estimates that 12.5 million salaried employees will benefit from the regulation.

“[The overtime rule] will put more money in the pockets of people worrying about costs like child care,” Ross Eisenbrey, vice president of the Economic Policy Institute, told The Daily Signal. “It’ll improve their lives, make them better consumers, and help the entire economy.”

Eisenbrey has for years been urging the Obama administration to address overtime pay, but he said efforts were stymied by sharp opposition from business leaders:

It’s always hard for the government and especially the bureaucracy to impose any new cost on business. There can be a political cost to an administration, and Congress threatens to intervene and punish an agency that does something like this.

Despite the administration’s reassurances, Beth Milito, senior executive counsel for the NFIB, said the regulation will have far-reaching consequences.

A survey of small businesses conducted by the group found that 44 percent had at least one employee affected, an unprecedented amount for a government regulation, Milito said.

“The one-size-fits-all when it comes to setting a salary threshold is very challenging,” she told The Daily Signal:

If you’re going to do one for the whole country, you need to take into consideration that in Louisiana, Arkansas, Ohio, and Michigan, a good salary is different than what you consider to be a good salary in New York, D.C., Chicago, or Boston.

Additionally, Milito said, one of the biggest challenges for owners of small businesses is the increased administrative burden, particularly on those who decide to move employees from salaried to hourly.

“If somebody is now nonexempt [from overtime pay], you need to make sure they know you have to record all time worked,” she said. “The additional paperwork and educating employees on the changes is challenging.”

Business owners, she said, are “doing this without any expertise” in human resources.

Kloha said he already is worried.

“I understand there are some businesses out there that are taking advantage of their employees,” he said. “But the vast majority of companies don’t, and it seems like they’re saying, ‘Let’s penalize everybody because we have some bad eggs out there.’”

Holding Their Breath

Despite the opposition from an array of institutions, some believe there are bright spots in the Department of Labor’s regulation.

Mike LeFever, president of the South Carolina Independent Colleges and Universities Inc. (SCICU) said he was relieved to see the government lowered the top end of the salary threshold from $50,440 to $47,476.

LeFever said his organization, a nonprofit representing 20 independent colleges and universities in South Carolina, was pleased to see the Obama administration pushed the regulation’s implementation to Dec. 1.

“Our groups need that long to completely analyze and look at the alternatives available to them,” he told The Daily Signal in a phone interview.

LeFever said he expects to see institutions like Furman University and Wofford College, which are among the SCICU’s ranks, do one of two things: raise salaries close to $47,476 to above that amount, so they’re exempt from overtime pay, or switch those salaries far below $47,476 to hourly wages.

The latter approach, LeFever said, likely would lead colleges and universities to limit hours strictly to 40 per week.

For on-campus positions that require weekend work, like those in student affairs or others who work at social events, colleges could hire part-time employees to limit the amount of overtime work for hourly workers, LeFever said.

“There’s going to be a lot of decisions to be made by Dec. 1, and everybody’s going to hold their breath and hope they can adjust on the fly,” LeFever said. “But everybody’s committed to carrying out the intent of the law.”

LeFever estimated the schools in the SCICU network boast a workforce of about 7,000. Twenty percent, or 1,400 workers, are in positions directly affected by the Department of Labor’s overtime regulation, he said.

Of concern for the schools, though, is whether the new rule will have an impact on tuition, though that likely won’t be determined until next year. LeFever said:

The [college] presidents that I’ve talked to, their main goal is to try to deliver the same level of services within the parameters of the law without increasing personnel costs and to try to keep that at a minimum to keep that off of increasing tuition. I can’t say what the impact is going to be, but it is certainly the goal of our members to try to keep it as minimal as possible without decreasing services.

Not a ‘Faceless Company’

For Kloha, the most difficult aspect of implementing the new overtime rule is trying to understand why officials in Washington decided to raise the ceiling for overtime pay so high.

“The bureaucrats seem to think I have a pot of money and will just take it and spread it out to my employees, not realizing how it works,” the Michigan business owner said. “In fact, I’m not far off the threshold myself, and I’m the owner.”

He already has fielded concerns from the two employees who will be affected. They anticipate their pay will fluctuate week to week as they clock in and out.

“Both of them are like, ‘Why is the government sticking its nose into this? I know what my salary is. My hours are fair. I’m not being screwed over. I’m not being forced to work tons of hours,’” Kloha said, adding:

I’m not one of those companies where I have a person working 70 or 80 hours a week and only getting a low salary. There are companies that do that, but I don’t think it’s the majority of companies. It’s a very limited amount.

Regardless, Kloha is steadfast that his will remain the same clean, honest business that Circle K Service Corp. has been for the past three decades, despite the government’s intervention.

“We’re human beings. We’re not a faceless company,” he said. “We’re trying to do our jobs and make a living and provide for our families.”