Operation Smile’s misleading opposition to the new overtime rules

The Department of Labor has issued an update to its overtime rules that will bring an additional 12.5 million salaried employees under the exemption threshold, the level below which they are guaranteed overtime pay if they work more than 40 hours in a week, regardless of their job title or duties. The Department of Labor estimates that about 4 million employees will gain the right to overtime pay for the first time, and 8 million more will have their right to overtime pay strengthened.

Business groups know that with wages stagnant and profits at all-time highs, they are unsympathetic opponents of the rule, so they have been focusing attention on non-profits. The Society of Human Resources Management, for example, has adopted Operation Smile, a non-profit that helps coordinate cleft palate surgeries in less-developed countries, as its poster child. An Operation Smile executive testified in the U.S. Senate against the new overtime rule, claiming that it would raise the organization’s costs dramatically and reduce its ability to deliver cleft palate surgeries:

“Yet still, this proposed update will increase our payroll cost by nearly $1 million annually affecting over 50 percent of our workforce. This is not a financial cost we can absorb. Considering that a cleft lip surgery costs an average of $240, this would mean nearly 4,200 fewer surgeries provided globally each year.”

Let’s examine this claim. Operation Smile reported more than $67 million of income to the IRS in June 2015. Even if the overtime rule increased payroll costs by “nearly $1 million annually” this would amount to less than 2% of its income, which we could reasonably assume to reduce the number of operations performed by about 1/67. Since Operation Smile claims that it performs about 16,000 surgeries per year, the reduction would be 238 surgeries – nothing remotely close to the claimed 4,200. Interestingly, Operation Smile’s expenses were less than $57 million, leaving a $9 million-plus cushion.

Critics of Operation Smile would probably be able to find better places to cut costs than reductions in surgeries performed. In November 2011, Forbes magazine ranked Operation Smile the tenth “least efficient” large U.S. charity, out of 200. And the Better Business Bureau’s Wise Giving Alliance issued a report in 2016 that found Operation Smile does not meet its standards for charities because two of its nine board members are compensated directly or indirectly. How many surgeries could be performed by coming into compliance? The founder and CEO, William Magee, Jr. takes an annual salary of $387,000, plus $28,961 in retirement contributions. Operation Smile’s “fundraising counsel” is paid $1,538,792 a year. Could a surgery or two be found there?

Is there any reason to believe that the rule would actually cost Operation Smile $1 million? Operation Smile has not disclosed how it calculated the added payroll expenses it claims it will have because of the new rule. A one million dollar figure implies about 39,000 hours of overtime for currently exempt salaried employees earning an average salary between the current $23,660 threshold and the new $47,476 exemption threshold.

My guess is that Operation Smile overestimates the number of employees affected by the rule because it is currently classifying some non-exempt employees as exempt. If it anticipates such large additional costs it is probably currently in violation of the law and has been failing to pay overtime to salaried employees who are not legitimately exempt. It is unlikely that fifty percent of its workforce is paid between $23,660 and $47,476 and is properly exempt as bona fide executives, administrators, or professionals. Many organizations wrongly believe that bookkeepers, clerks, analysts, fundraising staffers and others with no management or supervisory responsibility and no professional credentials are nevertheless exempt just because they are on ‘salary’. Another possibility is that Operation Smile mistakenly calculates the cost of the rule as the cost of raising the salaries of exempt employees to $47,476 in order to maintain their exemption. That is an unrealistic response that is in no way required by the rule. An employee paid $24,000 a year would have to work 1,356 hours of overtime, equivalent to a half year’s work, to equal the cost of raising her pay so substantially.

One thing is clear: Operation Smile will not be forced by the overtime rule to cut anything close to 4,200 surgeries.