Getting ready for the new federal overtime rule and the doubling of the salary threshold.
NOTE: The National Restaurant Association and the American Hotel & Lodging Association are working on legislation to put the implementation of the new federal rule on hold. Learn more about their efforts and the overtime rule by participating in their member webinars. The NRA webinar takes place Thursday, May 26, at 12:00 p.m. PST and AH&LA’s member webinar is Thursday, June 2, at 11:00 a.m. Learn more here. For information published by the Department of Labor on the new rule, click here.
Peterson Sullivan hospitality advisory manager Marney Zellers, CHAE, looks at what Washington employers should consider as they prepare to comply with the new federal rule for overtime exemptions. For information published by the Department of Labor on the new rule, click here.
New Department of Labor (DOL) rules regarding overtime pay exemption thresholds were announced by the White House on Wednesday, May 18. The Department estimates the new rules could affect more the four million employees nationwide.
Wednesday’s announcement outlined changes to the FLSA rules regarding overtime exempt employees, effective Dec. 1, 2016. These changes include:
- An increase in the annual salary threshold to $47,476 a year from $23,660, or weekly salary threshold from $455 to $913. This salary is equal to the 40th percentile of full-time salaried workers in the lowest income census region.
- Updates to the salary threshold every three years, maintaining it at the 40th percentile of full-time salaried workers in the lowest income census regions.
- An increase in the “highly compensated employee” threshold from $100,000 to $134,004.
- Employers will be able to count bonuses and commissions toward up to 10 percent of the salary threshold.
No changes have been made to the primary duties criteria. Furthermore, no changes have been made to Washington state rules allowing overtime-exempt status to resident, on-call managers as long as their agreed-upon active work hours do not exceed 40 hours per week. For more background on overtime pay requirements and exemption criteria, including how commissioned employees are treated, see below.
PLANNING FOR CHANGES
If your business currently has salaried employees whose salaries are under the weekly or annual threshold, and you determine they work more than 40 hours per week, you will need to decide how to remedy the situation. Possible solutions include 1) increasing salaries, 2) reclassifying these employees from salaried to hourly, or 3) leaving salaries the same, requiring managers to clock in and out, and paying for any overtime incurred.
Some employers may opt to reduce base salary or wage rates in order to accommodate overtime. Make sure to consider all aspects of each solution before deciding. For example, what might be the emotional effect on a manager of going from a salaried position to an hourly position?
While analyzing current salaried positions, take time to make sure overtime exempt, salaried employees also meet the “primary duties” requirements set forth in the FLSA. You may want to reevaluate compensation structures and/or job descriptions based on what you discover.
This is also the ideal time to evaluate your timekeeping technology. Is it time for an upgrade? Are there any “automatic settings,” such as automatic breaks or rounding up, which may be inaccurately measuring employee time? Acute measurement of overtime will help you manage costs, and assessing how your technology is configured can ensure you are in compliance FLSA rules.
REVIEW YOUR OVERTIME POLICIES AND PRACTICES
Now is the time to scrutinize your overtime policies, and to implement them if they do not already exist. One solution is to set policies against overtime and to require pre-approval for exceptions. Monitor schedules and timekeeping to avoid unplanned overtime.
Overtime is not always a negative. In the hospitality industry, many employees choose to work more than 40 hours per week. Given the option, many employees would even prefer to work more than 40 hours per week at the same job even if they weren’t being paid overtime wages, rather than trying to balance a second job. If you are going to allow overtime, plan for overtime. Build it into your labor budget, set associated hourly wages accordingly, and have strict policies around who is allowed to work overtime and how many overtime hours are allowed. Again, monitor schedules and timekeeping to avoid unplanned overtime.
COMMISSIONS AND BONUS PAY
If you have sales managers who are not already exempt under the retail and service commissioned employees provision, you will get a bit of a break on the salary threshold increase. The latest rules include a new provision allowing 10 percent of the minimum compensation required to be exempt from overtime to come from commissions paid to employees.
This new provision also permits bonus pay to be included in up to 10 percent of meeting the salary threshold. If you are considering a raise in salary, you might instead align your incentives by offering an incentive bonus based on sales, RevPAR, profit levels, cost management, etc.
EDUCATE AND COMMUNICATE WITH YOUR EMPLOYEES
The best way to manage change and to help your employees adapt to change is through education and communication. Make sure your employees understand (and know that YOU understand) all aspects of the FLSA rules. Taking time to do this can avoid misunderstandings and misconceptions about the rules and how you are implementing them. Washington state only requires employees be notified of changes in agreed wages in advance of their effective date. In other words, the date the employee begins performing work at new agreed wage). However, giving employees ample time to fully grasp plans for changes in pay structure can lead to a smoother transition.
If you have salaried employees who will now become hourly, it is vital you communicate that this change in compensation structure does not mean a demotion of role or status. Communicating this to your entire team is important so the authority and position of hourly rate managers is affirmed to both the staff and managers. For example, in California generally only the highest level managers are paid salaries. While this likely required a shift in overall thinking about the correlation between position and compensation structure, California hotels and restaurants have since adapted.
Ultimately, the way you deliver the information and your solutions sends a message to your employees about what kind of employer you are. It could damage the culture of your business if employees feel as if these new rules, intended to protect them, are in fact punishing them. Send a positive message about your solutions to your employees. Honest conversations and education about the updated FLSA rules can bring about positive, creative, and effective solutions that your whole organization can buy into.
Be advised, the information and suggestions made in this article are not intended as legal advice. Ultimately, this is an employment law issue. Please consult your employment attorney regarding the rules and their application to your specific business situation. Marney Zellers is a certified hospitality accountant executive and an advisory manager in the hospitality group at Peterson Sullivan Certified Public Accountants and Business Advisors. You can reach her at firstname.lastname@example.org or visit www.pscpa.com for more information.
MORE ON OVERTIME EXEMPTION CRITERON
The Department of Labor sets federal rules under the Fair Labor Standards Act (FLSA) regarding overtime rates, calculation of overtime hours and those employees who are exempt from overtime pay. States may also pass their own employment laws, and employers must follow both federal and state laws. When they differ, the rules that provide the most protection for employees are applied.
Both federal and Washington state laws require employees to be paid a rate of 1.5 times their hourly rate for hours worked in excess of 40 hours in a one week period. Certain employees are exempt from overtime pay, if they meet the following criteria:
- They are full-time employees.
- Their annual or weekly salary meets the DOL threshold, now set at $47,476 a year.
- Their job duties meet the DOL requirements for classification as professional, executive, administrative, or computer. Note: “Highly compensated” white-collar employees only need to demonstrate that one of their job duties meets the DOL requirements.
In order for an employee to be exempt from overtime pay, his or her “primary duty” (the principal, main, major or most important duty that the employee performs) must fall within one of the categories noted above. In an employment dispute, determination of an employee’s primary duty is made on a case-by-case basis and by looking at the job as a whole.
Another overtime exemption exists for retail and service employees whose pay is at least 50 percent comprised of commission. The total compensation of these employees must exceed 1.5 times the applicable minimum wage per hour worked in a workweek in which overtime hours are worked. Hotel sales managers, catering sales managers, etc., may be overtime-exempt under this provision.
For restaurants, overtime-exempt employees are often managers and most likely fall under the “executive” classification, meaning their primary duty is managing the business or a department. To be considered an executive position, they must manage at least two full-time employees, as well as have direct authority or explicit influence in hiring, promoting or firing other employees.
Some chefs and culinary management may be classified as “creative professionals” whose primary duties are that of creativity, imagination or talent in an artistic endeavor. In either case, these employees are only exempt from overtime if these duties can be considered the primary duty of their position.
Various hotel managers often fall under the “administrative” overtime-exempt classification. In this case, their primary duty is non-manual office work related to the management of the business or its employees and must include exercising discretion and independent judgment with regard to important business decisions. (By Marney Zellers, CHAE)
DOL Wage and Hour Division Home Page on Final Rule (includes links to full rule, guidance and compliance guide)