Overtime Law’s Impact on Restaurants

overtime impact on restaurantsPresident Barack Obama’s plan to change the overtime law can impact restaurants and other small business. Depending on who you listen to, the impact could be positive or negative.

Even the economists are divided on the overall effect of the change to the law that would make more workers eligible for overtime compensation. Currently, a “white-collar exemption” exists, but that may change. In the current Fair Labor Standards Act (FLSA), according to the U.S. Department of Labor (DOL), “Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees.”

However, on March 13, 2014, the president directed the Department of Labor to “update regulations defining which white-collar workers are eligible to receive pay for hours worked over 40 in a workweek” according to the DOL site. This would include restaurant and fast food shift supervisors.

The Positive Impact

Currently exempt employees can be denied overtime if their salaried pay is in excess of $455 per week. The resulting math shows that depending on how many overtime hours an employee in that pay range works without compensation, his or her overall salary could fall below minimum wage.

A change to the overtime rules would help restaurant or fast food assistant managers (a typical title) achieve a fairer wage and ultimately have more money to spend.  Quoted in NPR’s “Overtime Pay Proposal Triggers a New Debate About Wages,” Jeff Grabelsky, associate director of The Worker Institute at Cornell University wrote: “(A change in overtime rules) could raise the pay of several million workers who may currently be misclassified as manager.”

The Negative Impact

Those arguing the other side of the debate about the impact of the overtime law contend that if small companies are saddled with increased costs of labor, they’ll eliminate positions and generate more layoffs.

Jonathan Meer, Texas A&M University economist, agreed with that assessment: “It is likely to slow job growth since, when costs of any kind go up, businesses will adjust.” (Quoted in the NPR article noted above). The result, he believes, will be job elimination and that fast food restaurants with already thin profit margins will be negatively affected by labor cost increases.

Meer’s assessment is supported by Qdoba Mexican Grill franchise owner, Chad Brooks. Brooks told the Wall Street Journal (“Obama’s Overtime Plan Could Cost Small Employers”) that he would trim managers’ hours to avoid higher overtime wages.

“What we’ll probably end up doing is putting all of those managers on hourly rates and then not allowing them to work over 40 hours [a week], which means they’re going to take home less money,” he said, adding that managers now work 45 to 50 hours a week and earn between $30,000 and $45,000 a year. “If something goes wrong and your highest-paid employee makes time and a half, that could be devastating.”

It’s too soon to tell exactly how this will shake out, but restaurant and pub owners should be ready for any changes to the overtime law to impact their businesses.