The House of Representatives passed a bill to delay the overtime regulation by 6 months but it remains unclear whether any delay will actually pass. The White House recently issued a statement indicating the President would veto legislation delaying the rule should it reach his desk.
So, as of today, beginning December 1, 2016, big changes are coming for restauranteurs when the Department of Labor (DOL) commences enforcement of new overtime regulations. Failing to properly plan for these changes can leave restaurant owner-operators vulnerable to litigation and potential fines and penalties.
Here are the changes to expect as well as how to prepare to ensure compliance.
Current Overtime Regulations
The Fair Labor Standards Act (FLSA) outlines how and when overtime should be paid. First enacted in 1940, the regulations haven’t been updated since 2004. However, a proposal was released last year following a 2014 Presidential Memorandum in which President Obama urged the DOL to modernize the overtime regulations to ensure workers are paid fairly.
Employees who work more than 40 hours per week are entitled to overtime pay — at a rate of at least time and one-half of their regular pay rate — unless they are exempted. The FLSA regulations provide exemptions for executive, administrative, and professional employees, who are frequently referred to as white collar or EAP workers.
Currently, EAP employees are exempt from overtime rules if they pass these three tests:
- Salary level test in which the employee receives compensation of $455 or more per week;
- Salary basis test in which the employee’s compensation is not decreased due to quality of work or performance; and
- Duties test in which the employee’s primary job responsibilities are classified as executive, administrative, or professional per the DOL guidelines.
New Overtime Regulations
The new overtime regulations will alter how overtime exemptions are determined. Here are the most prominent changes to expect on December 1, 2016:
Increased salary level. The standard salary level for full-time employees will increase from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). However, if an employee meets or exceeds the $47,476 annual pay threshold, overtime exemption isn’t guaranteed. Remember that the salary level test is based on the weeklycompensation, not the annual pay.
HCEs. The threshold for highly compensated employees (HCE) will be increased from $100,000 to $134,004 per year. In order to achieve exempt status as an HCE, the employee must receive at least the updated standard salary level of $913 per week and pass a standard duties test. Commissions and non-discretionary bonuses and incentives may count toward the remainder of the annual compensation threshold and can now be used to satisfy up to 10 percent of the standard salary level.
Automatic updates. Standard salary and HCE total annual compensation limits will be automatically updated every three years, beginning with the first update effective January 1, 2020.
How to Achieve Compliance
Restaurant owner-operators have a few options in order to achieve FLSA compliance:
- Raise wages. To retain exempt status, consider raising the wages for EAP employees who are close to the new standard salary level.
- Reclassify as non-exempt. It may be beneficial to reclassify some employees to non-exempt status as opposed to raising wages to the new standard salary level. This means you will pay overtime in addition to their regular salaries.
- Balance work hours. By evaluating staffing needs, employers may be able to more effectively balance schedules so that non-exempt employees work 40 or fewer hours per week.
Due to the complexity of the wage and hour rules as well as the unique staffing needs of each restaurant, a case-by-case evaluation will be required — there simply is no shortcut unfortunately. Restauranteurs should review the overhead costs associated with reclassifying employees and raising wages.
And while not directly related to FLSA compliance, owner-operators may find that investing in technology can help increase productivity. Gaining efficiencies in inventory management and employee scheduling can pay off substantially. Cross-training employees as well as shifting duties can be useful also. Regardless of the approach taken, it’s important to be fair to employees during this transition and not act in a way that will damage workplace relationships.
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