Your Primer on the New Overtime Rule

How changing the salary threshold will impact your labor costs and profitability, and what you can do about it

Understand the new overtime rule

Starting December 1, 2016, the Department of Labor will institute its final change to the federal overtime rule changes, which more than doubles the salary threshold for eligibility from $23,600 per year to $47,476 a year. This means salaried workers earning less than $47,476 are eligible for time-and-a-half if they work more than 40 hours a week. The two main exemptions to this reform are employees earning above that amount and managers.

Prepare for impact

Restaurant owners and foodservice operators should expect a significant impact to their labor costs, which, in turn, will lead to a hit on their profitability. To mitigate these consequences, we recommend conducting a thorough impact study now, and then consider a wide variety of potential solutions, so that come December 1, you’re ready. 

Get analytical

Before responding, operators need to conduct a detailed wage analysis to determine the scope and scale of impact across their organization. Since salary pay varies wildly across the United States, not all areas or operations will feel the force of this rule to the same degree.

The first step is to conduct individual wage gap analysis to determine the employees impacted. Depending upon the gap in your current salary pay structure, simply increasing salaries to protect your day-to-day operations and work schedules may best serve your needs. Your analysis should also include the overall dollar impact. This will help you get a good idea of the  likely hit to profitability, as well as the blow to total sales. Be sure to focus on the annual impact to overall profitability versus short- term dollars. 

Assuming that closing a potential salary gap is too costly for your organization, the next step is to conduct a role review. This is an evaluation of all the functions an employee is responsible for, with the end goal of reducing or eliminating some, so that they avoid overtime pay by staying below the 40-hour/week threshold. The key is to keep your front-line managers as close to the guest experience as possible, so look closely at indirect guest activities, like ordering, inventory, scheduling, opening, and closing. These non-guest activities could then be supported via other hourly roles as development opportunities, the addition of an hourly part-time role, or through technology that could be hourly as well.

Plan for action

Now that you have an understanding of potential net income impact, and current roles/functions, there are a variety of solutions you can explore to offset any calculated repercussions of the new overtime rule. As you consider the below solutions, be sure to take into account the direct hard financial impact and the indirect impact on employee morale, guest service, and quality of experience. All of these elements can affect financial performance, both positive and negative, down the line.

1. Additional staff to share hours

This simplest option is to add more staff to do the work, which will resolve the short- term overtime issue. But this option creates the need for strong hourly management processes, such as monitoring time clocks, limiting smoke breaks, and enforcing meal-time policies. You could also consider partnering with other local business to share hours between employees. This could help reduce employee defection while keeping labor costs down. 

2. Eliminate roles entirely

Moving as many salaried roles out of the organization as possible. Consider this change carefully, as it could eliminate the aspirational aspect of growth within your organization. Also recognize that if you choose to “demote” first-time salaried team members to hourly roles, there will undoubtedly be a negative impact on culture and guest relations, which could be long-term.

3. Getting the message out

Deploy transparent communication(s) to your team(s) regarding the overtime rule change and its direct financial impact on your business. Today’s employees need to understand the “why” behind any business move you intend to make. Be specific and engage employees your to work through possible solutions.

Ultimately, the goal is to account for this external force upon your business. There is time to respond, but analyze the issue now, and use this time before the law is implemented to develop a strategy to minimize its impact on your profitability.