Federal overtime exemptions are changing.

The deadline for the new minimum salary requirements for overtime exemptions from the Fair Labor Standards Act (FLSA) is quickly approaching. Restaurants should take the time now to immediately evaluate their current pay practices to avoid penalties and unnecessary costs associated with improperly paying workers.

The FLSA is a federal law that mandates a minimum wage and overtime at a rate of no less than one and one-half times the employee’s regular rate for all hours worked in excess of forty hours per workweek. Generally, restaurants with annual gross sales of at least $500,000 at one or more establishments are subject to the minimum wage, overtime and reporting requirements of the FLSA. The wage and overtime provisions of the FLSA apply to most employees, unless the employee is properly classified as “exempt” from such provisions.

While there are several exemptions to the wage and overtime requirements of the FLSA, the most common exemptions in the restaurant industry are the executive and administrative exemptions. These generally apply to managers who supervise employees or those positions that are responsible for business operations to a significant degree such as managing budgets, ordering supplies and food, setting policies and similar managerial duties.

The Wage and Hour Division of the Department of Labor (DOL) is responsible for issuing regulations detailing the eligibility requirements of FLSA exemptions. In September 2015, the DOL proposed changes which are expected to take effect in 2016. The changes will have a dramatic and narrowing impact on the scope of the administrative and executive exemptions which will significantly affect the restaurant industry. For example, the minimum standard salary an employee must be paid to qualify for the executive and administrative exemptions will be drastically increased from its current rate of $455 per week ($23,660 per year) to $921 per week ($47,892 per year).

The impact of this increase, which requires employers to more than double the amount of salary for exempt employees, will be substantial. The DOL estimates that approximately 21.4 million employees in the United States who are currently classified as exempt may no longer be considered exempt under the new regulations.

Significantly, the DOL has proposed that the minimum salary required for these exemptions will automatically increase each year. Under the proposed regulations, the salary level for the executive and administrative exemptions will be adjusted upward each year either equal to the 40th percentile of weekly earnings for all full-time salaried workers or at a rate in accordance with the inflation rate, as measured by the Consumer Price Index for Urban Consumers. Because of these automatic annual increases to the minimum salary level for these exemptions, the number of employees who will be disqualified from exemption will likely grow each year.

It has been projected that the restaurant industry will be hit hard by these salary level changes as most management level employees do not earn at least $47,892 per year. Therefore, the management level employees will either need a pay raise or the employer will incur overtime expenses given the long hours that most store managers and other management staff average each week. Either way, costs will increase exponentially for restaurants. Accordingly, it is vital that restaurants plan for these proposed changes now to avoid the costly penalties of misclassifying workers as exempt or the unexpected increased costs of paying overtime for newly non-exempt employees.

What Can Restaurants Do Before the Proposed Changes Take Effect?

Because of the severe financial impact of these changes, it is important for employers to plan and budget for 2016 and future years with an understanding that the minimum standard salary levels for exempt and administrative employees will increase annually. To avoid costly mistakes, restaurants should take the following steps:

Audit Your “Exempt” Classifications

The most important action that any employer can take is to ensure that each of its employees who are currently treated as exempt from the overtime requirements of the FLSA truly meet the eligibility requirements. Often in the restaurant industry, managers and supervisors are required to pitch in and assist their subordinates with manual labor duties that are viewed as “non-exempt” tasks. Because of the varied nature of each employee’s job duties and responsibilities, it is important to ensure that each employee who is treated as exempt primarily performs exempt tasks.

Determining which duties meet the exemption is often a complex legal analysis that requires competent legal counsel who specializes in the FLSA. Restaurant employers should not undertake this audit on their own or with counsel that does not have the required expertise. Often times, legal counsel will need to conduct research regarding similar job classifications and review legal precedent and DOL opinion letters.

Once restaurant employers conduct the appropriate audit to ensure that its employees are properly classified under the current rules, restaurants should determine how many of their exempt employees receive a salary less than $921 per week, the proposed minimum qualifying salary for the administrative and executive exemptions. Those employees who are not paid at or above the minimum required salary under the new rules will no longer be exempt from the minimum wage and overtime requirements of the FLSA when the new rules take effect. Therefore, the transition to hourly or “nonexempt status” should be scheduled in advance.

Evaluate the Cost of the Proposed Changes and Prepare a Budget

Once the restaurant determines how many employees will lose their exempt status under the new proposed rules, a determination regarding the financial impact should be made well in advance of the effective date of the new rules.

The restaurant should evaluate the costs of each of the following options:

  1. Increasing the salary of the impacted employees to ensure that they remain qualified for an FLSA exemption;

  2. Maintaining the salary of the impacted employees, and determining the overtime costs the company will incur if the employee continues to work his/her regular hours;

  3. Considering the costs of hiring additional workers and/or altering job duties and responsibilities to minimize potential overtime; and

  4. Decreasing the salary of the impacted employees to balance the projected overtime payments to each respective employee.

After evaluating the financial impact of each of the options stated above, the restaurant needs to determine which option(s) best suits their company.

Communications to Employees Regarding Wage Changes

Employers should also ensure that any changes to their employees’ job duties, responsibilities, work hours, or pay are clearly and properly communicated to each affected employee. When and how these changes should be communicated will depend on the employer’s policies, employment agreements for certain employees, offer letters and any other practice or promise to employees regarding their wage classifications and pay. In most circumstances, employees should be given written notice of these changes in pay, duties or FLSA classification. Meetings should be held with individual employees to communicate and explain the new pay plan.

If adequately prepared, employers should be able to smoothly transition their practices under the current FLSA regulations to the newly proposed rules. However, preparation is key. Employers are strongly advised to seek competent legal counsel in making these substantial decisions moving forward and not to wait until the new rules are in effect.

The opinions of contributors are their own. Publication of their writing does not imply endorsement by FSR magazine or Journalistic Inc.

Expert Takes, Feature