Broad Impacts of ‘The Final Rule’ for Restaurants

Effective December 1, 2016, restaurants across the U.S. will be required to pay managers a salary of at least $47,476 per year in order to continue to treat them as exempt employees, that is, employees who aren’t owed overtime pay. The U.S. Department of Labor’s new Final Rule announced May 18, more than doubles the current minimum salary that must be paid to treat employees as exempt. Well before the December 1 deadline, restaurant operators must evaluate their options and formulate an action plan that is affordable and effectively manages morale and house culture.

Restaurants Will Feel Brunt of the Change

While the Final Rule governs employers across industries, restaurants, bars and nightclubs will be among the hardest hit.  As compared to many other sectors, restaurants much more commonly employ lower-paid managers whom they classify as exempt, for example, kitchen managers, front of the house managers, shift managers and even general managers. According to indeed.com, for example, the average annual salary for restaurant managers today in Fort Lauderdale, FL is $39,000, in Portland, OR is $40,000 and in Los Angeles, CA is $44,000 – all well below the new federal minimum salary for exempt status. 

Restaurant operators must evaluate their options and formulate an action plan that is affordable and effectively manages morale and house culture.

As another illustration of the magnitude of the hike, the new federal minimum salary will be nearly $6,000 higher than today’s minimum salary for exempt status under even California law, the state most infamous for leading the breakneck charge to increase wage scales.

Practically speaking, virtually all restaurant operators across the country will be subject to the new minimum salary for exempt status. The Final Rule was promulgated pursuant to the Fair Labor Standards Act (FLSA), which governs all employees and employers engaged in interstate commerce.  In short, any employee who on the job regularly uses any instrument of interstate commerce – the phone, email, internet, banking, U.S. mail, etc. – and any restaurant that works with vegetables, meats, paper goods, seasonings or other supplies that have crossed state lines and which grosses at least $500,000 in revenue per year – are subject to the FLSA and, therefore, the new Final Rule. 

In short, it’s difficult to imagine much more than a child’s lemonade stand being so isolated in this country that it’s not subject to the FLSA.

Restaurant Operators’ Options

Operators paying exempt employees a salary of less than $47,476 per year have decisions to make well before December 1. Their options include the following:  

1. Increase employees’ salaries to at least $47,476 per year in order to continue to classify them as exempt and avoid having to pay overtime wages. This option, obviously, will have significant financial consequences on many operators. In a slight nod to the total compensation model, the new regulation does permit employers to take into account money paid as non-discretionary bonuses and commissions to satisfy up to 10% of the minimum salary requirement.  In order to exercise this provision, the bonuses or commissions must be paid quarterly or more frequently.
2. Prior to December 1, 2016, operators may reclassify lower paid managerial employees from salaried, exempt status to hourly, non-exempt status. In this approach, employers must then track all time worked by the formerly exempt employees and pay on an hourly basis for all time worked, including at overtime rates.  In order to avoid costly overtime wages, operators following this approach will likely need to revise how workers are scheduled and take steps to prevent work outside of scheduled hours, e.g., by attempting to prevent work-related emailing and phone calls outside of scheduled work hours. Aside from the financial consequences, reclassifying exempt, managerial employees as hourly employees will impact morale and house culture. Managerial employees, even those paid at the lower end of the current range for exempt status, often take pride in being exempt. Reclassifying such employees to hourly, non-exempt status may feel like a demotion.  Reclassified employees may be resentful and demoralized and other hourly employees may extend them less respect than before.  If restaurants choose to reclassify currently exempt employees, how the action is conveyed to the workforce must be considered carefully. Employees must, in some way, be made to feel that, regardless of the change, they are valued and respected.
3. Take no action, but take heed! Should operators, as of December 1, 2016, continue to treat as exempt employees who are paid a salary of less than $47,476 per year, they will become liable for overtime wages for all overtime worked, in addition to the employees’ salary. In other words, if operators don’t increase the annual salary to meet the increased minimum by December 1, 2016, any formerly exempt employees who continue to be paid less than $47,476 will no longer be exempt employees under federal law.

Around the Corner — More Increases to Come

Further increases in the minimum annual salary for exempt status are scheduled. Beginning on January 1, 2020, and every three years thereafter the minimum annual salary figure will increase under the Final Rule. The increases will be tied to financial indicators. At present, it’s expected that the minimum annual salary for exempt status will increase to $51,000 on January 1, 2020.

The Final Rule does not revise the duties required to meet the executive, administrative or professional exemptions.

Plan Now

Restaurant operators should begin to consider their options well in advance of the December 1, 2016 effective date, as the choices they make, or fail to make, will have significant consequences.