By Ian McCue(opens in new tab), commerce and retail reporter
⏰ 5-minute read
- The U.S. Department of Labor recently increased the FLSA’s minimum salary threshold for overtime exempt employees.
- This new threshold is still low enough that it likely will not affect most salaried positions at restaurants and hotels, unlike an earlier proposal.
- Businesses that fail to comply with this new rule face fines, lawsuits and could develop a bad reputation in the super competitive restaurant labor market.
At the start of 2020, a change to federal overtime rules quietly went into effect that could impact restaurants, hotels and plenty of other businesses.
For the first time since 2004, the U.S. Department of Labor raised the for employees who are “overtime exempt,” or ineligible for overtime pay. The minimum salary went from $23,660 to $35,568, a 50% increase. Under the latest version of the Fair Labor Standards Act (FLSA), anyone earning less than $35,568 must be able to receive time-and-a-half pay for any hours over 40 worked in a week.
Employees whose salaries surpass that threshold must also pass “duties tests” in order to be overtime exempt, as they did before the law was revised. These exempt employees must have certain decision-making powers, manage others or perform certain types of tasks. (For more information, read this(opens in new tab).)
How does the modified FLSA affect restaurants?
The Department of Labor predicts this new salary threshold will make an additional 1.3 million people overtime eligible, a potential win for those workers.
But the threshold is still low enough to not have major repercussions for most restaurants, an industry that must pay close attention to overtime laws, said industry veteran Mike Smith.
The starting salary for an entry-level general manager at most quick-service restaurants is around $40,000, according to Smith, who spent more than 20 years in various leadership roles with such restaurants. The median salary across all food service managers is $54,240, per the U.S. Bureau of Labor Statistics(opens in new tab).
Since both of those amounts are higher than the new $35,568 threshold, even under the amended law, most quick-service GMs are not eligible for overtime.
“I think you may have a few very low-paid GMs that came up through the system that could be caught up in this, but I really don’t think it (the revised FLSA) will have much of an impact,” Smith said.
However, smaller full-service restaurant chains or independent eateries may have supporting managers with salaries in the neighborhood of $35,000, said Brady Thomason, a trained chef with experience at numerous hotel and restaurant chains.
These could be people responsible for running the front or back of the house, for example.
The threshold for overtime exempt employees was initially set to jump to $47,476 in 2016 under then-President Barack Obama, but a lawsuit prevented that from happening. That salary minimum would have been a much bigger problem for restaurants, Smith noted. It would’ve affected at least 75% of the managers at the 20 restaurants he oversaw at that time.
A footnote to overtime rules
Companies with employees whose salaries fall near the threshold could take advantage of a notable – and new – caveat to the rule: Up to 10% of that $35,568 salary can come from nondiscretionary bonuses or incentives.
But Thomason doesn’t think most restaurants will utilize that provision because it only allows for nondiscretionary bonuses(opens in new tab), meaning the bonus amount and criteria for earning it must be set ahead of time and the employee can expect to earn it if they fulfill those obligations.
Most bonuses in the restaurant world are discretionary, Thomason said, where the employer decides whether to distribute it and the employee does not expect it.
How can companies keep employees salaried and still comply with the amended FLSA?
The increased salary threshold could benefit some employees who did not receive overtime in the past, as restaurants will likely keep those staffers salaried to avoid the unpredictability and potentially higher cost associated with overtime. Here’s how restaurants can continue to comply:
- Increase salaries:
This is the most obvious solution for employees who already meet the duties test for overtime exemption (say, increasing a manager’s salary from $30,000 to $35,600. The other option is to begin paying her hourly and make her eligible for overtime). Businesses need to make sure any salaried employees earn at least $35,568 and every paycheck is for the same amount in order to be exempt.
- Adjust starting salaries:
Along those same lines, any new hires for qualified roles need to start with a salary above the minimum in order to be overtime exempt. This is only a concern if certain managers would previously fall below that threshold.
- Educate everyone:
Many departments of a business – from accounting to human resources to managers – need to know about and understand this revision to the law. Ensure everyone also grasps how the business is responding to minimize errors and confusion that could lead to non-compliance.
- Review duties:
The amendment provides a great opportunity to review job descriptions for overtime exempt employees and make sure they actually describe what that person does day to day. Although the duties test did not change, taking a second look could decrease vulnerability to future compliance-related lawsuits.
What are the penalties for noncompliance?
Companies that “willfully or repeatedly violate” the overtime rules can be fined up to $1,000 for each violation, according to the Department of Labor(opens in new tab). However, employee lawsuits could open up the company to much greater losses.
It’s difficult to predict how strictly this new federal overtime rule will be enforced, and Smith suggested the federal government may rely on states to track it. Enforcement may be tighter in some states than others.
The negative publicity and reputational hit of overtime violations could have long-lasting effects for restaurants, too.
“The labor market in restaurants is so competitive and so tight, you get one review out on Glassdoor saying you don’t comply with new overtime rules and it could be pretty damaging to you,” Smith said.
As always … there are exceptions
Three states have a higher threshold for overtime exempt employees than the new federal regulation. In this case, employers should adhere to the state law (and as a rule of thumb, always follow the law more favorable to employees).
The Golden State’s threshold is twice the minimum wage, which on Jan. 1 increased to $12/hour(opens in new tab) for businesses with 25 or fewer employees and $13/hour for companies with 26-plus employees. Annualized, that comes out to $49,920 for smaller businesses and $54,080 for the rest. California’s minimum wage is scheduled to increase $1 per year through 2023, so the threshold will keep rising.
- New York:
New York’s law depends on exactly where in New York you work. In New York City, the salary threshold is $58,500; Nassau, Suffolk and Westchester Counties have a threshold of $50,700; and the rest of the state has a minimum salary of $46,020.
A state you probably didn’t expect to see here, Maine has an overtime exempt threshold that’s 3,000 times the minimum wage. Its minimum wage jumped to $12/hour on Jan. 1, so the threshold is now $36,000, a touch higher than the FLSA’s.
The bottom line
Many restaurant leaders are still not be aware of this change to the FLSA, especially since it’s not as drastic as the Obama-era proposal. But they need to understand potential issues posed by the higher salary threshold and comply as quickly as possible. Time is of the essence.