Overtime Under Review

As wage earners await a final ruling on overtime pay, employers prepare to pass on new costs. For restaurateurs, that could mean more than higher food prices.

President Barack Obama announced in June 2015 a plan that would make 4.7 million Americans eligible for overtime pay in its first year. The Department of Labor proposed extending overtime pay to most salaried workers earning less than $50,440 per year, up from the current threshold of $23,660, with future updates tied to inflation or wage growth. After considering public input, the department planned to issue a final rule in 2015.

The restaurant industry isn’t completely opposed to raising the salary threshold for overtime pay, but many leaders say the president’s proposal goes too far. “We recognize it’s probably time to increase [the threshold],” says Jay Stieber, executive vice president and general counsel of Lettuce Entertain You Enterprises (LEYE). “We think the quantum leap is certainly larger than we would like to see. The consequence is the restaurant industry is going to have to reevaluate its labor model as it relates to management personnel in stores.”

Stieber, who also serves on the board of the National Restaurant Association, oversees the legal and financial functions of LEYE, a Chicago-based firm that owns more than 100 restaurants across the nation.

Stieber says overtime is the latest in a string of regulatory issues challenging the industry, including the Affordable Care Act, minimum wage increases, and mandatory paid sick time. He says restaurants that operate on tight margins are already pressured by increased costs of commodities, utilities, real estate taxes, and insurance. “This is a low-margin business, and these additional costs are difficult to absorb and are therefore barriers to growth and job creation,” he says. He says restaurant owners could end up raising menu prices to accommodate the change.

The current threshold of $23,660 has been raised twice in the last 40 years, and it is about $600 below the poverty threshold for a family of four. Total costs for employers is expected to be a fraction of a percent of payroll costs and revenues, according to the Department of Labor. Hence, a “full macro-economic analysis  is not likely to show any measurable impact on the economy.” Supporters say the overtime proposal would boost the middle class and increase standards of living by raising workers’ earnings and helping them achieve better work-life balance.

“That’s good for workers who want fair pay, and it’s good for business owners who are already paying their employees what they deserve—since those who are doing right by their employees are undercut by competitors who aren’t,” Obama wrote in an op-ed for Huffington Post. “That’s how America should do business. In this country, a hard day’s work deserves a fair day’s pay.”

Most restaurant workers are paid hourly and are already eligible for overtime. The proposed rule change would impact salaried managers, assistant managers, kitchen managers, chefs, and assistant chefs who earn between $23,660 and $50,440 per year, or $455 to $970 per week. All of LEYE’s salaried employees, Stieber points out, are eligible for performance-based bonus pay, which doesn’t count toward the overtime exemption threshold. Those incentive plans may change if the threshold is raised to the proposed level.

The proposed rule does not amend the duties test, which is used to determine whether an employee’s primary job duties involve executive, administrative, or professional work and are exempt from overtime. But the labor department plans to determine whether the current test is working. Stieber says he’s especially concerned that the department will change the standard. California, for example, has a more stringent test than the federal regulation that requires more than 50 percent of an employee’s time be spent performing managerial or other exempt duties in order to be ineligible for overtime. “I think the restaurant industry is unique,” he says. “To operate a restaurant, there has to be a lot of flexibility in what they do.”

For example, a floor manager of a full-service fine dining restaurant could, if the restaurant is busy, be expected to greet people, clean tables, and perform other duties, in addition to managerial responsibilities.

Stieber is concerned about proposed annual changes to the salary threshold. He says it’s hard to evaluate how that will impact the industry. The National Restaurant Association is evaluating the potential cost and administrative burden of the overall proposal and plans to submit comments to the Department of Labor.

“While we are still reviewing the Department of Labor’s proposed overtime regulations, at first sign, it seems as if these proposed rules have the potential to radically change industry standards and negatively impact our workforce,” said Angelo Amador, the association’s senior vice president of labor and workforce policy and regulatory counsel, in a statement in June 2015. “Supporters of these regulations say they want to increase Americans’ take-home pay, but these sweeping changes to the rules could mean
anything but.”