Knowledge Exchange Report. Economic Impact of Mandatory Overtime on New York State Agriculture

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1 Farm Credit East Knowledge Exchange Report September, 2014 Economic Impact of Mandatory Overtime on New York State Agriculture The New York State Legislature and Governor Andrew Cuomo are considering legislation to require New York farm employers to pay mandatory overtime to farm employees. This action would change a long-standing exclusion from mandatory overtime. To date, little economic or financial analysis has been prepared on this proposal. The adoption of mandatory overtime pay in New York would clearly impact many farms financial viability and investment decisions. The reality is that at any point some farms have financial challenges, so additional costs would clearly spell negative implications for them. In addition, even farms that are financially stronger could experience significant financial impact that would affect future decisions to expand or modernize facilities. Labor Intensive Agriculture New York farms, regardless of size, are overwhelmingly family businesses with relatively narrow margins and limited ability to influence prices for their products. Most farms have considerable capital investments and may not be able to make significant short-term production shifts. Little argument can be made that farms will simply pass through costs since they do not pass through costs for higher energy or feed bills and are unlikely to be in a position to pass through higher labor costs. New York State has a diverse agricultural base. In many respects, diversity in production and marketing is beneficial when farm prices are low in one sector but other farm sectors are not impacted. For example, farm milk prices have little impact on apple or grape prices. Thus agricultural diversity benefits long-term industry stability at the state level. New York has many part-time farm operations that depend in part on nonfarm income to support family living situations. These part-time operations are an important and integral part of agriculture. Many part-time farms and some smaller full-time farm operations do not have employees. Most full-time farm operations have some employees, even if they are limited to seasonal employees. Moreover, farms with employees produce an overwhelming majority of New York State s agricultural production.

2 2 New York Agriculture Overview 7.2 million acres of land 35,537 total farms; 29 percent with employees $5.4 billion in total farm sales $37 billion in economic impact for agriculture and related processing/inputs 156,066 jobs, including agriculture and related processing/inputs 3 percent of New York s GDP (gross domestic product) (ag and related processing) 1.7 percent of total New York State employment (ag and related processing) 10,345 farms employ 60,944 employees (full- and part-time). Total labor expense on farms is $771,281,000 (hired and contracted labor). Labor makes up percent of farm sales. Of all farm expenses, labor is one of the most significant, making up 17 percent of total expenses. The mix of agriculture in New York State makes it labor intensive. New York produces a significant amount of fruit, vegetable, dairy, greenhouse and nursery products farm sectors that are far more labor intensive than grain and livestock farms that dominate the Midwest. For every $100 of production sold, New York farmers paid $14.24 to farm workers compared to a U.S. average of $8.50. Thus New York agriculture is more sensitive to changes in labor costs than most major agricultural states. Nationally labor is 8.5 percent of total sales. New York labor represents 14.2 percent of total ag sales. Iowa spends less than 3 percent of total sales. Of the top 12 agricultural states, only California has a higher percentage of sales spent on labor. When considered on a net farm income basis, the implications of changes in labor costs become more apparent. Net income is the amount farm families have available to pay their own living expenses, repay debt and reinvest in new equipment, buildings and livestock. Total labor costs are 63 percent of net cash farm income in New York. Total labor costs are 36 percent of national net cash farm income. A 20 percent increase in labor cost in New York would reduce overall net cash farm income by 12.7 percent. A bright spot in the upstate New York rural economy is the payroll amount for farm labor over the past 10 years. From 2002 to 2012, farm payroll increased 63 percent from $472 million to $771 million. During this period, the overall number of employees actually declined from 24,539 full-time 1 and 43,347 part-time/seasonal 2 (67,886 total) in 2002 to 27,148 full-time and 33,796 part-time/seasonal (60,944 total) in Worked 150 days or more 2 Worked fewer than 150 days.

3 3 Payroll, $ Millions $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 New York Farm Payroll and Hired Workers 70,000 68,000 66,000 64,000 62,000 60,000 58,000 56,000 54, Hired Workers Payroll Hired Workers Mandatory Overtime Assumptions for Analysis Mandatory overtime clearly has significant implications to farms. Current legislation provides mandatory overtime for work over eight hours per day. It has been suggested that a more likely scenario would be based on a weekly or biweekly threshold. To provide some understanding of its impact, Farm Credit East utilized data from the 2012 U.S. Agricultural Census. We made the following assumptions: percent of employees receive overtime pay. Explanation: With some exceptions, it is unlikely that all employees will be paid overtime. For this assessment, we estimated that 70 percent of employees on farms will be paid overtime. The remaining 30 percent would work only the hours allowed without overtime hours per week for those receiving overtime pay. Explanation: Many farm workers have sought to work long hours for more pay so we used 72 hours for this analysis. As noted, this is for 70 percent of the workforce. 3. Assumes no overtime is paid today. Explanation: We assume that farm employees do not currently receive overtime pay. We know that some employers voluntarily pay overtime, but there is no data to determine the extent of voluntary overtime paid.

4 4 4. Not all cost increases are included. Explanation: This analysis reviews overtime pay only. We know that additional costs will result from higher payrolls, such as increased payroll taxes at an additional 7.65 percent of wages. In addition, we expect the potential for increased workers compensation and some in higher unemployment payments. 5. Proportional analysis to understand impact on farms. Explanation: As previously noted, some farms have employees and others do not. While census data helps us understand how many farms are profitable and how many operate with losses, the Agricultural Census data does not break this down based on farms with employees and without. For this analysis, we used the percentage of farms with employees to prorate our impact estimates. 6. Reduce hours or pay. Explanation: It is reasonable to expect that mandatory overtime would cause farm businesses to consider options to reduce overtime pay by increasing hours for those employees who do not reach the threshold or by hiring additional employees. It is possible that some farms will reduce base pay. We did not attempt to make adjustments based on these possibilities. Mandatory Overtime Scenarios Scenario 1: 72 hours worked with 40-hour threshold With this scenario, we contemplate: 70 percent of employees receive 32 hours in overtime pay Farm employees who receive overtime pay work 72 hours per week Time-and-a-half is paid to employees who work more than 40 hours per week Summary of analysis: Increase in farm payroll: $120.0 million Percent increase in farm payroll: 15.6 percent Percent decline in net farm income: 10 percent Estimated number of farms going from profit to loss 3 : 1,409 Scenario 2: 72 hours worked with 50-hour threshold With this scenario, we contemplate: 70 percent of employees receive 22 hours in overtime pay. Farm employees who receive overtime pay work 72 hours per week. 3 This is 29 percent of the farms with a profit of less than the amount of the increased labor expense in It does not count farms that posted losses that year.

5 5 Time-and-a-half is paid for employees who work more than 50 hours per week. Summary of analysis: Increase in farm payroll: $82.5 million Percent increase in farm payroll: 10.7 percent Percent decline in net farm income: 7.0 percent Estimated number of farms going from profit to loss: 1,115 Scenario 3: 72 hours worked with 60-hour threshold With this scenario, assumptions are: 70 percent of employees receive 12 hours in overtime pay. Farm employees who receive overtime pay work 72 hours per week. Time-and-a-half is paid for employees who work more than 60 hours per week. Summary of analysis: Increase in farm payroll: $45.0 million Percent increase in farm payroll: 6.0 percent Percent decline in net farm income: 4.0 percent Estimated number of farms going from profit to loss: 706 Issues to Consider A number of issues should be reviewed as part of consideration of proposals establishing mandatory overtime: Farm viability: This legislation, if enacted, will increase the farm cost of production and place some farm businesses in a negative financial situation (incurring financial losses). The impact would most likely be felt on full-time farms, but fruit and vegetable farms with only seasonal workers that are considered small under USDA definition ($250,000 in total sales) could see a major increase in their labor costs as well. Impact on farm workers: Mandatory overtime will require farmers to consider options to manage labor costs. Some employees may find their hours reduced to avoid mandatory overtime pay. In other sectors, such as retail, it is believed that employers often closely manage schedules to avoid incurring overtime. Many farm workers seek to maximize work hours to increase incomes. Depending on each farm situation, farmworkers may find their hours cut back as agricultural employers try to manage the impact of overtime. Competitiveness: Most states that New York competes with in the agricultural marketplace do not have mandatory overtime requirements for farm workers. A mandatory overtime requirement is an additional cost that New York farmers will need to bear and still compete in an increasingly national and international marketplace.

6 6 Investment on the farm: National and global commodity markets determine prices of most farm products. Farmers have little opportunity to pass costs on to consumers and would have to absorb increased costs. Increasing the cost of agricultural labor in New York will put local farmers at a competitive disadvantage to farmers in most other states. Over time, we can anticipate that this will mean less investment in New York as farmers consider options to farm in other states. Impacts on businesses and employment dependent on agricultural production: Agricultural production actually creates more off-farm than on-farm positions by a one-to-three ratio. Many off-farm jobs are in processing, handling, inputs and supply. To the degree that New York agricultural production declines as a result of mandatory overtime, a portion of these supporting industries will also decline. Less locally grown food: To the degree that less agricultural production occurs in New York, more food will be imported from other states and countries, most of which do not have mandatory overtime requirements. Contact: Robert A. Smith Senior Vice President, Public Affairs and Knowledge Exchange Farm Credit East robert.smith@farmcrediteast.com Farm Credit East report contributors: Christopher Laughton, Director of Knowledge Exchange Kasey Ann Heineman, Intern Robert A. Smith, Senior Vice President, Public Affairs and Knowledge Exchange Sources: USDA 2012 Agricultural Census Rigoberto Lopez, Nataliya Plesha and Benjamin Campbell, Economic Impacts of Agriculture in Eight Northeastern States, unpublished, 2014.

7 7 Appendix A: U.S. States Ranked By Labor Expense as a Percent of Sales Ranking State Sales of Ag Products- $1000s Labor Expense $1000s Total Labor as % of Sales 1 Hawaii 661, , % 2 Massachusetts 492, , % 3 Rhode Island 59,652 21, % 4 Alaska 58,925 20, % 5 Connecticut 550, , % 6 New 190,907 57, % Hampshire 7 New Jersey 1,006, , % 8 Florida 7,701,532 1,836, % 9 California 42,627,472 9,255, % 10 Washington 9,120,749 1,842, % 11 Oregon 4,883, , % 12 Maine 763, , % 13 Arizona 3,732, , % 14 New York 5,415, , % 15 Vermont 776, , % 16 Nevada 764,144 91, % 17 New Mexico 2,550, , % 18 Utah 1,816, , % 19 Virginia 3,753, , % 20 Pennsylvania 7,400, , % 21 Michigan 8,678, , % 22 Kentucky 5,067, , % 23 Wyoming 1,689, , % 24 South Carolina 3,040, , % 25 Maryland 2,271, , % 26 Tennessee 3,611, , % 27 Idaho 7,801, , % 28 Wisconsin 11,744, , % 29 Louisiana 3,809, , % 30 Texas 25,375,581 1,906, % 31 North Carolina 12,588, , % 32 Colorado 7,780, , % 33 Montana 4,230, , % 34 West Virginia 806,775 51, % 35 Georgia 9,255, , % 36 Ohio 10,064, , %

8 8 37 Oklahoma 7,129, , % 38 Missouri 9,164, , % 39 Mississippi 6,441, , % 40 Alabama 5,571, , % 41 Delaware 1,274,014 56, % 42 Indiana 11,210, , % 43 Arkansas 9,775, , % 44 Illinois 17,187, , % 45 Minnesota 21,280, , % 46 Kansas 18,460, , % 47 South Dakota 10,170, , % 48 North Dakota 10,950, , % 49 Nebraska 23,068, , % 50 Iowa 30,821, , % US Total 394,644,480 33,460, % Source: USDA 2012 Agricultural Census