Restaurants could be forced to change the way they pay managers in just a few months as the federal government moves forward on new rules that dramatically expand who is eligible for overtime.
Earlier this week, the U.S. Department of Labor sent its final set of overtime rules to the Office of Management and Budget, a mandatory step that precedes publication of those final rules.
“The OMB has 30 to 90 days to review the rules, after which they will be published,” said Elizabeth Washko, an attorney in Nashville, Tenn., with the Ogletree Deakins labor and employment firm. After that, employers will have 60 to 90 days to comply.
Add it all up and restaurants have three to six months to figure this out.
However, it will most likely be closer to the three-month mark. According to Washko, “they’re pushing to have that done earlier than expected.”
The rules do not require an act of Congress, but there is an incentive for the Labor Department to get the rules out sooner rather than later – the prospect that the November election could usher in a new administration that stops the change.
The final rules are not yet known. But, as proposed, they would dramatically increase the weekly pay threshold for those who can be classified as exempt, from $455 per week to $970 per week, or from $23,660 per year to $50,440.
That would make the lowest paid 40 percent of the workforce eligible for excess pay if they work more than 40 hours a week.
The rules could have a significant impact on employers’ costs and management strategies. The National Retail Federation has estimated that it would cost retail and restaurant businesses $745 million to comply with the new regulations.
“I think it’s going to cost money in the long run for most restaurants,” Washko said. “Some restaurant companies will handle it more effectively and mitigate costs.”
In a note this week, Piper Jaffray analyzed several restaurant and retail companies and listed their average pay for store managers, based on numbers from Glassdoor. The analysis listed several chains that pay their unit managers less than $50,000 a year, on average.
Those chains or their franchisees, which include Dunkin’ Donuts, Burger King and Noodles & Company, could be required to hike pay for managers for them to qualify as exempt from overtime rules.
On the flip side, companies like Del Frisco’s Restaurant Group Inc. and Ruth’s Hospitality Group Inc. that operate upscale concepts would be less affected because their managers are paid higher wages and would be exempt under the rules.
Washko said that companies could reclassify unit managers as non-exempt and then pay them overtime wages. The problem with that is that unit managers work a lot of overtime.
“Exempt managers work hard, and they work hard for good reason, because of incentives, bonuses and things to make the restaurant more successful.”
“They’re either going to have to bump them up to the new minimum or reclassify them as non-exempt, which may result in overtime,” she said.
The National Retail Federation expects that the new rules will affect 2.2 million retail and restaurant workers, and that 32 percent of those would actually be converted to hourly.
But 21 percent of the affected workers would have their base wages lowered to reflect the number of hours they work, so even though those employees will get overtime, they won’t be paid more.
Washko believes that such a move could impact a restaurant’s morale. “It feels like a demotion,” she said. “You’re having to clock in and out and watch your hours. It could affect morale.”
Another potential concern is that the final rule could say something about the type of work that managers do.
Washko said the final rule could include a “duties test” that would govern how much basic labor managers are doing. The idea, potentially, is that managers must spend most of their time managing and not cooking food or serving customers.
“It’s hard to know anything concrete until we know the final rule,” she said.
Still, in the meantime, operators can prepare for the rules by getting a sense of what managers do, their job descriptions and what they do during a typical day. She also said restaurants should collect data for exempt managers and figure out how many hours they work in a typical week.
