Most restaurant owners are now aware that the U.S. Department of Labor (DOL) recently announced one of the most significant developments in federal labor policy from the last decade. Effective December 1, 2016, new regulations governing the "white collar" overtime exemptions under the Fair Labor Standards Act (FLSA) will essentially double the federal overtime salary exemption.
Since 2004, the annual overtime threshold has remained at $23,660 ($455 a week), but the new rule will raise that minimum to $47,500 ($913 a week). While the rule makes no changes in the duties tests used to qualify exemption status for salaried employees earning in excess of $47,500, the rule guarantees time-and-a-half pay to any salaried employee earning less than the salary minimum working more than 40 hours in a week.
According to the National Retail Federation, these new rules are expected to have a substantial impact on retailers and restaurants, especially for managers who are among those most directly affected by the ruling and overwhelmingly disapprove of the changes. With an update this significant, it’s crucial for restaurant owners to understand and fully comply with the new regulations. Here’s how the new federal overtime regulations will affect restaurants across the U.S. and some of the key factors that will affect their transition to compliance:
Understanding Exempt vs. Non-Exempt Employees
Most workers are classified as either exempt or non-exempt, depending on their salary and the type of work they perform. The FLSA requires employers to pay overtime to employees who work more than 40 hours in a given workweek, unless they meet certain exceptions. Hourly employees are automatically eligible for overtime pay, which used to be the case for most salaried workers as well. For salaried workers earning more than the threshold limit, employers should perform a duties test to determine if they may be classified as exempt. If a worker performs mostly executive, administrative or professional duties, the employee likely falls under the “white-collar exception,” meaning they are not eligible for overtime pay.
It’s important to remember that this exemption only applies to workers earning more than the threshold, and many states have their own wage and hour laws that may be more stringent than the FLSA. In order to avoid legal issues, employers must ensure they are compliant with both state and federal regulations.
Determining the Best Compliance Option
In general, employers have three major compliance options to avoid potentially unbudgeted overtime liability – each with their own benefits and drawbacks.
Option One: Raise non-exempt employees’ salaries to maintain exemption status.
This option is the simplest way for employers to avoid the hassle of managing overtime, while also staying compliant with the new FLSA regulations. Raising salaries to maintain exemption status makes the most sense for employees with salaries that are already close to the threshold and who regularly work overtime.
As part of the ruling, for the first time, employers may use nondiscretionary (i.e., triggered or accrued) bonuses and incentive payments to meet up to 10 percent of the standard salary level for executive, professional and administrative employees, making it easier to increase compensation to meet the new salary requirements. It should be noted that these payments must be made at least quarterly.
Option Two: Reclassify hourly employees as salaried employees.
With the new ruling, many restaurants will be reassessing current employees’ exemption status. It’s possible, and quite likely, that some employees who are currently classified as hourly, nonexempt workers may meet the “white-collar exemption” criteria. Employers will have the option to switch these employees to exempt status by transitioning them from hourly to salaried status.
One way of achieving this transition is employing the “fluctuating workweek,” where an employee is paid the same, clearly communicated salary regardless of whether they work 32, 45 or 50+ hours each week. The rate must equal minimum wage for all hours worked within each and every given work week, and overtime hours must be paid at time and a half.
In reality, however, employers pay only a third (one-half of the regular rate) of the additional amount that must be paid to a nonexempt employee working more than 40 hours per week. Where overtime hours are unpredictable, this reduces the amount of potentially unbudgeted overtime liability. Since the regular rate is calculated anew each week, based on the total number of straight and overtime hours worked that week, the cost of overtime to the employer goes down the greater the number of overtime hours an employee works.
While employers are entitled to make this change, it’s important to consider the effects on employee morale. From an employee’s perspective, it looks like the greater the number of hours worked, the less the employee is paid. Not surprisingly, the fluctuating workweek is not popular for employees who work a substantial amount of overtime. For those employees who work fewer than 40 hours a week on a recurring basis, however, the fluctuating workweek can provide a more predictable income.
Option Three: Reclassify salaried employees as hourly, and adjust their base pay to account for overtime.
Option three may appeal to employers as the most cost-neutral option, since employees will earn the same amount as they did before the rule change. However, employers will also need to consider the effects to company morale. A recent study by the National Retail Federation found that 85 percent of respondents felt that “if they were transitioned from salaried to hourly pay the change would have negative consequences on managers.”
One of the biggest issues for managers is the changes to their benefits. Nondiscrimination rules of the Affordable Care Act mean there would likely be no changes to employees’ eligibility for health benefits, but other benefits like paid time off and vacation time may change significantly depending on employer policies. Updating the benefits policy may be the best option to avoid declining morale if you plan to reclassify your employees.
Flexibility is also an important factor to consider. Salaried employees are often accustomed to staying late or working in flexible arrangements without having to keep an eye on the clock. As hourly employees, flexibility doesn’t have to disappear, but employees will need to adapt to the new structure. For example, a manager can stay late to finish paperwork to meet a deadline, but would need to come in later or leave earlier later that week to compensate.
Finally, according to the same National Retail Federation study, nearly half (45 percent) of respondents said reclassification as an hourly employee “would make them feel as though they are performing a job instead of pursuing a career.” Given that many managers in the restaurant industry start their careers in hourly positions and move up through the ranks, it should be unsurprising that many employees view the change from salaried to hourly work as a demotion or a step back in their career path.
Note: Reclassifying salaried workers as hourly employees is legal, but employers should take care to stay compliant with FLSA by documenting when the changes were made and why, as employers will need to show this information to the DOL Wage and Hour Division.
Communicating Changes to Employees
Another important issue rarely discussed beyond the requirements is how to properly communicate a change this significant to the employees. While clear, transparent communication is always important, this new rule does not require you to put anything in writing or ensure employee acknowledgement. However, restaurants should be aware that some states, like Missouri, require a 30-day notice period before making a change that lowers an employee’s compensation.
Equally sensitive is the timing of this change. December 1 comes very close after Thanksgiving – a time when many people are taking off work and are not necessarily focused on this kind of detail. Employers should focus on communicating any relevant changes as soon as possible to allow employees to prepare for the impending changes.
Finally, restaurants should be very careful trying to guess what the courts will do with petitions for injunctions to delay or effectively stall this new rule. Restaurant owners should plan for December 1 either way, and craft their communications to account for any delays and how this will affect employees. Uncertainly has unintended consequences.