Quick-service restaurant employers will soon feel the impact of the U.S. Department of Labor’s new overtime regulation. The new rule, referred to as Overtime Rule 2.0, establishes the minimum salary threshold for the Fair Labor Standard Act’s white-collar exemptions at $684 per week, which annualizes to $35,568 per year. While meeting the salary threshold does not automatically make an employee exempt from overtime pay, a failure to pay the minimum salary will result in an employee being misclassified and entitled to overtime regardless of their job duties. The DOL expects the rule will expand overtime pay obligations to an estimated 1.3 million additional workers, many of whom work in restaurants.
As a result, quick-serves will have some decisions to make on the exempt status of certain managers and shift leaders, and with an effective date of January 1, 2020, now is the time to act and prepare for this change.
Executive Summary: Overtime Rule 2.0
- The minimum salary threshold will be $684 per week, which annualizes to $35,568 per year.
- The rule provides one threshold for someone to be considered exempt, regardless of exemption, industry, or locality, subject to a few exceptions that already existed.
- Employers will be able to credit certain non-discretionary payments in limited ways.
- The highly compensated employee exemption’s additional total annual compensation requirement will be set at $107,432 per year.
- No changes will be made to the duties tests—the crux of the relevant exemptions. In order to be exempt from overtime, the employee must meet the new salary threshold and the duties test. The employee’s job duties must primarily involve executive, administrative or professional duties as defined in the regulations. Quick-service restaurant employers must be careful to ensure that managers are not engaged in too much non-exempt job duties during their shifts, i.e. cooking, taking orders, expediting orders, being a cashier.
- No change has been made to the various other exemptions (for example, outside sales) that do not specifically include a salary requirement even if the employee happens to earn a salary.
- There will be no “automatic” updates, or even a formal schedule of future adjustments, to these figures. However, you can expect that the salary threshold will be assessed more frequently than it has been in the past, but hopefully not so often that it essentially drives the market.
Analyzing Your Managers to Determine Actions Needed
The first question is where to start. Employers should prepare a report of all employees currently classified as exempt under one of the white-collar exemptions, then sort the report by base salary. If managers are not making the required $684 per week, then the employer has two basic options.
Option 1: Raise Salary
If a manger’s salary is currently less than $684 per week, the employer could increase the salary to get it up to or above the new required level. While the duties requirements for exempt status did not change, this is also good time to be sure that all your managers still exercise the duties needed to qualify for the exemption. If it is a close call on the duties requirements due to the nature of quick-service restuarants, or if your managers realistically work less than 40 hours per workweek, consider whether Option 2 is right for your organization, rather than reflexively raising salaries.
Option 2: Make Non-Exempt
In cases where the manager’s salary is below the required threshold and the employer does not plan to raise the salary as outlined in Option 1, the employer should convert these managers to non-exempt status.
While this may seem like a simple change, it’s not. There are many issues to consider. Here are just a few.
- What will be the new hourly rate? Your managers may expect you to just divide the current salary by 2080 hours. But if they regularly work overtime, this means the annual pay will increase significantly.
- Will this new rate require a change in the budget?
- How will you manage their time to limit overtime pay and who will oversee these managers? In some quick-service restaurant systems, the business requirements of a manager cause these individuals to work well over 40 hours per workweek.
- What instructions will be given to these newly non-exempt managers on how to properly record their time?
- Will these managers be expected to respond when off-duty, and if so, how will they record any time worked when off-duty?
Bonuses and the 10 percent Provision
Bonus and incentive pay is common for restaurant managers. This new regulation requires extra thought be given to these bonuses.
If the managers are exempt, the overtime rule permits an employer to satisfy 10 percent of the salary requirement (or $68.40 per week) with a bonus. But, this may be a little misleading. If the manager does not earn the bonus, the employer still must pay the full $684 per week. This could affect the motivation of some managers, depending on the bonus plan you have in place.
If the managers are non-exempt, overtime needs to be calculated and paid, factoring in any bonus or incentive pay earned. In other words, the regular rate used for calculating overtime must be adjusted to account for the productivity bonus or incentive payment. Adjusting payroll practices to account for this can take some time and planning.
Will This New Rule Survive?
After the drama surrounding the last-minute injunction blocking the 2016 overtime proposal, some restaurant employers are approaching these changes cautiously. While there is always a chance for litigation to unfold in such a way that it would impact the implementation of this rule, it appears the DOL has learned from the lessons of Overtime Rule 1.0. This means the rule is likely to go into effect in 2020.
The best practice for quick-service restaurants is to assume Overtime Rule 2.0 will go into effect on January 1, 2020. You should use this time to start evaluating not just whether changes will be necessary, but how best to make those changes (timing, communications, etc.).
If you made changes in 2016 in anticipation of the $913 per week threshold, you are certainly ahead of the curve. However, now that we know that they DOL’s salary threshold will be lower, you may now have more starting salary flexibility when hiring new managers into your system. If you did some of work in 2016 but decided to wait to implement once the preliminary injunction was put in place, you also have a great head start. Nonetheless, in both cases, you must keep in mind that three years have passed, and it is possible that an employee’s work duties have changed in the interim. It is imperative to confirm your prior findings at least for any employee that might receive a salary increase to qualify for exempt status under Overtime Rule 2.0.
If you haven’t started considering how to address Overtime Rule 2.0, now is the time.
Alden J. Parker is the regional managing partner of the Sacramento, California, office of national labor and employment law firm Fisher Phillips. Alden co-chairs the firm’s Hospitality Industry Group, and he represents employers in all facets of employment law. He may be reached at email@example.com.
J. Hagood Tighe is a partner with Fisher Phillips in Columbia, S.C. Hagood is the co-chair of the firm’s Wage and Hour Practice Group, and he represents management in class and collective actions throughout the country. He may be reached at firstname.lastname@example.org