New overtime rules that are expected to go into effect at the first of the year could have a significant impact on employers’ labor costs.
There are several components to the final rules issued in September by the U.S. Department of Labor, but the provision that raises the standard salary level for employees to be eligible for overtime is the one that will likely have the greatest impact on restaurant owners.
According to the final rules, which are set to go into effect Jan. 1, 2020, salaried employees who earn less than $684 a week (or $35,568 a year) will be eligible to earn overtime. The current threshold for being eligible for overtime is $455 per week or $23,660 a year.
This is the first increase in the overtime salary standard since 2004. The DOL had issued a final rule to more than double the standard to $913 a week (or $47,476 a year) in 2016, but just days before it was to become effective, a federal judge issued a nationwide injunction blocking the rule citing the hardship such a sweeping change would bring.
While this new increase is more modest, it is still expected to impact approximately 1.2 million workers who currently are not eligible for overtime pay but will be as of Jan. 1 if employers do not raise their compensation.
How should employers respond?
The Restaurant Law Center with National Restaurant Association and the law firm of Epstein Becker Green recently hosted a webinar on the subject. They provided a good example of how this could impact the owner of a restaurant.
Example: A supervisor currently earns $600 a week in salary and works 50 hours a week. Broken down hourly, this employee earns $12 an hour.
An employer has several options once the final overtime rule becomes effective.
Option 1: Raise the employee’s pay to satisfy the new minimum salary level.
- The employee now gets $684 a week
- Labor cost increases 14 percent
Option 2: Implement a fluctuating workweek, where legal, and make employee salaried, non-exempt and pay half-time overtime for 10 hours.
- Employee now earns $660 for 50 hours of work
- Labor cost increases 10 percent
For more about fluctuating workweeks, please click here: https://www.dol.gov/whd/overtime/fww.htm
Option 3: Maintain current pay but reduce hours to 40 and pay no overtime.
- Employee still earns $600 a week, but works only 40 hours a week, which amounts to $15 an hour.
- Pay another employee $150 to do the last 10 hours of work
- Labor cost increases 25 percent.
Option 4: Maintain same hours, base pay and pay full overtime (time-and-a-half after 40 hours, which in this scenario would be $22.50 an hour).
- Employee earns $225 for the 10 hours overtime in addition to base pay.
- Labor cost increases 37.5 percent.
Option 5: Adjust the employee’s hourly rate for earning $600 for 50 hours a week, including overtime. This would reduce the hourly rate for 40 hours a week from $12 an hour to $10.91 an hour. The employee would, however, earn $16.37 an hour for the 10 overtime hours.
- Employee earns $436.40 for 40 hours and $163.65 for the 10 overtime hours.
- It is likely you would eventually eliminate overtime to reduce costs.
- In that case, you would pay another employee $10.91 for the last 10 hours of work.
- Overall, labor cost decreases 9 percent. Morale also declines.
These are tough choices to make, but essentially it comes down to the choice between raising your employees’ pay so they are exempt from overtime or maintaining their current pay scale, understanding you will have to account for overtime costs. You should also work with your payroll company to make sure that all your employees are properly classified as “exempt” or “non-exempt.” You will also need to review your state’s particular salary requirements because many already exceed the new federal rule.
For more information, please visit the U.S. Department of Labor’s website at www.dol.gov.
Kristin Ward is a Tax Manager with Antares Group, Inc. She can be reached at firstname.lastname@example.org.