How retailers can respond to minimum wage, overtime pressures
UPDATE (12/14/16): On Nov. 22, a federal judge blocked the new federal overtime pay rule. Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas granted an emergency preliminary injunction nationwide, blocking the Department of Labor’s new federal overtime rule, which would have nearly doubled the Fair Labor Standard Act’s salary threshold from $23,660 to $47,476. The new federal overtime rule was supposed to take effect on Dec. 1, but due to the injunction, companies no longer have to make pay changes by the deadline. However, the overtime rule could still be implemented in the future as a preliminary injunction is not permanent.
Stay tuned as RSM’s retail industry practice will be following this situation closely.
ORIGINAL (9/6/2016): Retailers already facing minimum wage increases across the country are now also facing new federal overtime rules that may further affect their labor costs. As if cultural shifts in consumer preferences and buying habits are not enough to deal with on the top line, the new labor policies pose additional challenges on the bottom line.
Currently, salaried workers who make $23,660 or less are eligible for time-and-a-half overtime pay if they exceed 40 hours a week. Starting Dec. 1, 2016, the salary threshold will nearly double as workers who make $47,476 a year or less will be eligible. Specialty retailers in traditionally low-cost areas, such as the South and Midwest, will be affected the most as their assistant managers and managers will likely qualify for overtime. These retailers typically have smaller store footprints and lower volume, and their assistant managers and managers often make below the new threshold. Consequently, their salaried workers, who often work more than 40 hours a week, may now be eligible for overtime. In addition to the higher direct labor costs, retailers will also need to invest in compliance tracking systems to ensure they are following labor regulations and limit exposure to regulatory penalties and potential lawsuits for not paying overtime to staff who qualify.
The uneven impact of rising labor costs
The impact of the these labor policies will clearly vary by retail segment and location; according to the RSM Middle Market Business Index, however, nearly two in five middle-market companies say the change in the overtime rule will have a negative impact on their organization’s ability to grow.
John Nicolopoulos, national retail practice leader, discusses the uneven impact the labor policies will have on retailers.
To combat the impact of the new regulations, there are three back-end strategies retailers can use to help maximize profitability and offset costs.
- Optimize labor. Retailers need to reevaluate their staffing strategies. Adding part-time workers for specific purposes, such as for store closers, at lower wages and fewer hours; using hourly workers at wage levels lower than managers’ salaries to perform less managerial tasks; and investing in high-skilled, more productive workers to help decrease the number of employees on the payroll can all help minimize the impact.
- Manage margins. Managing the supply chain is becoming increasingly important. From purchase through delivery, operations need to be integrated, efficient and smooth to truly maximize margins and offset rising labor costs. The transition from multichannel to omnichannel to truly seamless commerce will drive long-term success. Since that doesn’t happen overnight, focus on managing costs along the supply chain in the near-term.
- Invest in technology. Many retailers have been slow to invest in technology, but labor pressures make investment imperative. Customer-facing technology can drive sales and also help control costs. For example, self-checkout is now common, especially in the supermarket sector, where it could eventually account for 50 percent of transactions.1 Retailers also need to invest in technologies to streamline the on-line sales process. Growing at a much faster rate than overall retail sales, the on-line channel provides a significant opportunity for growth; it now represents only 10 percent of overall retail sales.2 However, currently many retailers claim on-line sales have a higher cost associated with them.
Overall, retailers need to take a balanced approach. They need to focus on costs, but not at the expense of customer service or experience. Although driving sales can mask many problems, unprofitable sales growth is not an answer. Strategically driving the top line while managing costs has always been the formula of successful retailers. Today’s headwinds certainly provide additional challenges and will force to retailers to think creatively and use all the tools available to them to be successful.