Dallas Bar Association

Penny-Wise Employers Should Not Be Pound-Foolish

by Michael E. Coles

Whether you represent employers or employees, the topic of the economy seems to dominate current conversations. Doubtless, in today’s business climate, penny-pinching is the name of the game. Cutting costs in some cases means losing valuable assets or forgoing potentially rewarding opportunities. Trimming costs, however, should never yield increased expenses. Yet many employers take seemingly simple steps to reduce overhead only to find their “simple solution” actually created a more complex problem.

For instance, many employers see staff reductions as an obvious opportunity to reduce costs. Reducing staff, however, rarely reduces work. Instead, employers do more with less. In cutting staff, employers should avoid two common mistakes: first, do not eliminate Human Resources altogether. At first blush, your HR staff looks like a cost center with no associated revenue. HR’s real value comes in managing employee-related issues and (hopefully) avoiding costly litigation. Seeing the real value of HR requires considering HR as a value center, not a cost center.

Second, staff reductions pose an additional threat. When employers reduce lower-level staff, remaining managers often gain additional work. Using managers to perform lower-level work could convert these exempt (i.e., no overtime) managers into non-exempt (i.e., overtime eligible) workers. Cutting staff at $15/hour only to convert $30/hour exempt managers into employees who earn $45/hour for overtime hardly sounds like good fiscal management.

Converting employees into independent contractors is another common employer cost-cutting measure. Employers pay no employment-related taxes for independent contractors and do not pay for health insurance or other fringe benefits for independent contractors. These reduced costs may seem like attractive and convenient ways to trim a budget. What initially seems attractive and convenient, however, can quickly become burdensome and expensive.

When one of those “independent contractors” loses his job and files for unemployment, the Texas Workforce Commission shows no wages reported. Rest assured a wage audit will follow. Pseudo-independent contractors may file claims seeking compensation for denied fringe benefits or overtime compensation. Any one of these scenarios could impose costs in excess of any potential savings; together, these claims could force a company to close its doors.

Finally, some companies face cash-flow issues and ultimately decide to delay payroll. Aside from the obvious snowball-effect of delaying paychecks, this decision exposes the employer to various claims. First, a failure to pay any wages at all constitutes a violation of the federal minimum wage law. Second, failing to pay exempt employees converts those employees into non-exempt employees. Third, failing to pay wages creates a claim that includes a right to attorney’s fees for the aggrieved employee(s).

Simply put, today’s economy demands tightening our belts, both collectively and individually. Employment laws and regulations, however, require that cost-conscious employers exercise care in selecting areas ripe for cost-cutting measures. A smart employer knows how to save the pennies…and the pounds.

Michael Coles is a Shareholder at The Coles Firm P.C., represents employers and employees in state and federal courts, and is a member of the DBA Labor & Employment Section. He can be reached at mikec@colesfirm.com.

Back to top