Wednesday, March 31, 2021

How Could a $15 an Hour Minimum Wage Impact Offsite Construction?

Construction, like almost every industry in the US, is scrambling to find enough labor to keep up with the demand. Unemployment numbers are all over the place with many states seeing as high as 8% while others are seeing rates as low as 3%.

The Offsite Construction industry inherently faces a unique problem. It’s called a “fixed location” which in many instances is located in a more rural setting with a slim qualified or skilled labor pool. 

“The past several months have been the hardest to recruit new employees at Apex Homes of Pennsylvania”, said Lynn Kuhns, president of the Middleburg company which has about 20 open positions.

"We used to get four, five, six applications a day. Now we're down to four in the last three weeks. It's the worst I've ever seen," he said. "It minimizes our ability to grow. And it's not just in our industry, it's everyone. It's a sad situation."

Because modular construction is growing at an unheard-of pace, top candidates have their pick of opportunities and often command ever-higher salaries. So companies in need of talent may end up paying a premium for new hires.

But what happens when the wages for a new hire are greater than that of his or her peers who have been with the modular factory longer? 

Recently the Fed has been formulating the idea of a $15.00 an hour minimum wage. But will that help the offsite construction industry? Quick answer….NO!

The Bigger Problem

The real question one has to ask is how will current workers in states with $7.25 to $10.50 minimum wage rates respond when new labor is hired under the $15.00 Federal minimum wage?

Offsite factory employers forced to pay higher wages to new workers than they're paying to tenured workers in the same positions, or even to more-senior employees, is a form of Pay Compression. 

Pay Compression is a compensation issue that occurs when there's little difference in pay between the factory’s production line workers regardless of differences in their respective knowledge, skills, experience or abilities.

The pay for new hires may initially have been only slightly lower than that of current employees (a traditional pay compression situation), but, as the market tightened, offers to new hires grew larger than the paychecks of long-term staff.

This part of Pay Compression could begin hitting many management positions within the company as well.

Examples of Pay Compression

A skilled electrical production line worker hired three years ago has worked his/her way up to $18.00 an hour plus benefits. The factory hires a new employee to work as an electrician to fill a vacancy but because of the shortage of skilled labor and a possible $15.00 Federal minimum wage, the tenured worker is now only making $3.00 an hour more than the new hire.

This situation, if left unaddressed by management, can cause dire consequences for both the employee and the company. Human nature, being what it is, will have the older worker wanting more dollars an hour equal to the difference between the new hire’s starting wage and the number of raises they’ve earned during their tenure. 

Can’t blame them. They just spent 3 years on the job and have the skill to wiring of a module like the back of their hand while the new hire may have no actual experience in electrical. And it has always been an OJT position for the new hire with the older workers showing them the ropes.

Will the tenured worker simply say “Screw this, why should I teach the new hire or work as hard as used to for the same pay?”

Another example of Pay Compression will happen in management positions within the modular and offsite factories. If a new employee is making more than his or her department manager, that is not necessarily a problem. 

But what happens if the new hire has a much-needed skill, like BIM or AI, but has less work experience than others in the department? It may be appropriate to start them higher in the position's pay range rather than paying them at the lower end but try explaining that to a 20 year veteran of the engineering department that won’t see a dime more in wages after the new person begins working side by side with them.

More than likely, the people with the skills to tackle BIM and AI “out of the gate” will probably be in their late teens or early twenties. OUCH!

Your Worker Visits McDonald's

Here’s a real-life example that’s already happening in many areas, especially in the East. Your worker, who's making $18 an hour, stops by McDonald's for a Breakfast Burrito before work and sees signs posted everywhere telling them “Starting wages of $18.00 an hour and a Sign-On bonus of $1,000. They will probably gag on that Burrito on the way to the plant to work as a finish carpenter, a skill that took them a couple of years to acquire.

Just two days ago I saw a billboard posted by Food Lion Supermarkets offering a $58,000 a year starting pay PLUS a $2,000 Sign-On Bonus. 

Isolated instances of pay compression may not warrant sweeping salary adjustments, however, there are times when a highly competitive labor market can reveal stresses on the compensation structure that need to be addressed.

If an offsite factory is consistently paying new talent more than existing employees, it's time to see if your company is using the right market data to evaluate pay levels. If your existing pay ranges are still appropriate given your factory’s skilled labor requirements and Pay Compression keeps cropping up, it may be time to have a consultant skilled in HR for a short time.

What Happens if there is no Federal Minimum Wage to $15.00

In most instances, you will be forced to pay more for skilled and unskilled labor in your offsite factory just to keep your required labor levels running at the minimum. 

To keep experienced and tenured workers from jumping ship to McDonald's, you should find out what your workers want from you. 

Do they want more money? Even though most will say yes, it is in fact, not the most important thing. What the majority of workers want is to be recognized for their work, to be appreciated by factory owners and management and the need to be proud of where they work.

Then it’s more money and maybe even quarterly bonuses based on production and quality.

It's an Inside Job

Managers who receive training from an HR consultant on how to discuss pay with employees can explain what the organization rewards and address any questions employees have about their pay.

At the end of the day, offsite factories that need to recruit certain talent may simply have to pay whatever it takes to do so and if not, rest assured, someone else will.

Gary Fleisher, Managing Director and contributor to
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