Quick-service restaurants will likely feel a big impact from the new federal overtime rule, which could make more employees eligible for overtime by significantly raising the exempt salary threshold in two phases. Specifically, the salary threshold for the so-called “white-collar” exemptions will rise from $35,000 to about $44,000 on July 1 and will jump to nearly $59,000 at the start of 2025—which means your managers and other key roles will need to earn at least this much to even be considered exempt from overtime pay. We went in-depth on the proposed new rule in our previous column, but now that the rule is final, we are providing a reminder of the upcoming changes along with five steps you should consider taking now.
What Happened?
The U.S. Department of Labor (DOL) issued a much-anticipated final rule on April 23 that raises the salary requirements for white-collar exemptions under the Fair Labor Standards Act (FLSA). The FLSA is a federal law that, among other things, requires employers to:
- pay non-exempt employees an overtime premium of 1.5 times their regular rate of pay for all hours worked beyond 40 in a workweek; and
- keep time records for all hours worked.
These requirements do not apply to “exempt” employees – and the DOL’s latest changes may cause employees who were previously exempt under the FLSA to become non-exempt and therefore entitled to overtime pay. Specifically, the final rule raises the salary thresholds under the FLSA’s:
- administrative, executive, and professional exemptions (which are collectively known as the “white-collar” exemptions) to $844 a week ($43,888 annualized) beginning July 1 and to $1,128 ($58,656 annualized) beginning January 1, 2025; and
- “highly compensated employee” (HCE) exemption to $132,964 on July 1 and to $151,164 on January 1, 2025.
The salary threshold is slated to automatically update every three years starting July 1, 2027.
What Should You Do Now?
The July 1st compliance deadline for the first jump of over $8,000 a year is rapidly approaching. Consider taking these five steps now to prepare:
- Review job duties and determine whether your employees are properly classified as exempt in general before taking next steps. Remember that your employees must perform certain duties to be considered exempt under the white-collar exemptions. For example, is management the primary job duty of your assistant managers and supervisors?
- Analyze compensation data for all affected employees. If an employee is currently exempt and will fall below the new salary threshold, you will need to decide whether to increase their compensation to maintain their exempt status or change them to a non-exempt (usually hourly paid) employee and pay them overtime. Up to 10 percent of the new salary threshold can consist of non-discretionary bonuses, incentive pay and commissions. So, you may need to consider adjusting the split between salary and incentive pay for employees who receive commissions, service charges, or incentives.
- Update your budget. You will need to factor in any potential increases into your labor budgets and decide how to proceed. This may be particularly difficult since the deadline to comply with the first increase is rapidly approaching—and it may require adjustments to your current staffing models, compensation structure, menu pricing, and hiring plans.
- Review your policies on timekeeping and overtime pay because you will need to communicate these policies clearly and quickly to employees who will change from exempt to non-exempt status. If you have employees who will be classified as non-exempt going forward, this also includes planning for changes like setting them up in your timekeeping system and making sure they receive any training or policy documents that they did not receive while classified as exempt.
- Decide how to communicate changes. In addition to developing communications focused on employee relations and morale, you’ll want to provide a written communication to each employee about the specific changes to their compensation and benefits and what new responsibilities come with the changes, such as timekeeping, meal and rest breaks, and other requirements. You’ll want to clearly communicate these new terms of employment with impacted workers before they take effect.
The finalized overtime rule falls under the U.S. Department of Labor and the Fair Labor Standards Act (FLSA), and, as with most federal rules, it is important to remember that local jurisdictions can have higher, stricter, or different wage and hour requirements. For example, some states already have a higher salary threshold for the white-collar exemptions than the FLSA’s, so it’s important for quick-service establishments to not only become familiar with the ins and outs of the new federal rule but to also research the requirements of all state jurisdictions within which they operate.
Courtney Leyes and Emily Litzinger are employment lawyers at Fisher Phillips where they regularly partner with restaurant industry clients to minimize liability and reduce risk with preventative strategies focused on compliance, training, and the implementation of best practices. Having both worked in the industry, they understand the delicate balance restaurant employers face when managing a diverse and ever-changing workforce in today’s complex legal landscape.
