A Critique of Salary

Articles about business are often full of jargon, ugliness, and imprecision, but I recently discovered an article on salaries that seems to avoid egregious examples of those linguistic evils. I had been looking into the origin of the term “salary” and the bureaucratic inventions based on it: “salaried exempt” and “salaried non-exempt.”

I’m a software engineer, and like most of the people who work on software, I am paid according to the “salaried exempt” rules. This is like a normal salary (I am paid a certain amount of money over the course of the year for my work, rather than per hour), except that my company is not required to pay me if I need to work extra hours to get my job done. Not all companies don’t abuse this policy, and my own actually provides some extra money to a point for overtime. Nevertheless, I have some critical thoughts of the entire concept of salary.

I’m not writing this to just summarize my thoughts on salary, but to compare and contrast them with the article I mentioned, which is titled “4 reasons why companies can ask their employees to work for ‘free'”. Lack of capitalization aside, I already have some problems with this. I’m not interested in why a company can ask their employees to work for free. The answer is intuitively obvious: it’s legal. The author talks about the legality of salaried employees being asked to work extra hours, so at least she covers the title. However, out of her four sections, only half talk about why employers can do this. The other half talk about why they would choose to.

A leaked Urban Outfitters memo from 2015 was the motivation for the article, itself written two years ago. It begins (emphasis mine):

The leaked Urban Outfitters memo asking salaried employees to volunteer one or more weekend shifts at an Urban Outfitters fulfillment center to pick, pack and ship merchandise is really no story at all, despite Internet shaming and sensational claims that Urban Outfitters is making management employees work for “free.”  The request of Urban Outfitters is not unusual; it is just unusual that the request was leaked to the media.  Employers regularly require exempt employees to go over and above a 40-hour work week without additional pay, and this approach is appropriate under wage-hour laws.

My disagreement with the article begins with the first paragraph. We’ll come back to the use of the word “free”, used to describe the hours worked by many salaried employees beyond the contractual obligation they have, and focus for now on the line “this approach is appropriate”. Why is it appropriate? Because it is legal. This is the theme of the article. The salary system in place is legitimate because it is legal, which is almost a tautology. The fact is, I don’t think there are many good reasons to have this system, and I think a lot of people realize that and appeal to the legality of it as justification.

And, while some media commentators have dubbed this as “working for free,” the reality is that the employees are not working for free.  They have agreed to work all required hours in exchange for a certain salary.

This is true, but the “required hours” amount to forty hours every week. What value is an agreement to work forty hours a week if this number is merely a suggestion?

After all, remember that there are salary requirements for exempt employees, so those who are being asked to “volunteer” are being compensated at a higher pay grade, at or above a salary set by our federal and state governments pursuant to public policy considerations.  Therefore, it is in fact “fair” to ask exempt employees for the extra work…

“Fair” in the context of this government means “legal”. It is constantly the reference point for fairness and appropriateness. I think it’s a bad standard though; why is the law written as it is written? The real question is what objectively determines fairness. The author tries to answer this by saying the quantity of money being paid justifies overtime. The salary for exempt employees exceeds an arbitrary government limit in the Fair Labor Standards Act, and is thus “fair”. After another reference to the law, she goes on again to give more rationale:

 The increased responsibility and salary levels of exempt employees also means they likely have more bargaining power in the marketplace and freedom to leave an oppressive employer, so government is less concerned about extra “unpaid” work in their case.

I don’t care what the government is concerned with. I don’t care what the government permits under law. I think it is wrong to require employees to work more hours than they are contractually obligated to work, and I’m convinced the entire concept of “salaried exempt” is absurd. The fact I have “more bargaining power” doesn’t offset this, and it turns out that many salaried exempt positions require such specialized skills that this bargaining is done by more people for fewer jobs anyway.

 1. Employees who are exempt can work over 40 hours without additional compensation.

Her first argument is a restating of the law. Of course employees can be required to work over forty hours without additional pay. We’ve already established this. But the interesting question is why this ought to be the case. Yet another attempt to rationalize this is provided:

Exempt employees take customers to dinner after hours without additional compensation.  They answer after-hour calls and emails without additional compensation.  This happens all the time.  And, it’s legal.

Employees often do things after work hours for which they are not paid and it is legal, so therefore companies can ask employees to work more than forty hours a week. It’s not really an argument, but a restating.

2. Volunteering for additional work does not change the employee’s primary duty.

Exempt employees who “volunteer” for  production type duties (e.g. pick, pack, and ship merchandise) do not have their jobs transformed into hourly non-exempt jobs as long as their primary duty remains exempt.

Again, another restating of the fact that companies can do what we’ve already established they can legally do. It gets a little more interesting after this:

3. Production work doubles as leadership training for exempt workers.

…Rolling up their sleeves to help might provide a real eye-opening education for how hard the hourly employees work and how decisions by exempt  personnel affect those hourly workers.  This could be valuable training for managers, administrators and professionals.  Also, isn’t rolling up your sleeves to perform “undesirable” tasks one definition of leadership?  Leaders should not be above any task, no matter how “menial.”

It isn’t doing undesirable tasks that repulses people from the concept of “salaried exempt”. It’s doing those tasks without getting paid for the extra hours worked. This rationale doesn’t even enter into the discussion when the jobs in question are in world of engineering, since there often isn’t any sort of “leadership” in the sense described here going on.

The fact is, we are no closer to answer as to why this is a good practice than we were when we started. One final reason is given:

4. ‘Volunteer’ work can reduce overtime.

Reducing overtime of hourly workers by asking exempt employees to pitch in, as long as the company does it legally, is a perfectly legitimate business decision.

Some people – who don’t get paid extra for working extra hours – can work in place of those who do get paid extra for working extra hours, which if done legally, is a legitimate business decision. Because, as we’ve already seen many times, it is the legality of the practice that makes it fair, legitimate, and appropriate. Overtime doesn’t reduce overtime, even if it means the business isn’t required to pay as much if they shift the employees working overtime around.

My response to all of this is pretty straightforward. An employee who agrees to a contract to work forty hours each week and then proceeds to do just that for $50,000 a year is making $50,000 / (52 * 40) ≈ $24 dollars an hour. Another employee who agrees to the same contract but who is asked to work evenings and weekends, averaging 50 hours of work a week is making $50,000 / (52 * 50) ≈ $19 an hour. This makes sense; 25% more hours worked for the same amount of money means a corresponding decrease in hourly pay.

A government or business can come along and say “we’re paying you for a certain amount of work, not a certain number of hours”, but this isn’t entirely accurate. If it were, an employee could leave the office after getting their work done. This rarely happens for “salary exempt” employees. It’s more accurate to say that “salary exempt” means working a minimum of forty hours a week and a maximum of whatever the managers of the company ask them to work.

While I don’t think the law is wrong to permit what it does, I think people should be a bit wiser than merely repeating what the law says to justify the behavior of companies. I understand that overtime is sometimes required. Companies can’t anticipate everything that might get in the way of an important deadline, and sometimes there isn’t time to hire and teach new employees (who would need to be laid off once the deadline is achieved anyway). This is fine and even fair as an emergency tactic, but it is a terrible policy for normal work.

I’ve often seen companies require employees to work extra hours to avoid hiring new employees, even though the employees working overtime were hired under the pretense of working forty hours a week. It might be legal, but it isn’t fair. I don’t think the government should come and sue the companies doing this sort of thing, but the employees working the mandatory overtime should probably look for jobs elsewhere. The market has already begun correcting this abuse, and companies are even advertising their commitment to a forty hour workweek as a perk.

Medieval peasants worked fewer hours than we wealthy Americans do, and it’s probably part of the cause of our moral decay as a civilization that we give so little time to genuine rest. Companies expect their employees to give up anything to get their jobs done when it turns out that many of the things employees give up are more valuable than the work.

Pre-Existing Conditions

President Trump recently signed a variant of Obamacare into law. Despite being pretty consistent with the law it replaced, many articles (and many comments responding to those articles) have brought up all of the old debate topics that popped up when Obama signed the original massive healthcare bill.

One topic in particular that seems to consistently divide people is insurance coverage of pre-existing conditions. If someone wants to buy health insurance but already has a medical condition for which health insurance would help alleviate costs, some argue that it is cruel to deprive them of the opportunity. Who needs it more, after all?

Answering this concern is straightforward and simple, and it’s a good lesson in how to respond to fuzzy emotional complaints (which are a terrible grounding for law). There are straightforward economic reasons that it’s actually impossible for health insurance to cover pre-existing conditions.

By “insurance”, I am referring to a system in which a large number of people pay money in proportion to some risk they may incur into a fund and out of which fund a small percentage of those people may withdraw money should they realize the risk accidentally. Paying money “in proportion to risk” simply means that some people are more likely to incur whatever risk the insurance hedges against, and so pay extra as a result to balance the flow of money in and out of the fund. The reason the risk must be realized accidentally is to avoid fraud.

All insurance works this way. Millions of people pay a car insurance company to protect their cars. Younger drivers, elderly drivers, and drivers with a history of traffic violations all pay more. More expensive cars also end up costing more, regardless of who is driving them. Thankfully, most people don’t get into car accidents, and so most of the people paying into the system never get anything out of it but peace of mind (or, in some places, the ability to legally drive their car). If someone goes out and bashes their car with a baseball bat in order to obtain a new one from insurance, their insurance company will decline the request; fraud would ruin the system.

Now imagine if suddenly, car insurance companies were required to cover cars which are already damaged. If you don’t have car insurance and you get into an accident, the car insurance company under penalty of law cannot decline you as a client. Nor can they hold you as a client indefinitely; you can always leave an insurance contract after a period of time. What would this do to the system?

Well, no one would buy car insurance until they got into a car crash. Why pay for something that does absolutely nothing for you? But can you see what this does to the equation? If 1000 people each pay $100 into car insurance each year and only 10 get into a car crash (we’ll estimate $10,000 as an average cost of each accident), then you have 1000 x $100 = $100,000 coming into the fund and 10 x $10,000 = $100,000 going out.

But if car insurance can be purchased on the spot even after a car accident to cover the car accident, 990 of those people won’t be paying anything. Why would they! They could get the benefits of insurance any time they actually needed them. The new equation is 10 x $100 = $1000 coming into the fund and 10 x $10,000 = $100,000 going out. $99,000 short to cover the expenses. The insurance company would foot the bill and would close. No company could take $99 in loss for every $1 of income.

This same analysis applies to medical insurance. No one would purchase medical insurance until they had a condition if it covered “pre-existing conditions”. This means that the only people paying into the fund are those who need to withdraw from it. You can hopefully see where this is going: “buying insurance” would cost as much, if not more, than paying out-of-pocket for all medical costs.

“But wait”, I hear you say. “What if the government also forced everyone to buy insurance?” This is exactly what they’d need to do. But now you’ve got an even bigger problem. First, in the United States, it is simply unconstitutional for the government to force citizens to buy a product or service. The Supreme Court, sympathetic to Obama, knew this. That’s why, despite Obama selling his Obamacare plan as something that would not raise taxes, the Supreme Court was forced to say that it increased taxes. Without forcing citizens to pay into the system, it would collapse.

But this isn’t the only problem, and it’s the reason the system collapses everywhere it is tried.

The more that insurance covers, the more expensive it is. That seems pretty straightforward. But the more it covers, the more expensive it also makes the services it covers. When insurance is used exclusively to pay for a particular service – and no one ever needs to pay out-of-pocket for it – that service increases in price. There’s no competition or bartering going on. The insurance company can raise rates and there isn’t much you can do about it.

This leads to a single-payer sort of system, where insurance companies simply can’t keep up with the demands of the government and are eventually just made into a government bureaucracy of their own. This costs incredible amounts of money (as it automatically raises the costs of services without limit), and is unreliable over longer periods of time and over populations with varied wealth and medical needs.

Much of this is beyond the scope of the problems with single-payer health care, but you can see already how it is all tied together, one problem necessitating a solution which itself becomes a problem, etc. The point is, any insurance which purports to cover “pre-existing conditions” isn’t insurance. It’s just an extra cost and added hassle on your way to paying the full cost of whatever service you want.