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John Gordon - March 2019


New Wage and Hour Standards Coming: Effectsby John Gordon, Principal & Founder, Pacific Management Consulting Group In the last couple of months, we have gotten important new updates in terms of wage and hour regulations that will impact us in 2020. Both came out of the Wage and Hour Division of the Department of Labor. These changes give the industry some time for pause and reflection.

  1. Overtime threshold raised to $35,308 on January 1, 2020<1>: employees paid less than $35,308 on an annual basis must be paid overtime. This is an increase from the $23,660 standard that was in place from 2007 until 2019. This means that more employees will be covered. This has been submitted to the Federal Register and there will be a 60-day public comment period starting soon.Detail: For those employees in the $23,400 to $35,000 range, incremental overtime expense will be incurred.  There is not annual automatic indexing, that is, no automatic increases of the ranges. Employers can use bonuses and incentive program wage payments to cover up to 10% ($3,531) of the standard salary/wage level. There are no changes to the job duties test, in that certain employees will be exempt if certain executive, administrative and professional characteristics are in place. The employer bears the burden of proving these factors. Non-management production line workers…are not exempt. If a state establishes a stricter standard, the stricter standard applies. <2> This is very good time to examine salary versus hourly basis for store managers. If you want to ‘fix it” either way, January 2020 seems logical. Operators and CFOs, I talk to remain split on the wisdom of mandating unit management to be hourly employees or be salaried. Sometimes the decision is based on fear of litigation (in which hourly basis might be better), sometimes based on pay bands. What makes the most sense given your brand and and labor market conditions? It really shouldn’t affect the layout of store variable v. fixed costs much, since store management is essentially fixed regardless if paid hourly or via a salary. My experience is that salaried employees act differently than hourly employees; some promoted employees to management want to be done with the hourly employee mentality. I first became an exempt salaried employee in 1978 and remember it as a part of my maturation.  Hopefully, this discussion can be a part of future Executive Connection operator comments. I’ve told clients that a generalized cost impact number from this has to be created using detailed payroll data. There will be some incremental expense, and that logically shift supervisors and assistant managers in some brands might be most affected. State case law differs on whether a shift supervisor is managerial or not, so recommend you check. Wage rates have gone up steadily since 2011, so hopefully the going forward impact will be less than what it could have beet could have been. This is an also great time to think about who should be doing payroll work. No restaurant operator should be a payroll expert; things are even more complicated and perhaps this is the time to consider payroll services who do this kind of work for a living if you are still doing it in house.

  2. The Wage and Hour Division will stop using the 80/20 rule for inspecting side work time ratios for tip credit employees. The DOL Field Operations Guide was amended in late 2018<3> to drop the 80/20 test for examining side work. In place since about 2009, the 80% direct care of customers ratio and 20% for side work (opening, closing, rolling silverware, etc.) was the standard. In attempt to cut down on litigation on this topic (which first started around 2000), DOL has told its field inspectors now to look instead if both customer service work and side work were being done at the same time. If so, that’s OK. If not, then two separate wage categories, one tipped wage and one at the federal minimum wage is necessary. A very nice posting of the list of the “approved” side work factors can be seen at: https://www.foxrothschild.com/publications/flsa-80/20-rule-redefined-for-employers-taking-the federal-tip-credit/ What must be kept in mind is that this change is instructive to the DOL auditors only. States may well have tighter rules, in which case the federal rules don’t apply. This topic has been litigated so much now that federal and state court rulings have a body of precedent that may or may not support the new DOL view.  Some federal rulings in 2019 have already disregarded the DOL side work standard. This is the unique blend of federalism in the courts and in the law: state interpretations matter. Plaintiff firms may well not worry about the DOL Field handbook whatsoever. In researching this point, there was sensitivity on the potential freeloading upon hourly employees as far back as 1967. This is a tremendously difficult labor market right now; word spreads among employees about difficult employers quickly. Tipped employees know they can walk out and find a better or same job in a heartbeat. My perspective as a longtime restaurant numbers guy is: is it really worth average wage savings of $.01/hour (I’m guessing) over your system to offload heavy duty work to tipped employees?   It probably is not worth it; if the big cost savings opportunity is this, then you and your brand have far bigger problems. About the author: John A. Gordon is a longtime restaurant analyst with boatloads of restaurant operations, corporate staff financial management and management consulting experience. His founded firm, Pacific Management Consulting Group was formed in 2003 to work complex operations, strategy and financial management engagements for clients.  He is reachable at jgordon@pacificmanagementconsultinggroup.com, office (858) 874-6626, website: https://www.pacificmanagementconsultinggroup.com. <1> https://www.dol.gov/whd/overtime2019. <2> https://www.dol.gov/whd/overtime/overtime2019.nprm.pdf <3> https://www.restaurantbusinessonline.com/workforce/its-official-8020-limit-tipcedit-won’t-be-enforced.  Keep in mind this headline is a bit optimistic and only relates to the DOL inspectors; different states and federal courts will have different interpretations

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