United States: To Comply Or Not To Comply? How The DOL's Overtime Rule, And The Court's Decision To Suspend The Rule, May Affect Your Restaurant

Remember in May of last year, when the United States Department of Labor (DOL) announced a new rule to drastically increase the amount salaried workers will need to earn in order to be exempt from overtime requirements? The new rule, which was set to go into effect on December 1, 2016, would have doubled the threshold minimum salary under the Federal Labor Standards Act's (FLSA) "white-collar" minimum wage and overtime exemptions, making it twice as difficult to qualify certain employees as overtime-exempt. The DOL's rule, estimated to affect roughly four million workers within the first year, left many employers scrambling to adjust their payroll practices to account for the steep changes. 

Well, you may have also heard that on November 22, 2016,  just days before the rule was set to go into effect, a District Court in Texas imposed a nationwide "preliminary injunction" which temporarily halted the rule from going into effect. In other words, the court is temporarily preventing the DOL from enforcing the new overtime rule until it can reach a final decision about whether the rule is legally valid. 

The court's decision has left many employers in overtime-classification limbo. On one hand, many employers are reacting cautiously, and proceeding as if the rule went into effect on December 1. They are keeping in mind that this injunction is not permanent, and if the court upholds the overtime rule as valid, it may also hold that it applies retroactively. If so, employers could be liable for misclassifying their employees, reaching back to December 1, 2016. 

Other employers feel more confidently that the overtime rule will never actually be reinstated, particularly given the results of the November 8th election, and the promise of a radical change in administration. After all, the recently nominated  head of the DOL, Andrew Puzder, CEO of CKE Restaurants (which owns Carl's Jr. and Hardee's), has publically expressed his disapproval of minimum wage and overtime increases. Many expect Puzder to lead the DOL in rolling back many of the Obama administration's employee-favorable policies, including this new overtime-exemption salary increase.

So what does this change mean for your business?  First, you should assess the potential impact the new rule may have on your restaurant by determining how many employees you currently have designated as "overtime exempt." Ignoring the rule could have serious consequences for your business, particularly if the new rule will impact the classification of numerous employees. 

Step 1: Identify which employees could potentially be classified as "overtime-exempt"

Under the FLSA, most employees must be paid overtime pay at 1 1/2 times their regular rate for all hours over 40 in a workweek. However, certain types of employees are "exempt" from this requirement. 

To qualify for the overtime-exemption, the employee must satisfy two prongs: (1) a "duties test" and (2) a minimum amount on a "salary basis". (It is a common misconception that employers can avoid paying overtime by simply paying employees a set salary.) To satisfy the duties test, the employee must perform certain duties qualify them for a specific overtime exempt category, such as a bona fide executive, administrative, professional, or outside sales worker. 

Many restaurant employees simply will not qualify for overtime exemption because of this "duties" requirement. For example, servers, bussers, hosts, food runners, line cooks, dishwashers, and even shift leads and wine stewards, will likely not qualify for any overtime exemption based on their traditional duties.  However, your salaried managers, sous chefs, and executive chefs may qualify for one of the executive, professional, or administrative exemptions. (For general information about these "duties" requirements, you can access information from the DOL's website and reference tools, https://www.dol.gov/whd/overtime/fs17a_overview.pdf or send us an email at the address below.) This is an ideal time to self-audit your classifications to ensure that all overtime-exempt employees perform the necessary duties to fall within a prescribed overtime-exempt category. 

Step 2: Assess how many employees will be affected by the salary increases 

If the employee's duties qualify them for an exempt category, they must also meet the minimum salary requirement:

Today, the minimum salary threshold is still $455 per week, annualized to and $23,660. 

If the new rule is reinstated, however, the salary threshold will jump to $913 per week, annualized to $47,476. 

The steep increase in the minimum salary-threshold will cause millions of workers to lose their overtime-exempt status. Thus, many employers will need to decide to either: (1) provide significant raises, to bring their workers up to the $47,476 salary threshold, or (2) begin tracking the employee's hours and paying overtime (or at least having the records to do so if it becomes necessary).

Step 3: Perform the cost-benefit analysis of complying with the new rule

Once you've identified your pool of potentially overtime-exempt employees, weigh the costs and benefits of complying with the DOL rule while awaiting further developments. The obvious major cost is that you may (perhaps unnecessarily) incur significantly greater operating or administrative costs for your business, depending on how many of your workers the new rule may actually affect. As a benefit, however, if you comply with the salary-increases requirements now, you need not worry about potential liability and exposure for back pay for overtime hours

1.As a small piece of goods news, the new rule will allow employers to satisfy up to 10 percent of the threshold with nondiscretionary bonuses and incentive payments, including commissions, as long as the employer pays them on at least a quarterly basis.

worked by improperly classified employees. In addition, you may improve and/or preserve employee morale, particularly if salary-increases were already communicated to staff. Of course, this analysis will vary business-to-business, and restaurant owners will have to assess their own needs, and their own aversion to risk, before implementing a final plan. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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