The threat of higher wages often puts investors into a cold sweat. But don't expect much of a reaction from soon-to-be effective rules that could make 4.2 million more salary workers eligible for overtime pay.
The new rules appear to be the definition of labor inflation. Starting Dec. 1, white-collar workers earning less than $47,476 are suddenly potentially eligible for time-and-a-half wages for every hour worked past 40 hours.
The rules could result in higher pay for lower-level managers ranging from manufacturing shift leaders, health care workers to restaurant and retail managers, says Mykkah Herner, modern compensation evangelist at PayScale. "It's a significant shift," Herner says.
Investors still aren't expecting much of a material hit because the new rules were:
• Anticipated by investors. There's no question the changes are significant and widespread and will affect "a giant swath of companies," says Mark Marcon, analyst at Robert W. Baird. But don't expect stocks to react. The overtime proposals were first aired last year, allowing investors and companies to prepare, he says. Any effect of the rules on future profitability is largely priced into stock prices, he says. Big staffing provider Manpower (MAN) has already seen its shares fall 10% over the past 12 months, a period in which the broader is down a little more than 3%. "In terms of market participants, anyone reacting to this news today is someone who is behind the eight ball," he says.
• Factored in by companies adjusting compensation. Companies with exposure to the new rules such as staffing services companies "were already in front of this," says Hamzah Mazari, analyst at Sterne Agee. Many employees affected by the change are already in corporate bonus plans giving companies the "flexibility to keep (costs) relatively unchanged by adjusting bonuses," Mazari says.
• Mitigated by staffing changes. The overtime rule change plus minimum wage changes are driving up the price of labor. But companies will simply hold off on hiring, Marcon says. If the cost of a worker is now $23 or $24 an hour, companies won't hire if the added benefit of the hire is less than $22 an hour, Marcon says. Companies are also rapidly adopting labor-reducing technology, such as self-ordering kiosks, to minimize the hit from higher wages, Marcon says.
There could actually be winners from the change, including temporary staffing companies like TrueBlue (TBI), Manpower and Kelly Services (KELYA), says Jeffrey Silber, analyst at BMO Capital. These companies could be hired to provide needed labor and help companies avoid the higher payrolls, he says. Automatic Data Processing (ADP), Paychex (PAYX), Paycom Software (PAYC) and Ultimate Software (UTLI) could also benefit by helping companies track all the new rules, says Marcon.
