Salary vs. Hourly - Is Your Restaurant at Risk for Unpaid Overtime?

As you ramp up your new restaurant, among your key labor issues is to determine which of your employees, if any, are "exempt" from the Fair Labor Standards Act (FLSA) regulations that guarantee most workers the right to overtime pay -- i.e., "time and a half" for every hour worked beyond the normal 40-hour workweek. This is not a new concern; however, recent changes in these regulations make this a crucial time to review your compensation practices to make sure you don't step outside of legal boundaries.

What's the big deal? Well, it isn't -- at least, until someone blows the whistle on your operation and brings violations to the attention of the Department of Labor (DOL), as disgruntled employees have been known to do.

. . . In addition to minimum salary requirements, to be exempt from overtime laws as an executive, the employee's primary duty has to be management of an enterprise or recognized subdivision.

You don't have to go outside the restaurant industry for a cautionary tale. Several years ago, Treetop Enterprises Inc., the second-largest franchisee of Waffle House, a popular restaurant in the Southeast, was ordered by a federal judge to pay about $2.9 million in overtime pay owed to its managers. The court rejected Treetop's claims that the managers were "executives" who were exempt from FLSA overtime requirements, because the Waffle House managers performed non-managerial tasks as their primary jobs, with management roles being secondary. It didn't help that the company's training manual defined their managerial duties as subordinate to cooking.

The penalties for violation of FLSA overtime requirements can include back overtime pay for every hour worked beyond a 40-hour week for as long as each misclassified employee has been working for you. In the case of Treetop Enterprises, this was time-and-a-half pay between 15 and 40 hours a week over a period of several years for 125 current and former managers.

The FLSA has been around since 1938 to govern minimum wage and child labor laws. Over the years, provisions have been added to these regulations to increase the scope of both the kinds of employees who are covered by the FLSA and the amount of money that they should be paid at a minimum. In the last decade, there has been a renewed emphasis on overtime pay, which has been driven by high-profile verdicts and settlements, such as the hard hit taken by Treetop Enterprises. As highly regulated as our industry is, and with as many areas of potential liability, restaurateurs often approach new laws with trepidation. In this case, the new overtime regulations are, in part, an attempt by the DOL to reduce the ambiguity of these laws.

General Overtime Requirements

Currently, the FLSA requires that most employees be paid a minimum wage of $7.25 an hour, with a tip credit of $2.13 per hour (tips actually received by tipped employees may be counted as wages for purposes of the FLSA, but the employer must pay not less than $2.13 an hour in direct wages). The FLSA requires most workers to be paid time and a half for all hours worked beyond 40 hours per week; however, the act provides an exemption for executive, administrative, professional, and outside sales employees, and certain computer employees. This exemption is the crux of the new regulations, as we will discuss.

If you haven't prepared for these new laws, you're not alone. "Many employers didn't prepare for new regulations thinking that Congress will strike them down," said hospitality employment attorney Douglas H. Duerr of Atlanta-based employment law firm Elarbee, Thompson, Sapp & Wilson, LLP. Duerr noted that there has been a lot of congressional interest in the new laws; however, he said "the bills in Congress try to deny money for enforcement of the regulations but will not undo them." Furthermore, those bills will have to go through conference committee, and the Senate has been less receptive to these actions.

"Even if these bills pass through conference committee the president has threatened to veto them," said Duerr. Without belaboring this article with a review of the legislative process, the upshot is clear -- it's way past time to bring your house in compliance with the new rules.

Duty, Not Title, Is the Important Thing

Under the new law, certain "white collar" employees are typically not eligible for overtime pay. As noted, these include executive, administrative, professional, and outside sales employees, and certain computer employees. But it's not that simple. The new overtime law is based on occupations, salaries and duties. Job titles are irrelevant under the new overtime law.

Executives. There are two governing factors for the overtime exemption for "executives." First, the employee must engage in specific duties as part of his or her primary job. And, second, he or she must be paid on a salaried basis of at least $455 per week, not including bonuses. Any employee who does not earn this much, will not qualify for executive exemptions.

"The Department of Labor says about 1.3 million workers will now be paid overtime as a result of the new laws," said Duerr. "A lot will come out of the hospitality industry, but these will be mostly [quick-service restaurants], with managers not making quite $23,000 per year." For most restaurant operations, he said, the biggest changes will be a result of these new minimum salary requirements.

What does it mean to be paid on a salary basis? "Employers get in trouble on this one," said Duerr. To be considered a salaried employee, "the employee has to receive a predetermined amount of salary each week, regardless of quality or quantity work performed," he said. One of the traps for unwary employers is that they can change the employee's exempt status by docking pay, in certain cases.

"If you furlough an employee for less than a week, you cannot make deductions from his salary [and still maintain his exempt status]," he said. But Duerr noted some exceptions. For example, you can make prorated deductions for absences of a full day for personal reasons, such as an illness. Other exceptions, which would not generally apply to the restaurant industry, include docking pay for violating major safety rules, with the operative word being "major." This would include violating a nonsmoking rule at an oil refinery, said Duerr.

You cannot dock pay or suspend exempt employees without pay for minor workplace rules infractions, such as not securing the back door. However, workplace deductions or nonpaid suspensions based on violations of written conduct rules -- such as sexual harassment or workplace violence, are acceptable, without losing the exemption.

Fortunately, the rules are not unyielding or unreasonable. They anticipate "inadvertent" deductions. In addition, the DOL will look to see if there is an actual, systemic practice of disallowed deductions. This "safe harbor" in the new laws allows employers to make an occasional mistake if the employer clearly communicates to employees that the business has a policy of no improper deductions, corrects improper deductions by compensating the employee, and shows a good-faith effort to comply with the laws.

In addition to minimum salary requirements, to be exempt from overtime laws as an executive, the employee's primary duty has to be management of an enterprise or recognized subdivision. The general manager would clearly be exempt under this definition of duties. Management of a recognized subdivision might include managing the kitchen, managing the shift or front-of-the-house operations. But you need to be careful that the position requires bona fide management. An assistant general manager may or may not be an exempt employee. For example, said Duerr, "the manager can't just float around. He has to be responsible for a recognized division, not just a group of tables."

Another requirement is that these managers also "customarily and regularly direct the work of two or more full-time employees or their equivalent," said Duerr. The equivalent of two full-time employees would be four part-time employees. Also, if there are two managers to a group, there would have to be at least four full-time employees or their equivalents, in their charge.

And a new twist to the executive exemption is that the exempt executive must either have the authority to hire or fire employees, or their recommendations are given particular weight. This authority or influence should be clearly described in the employee's job description, Duerr recommends.

But if the employee is also a business owner with at least 20 percent ownership of the business and is involved in management, he is exempt without having to meet the salary requirements.

Administrative personnel. "Administrative" employees may also be exempt. First, they have to meet the same salary requirements (again, at least $455 per week). Regarding their duties, they must be engaged in office, nonmanual labor (which includes most restaurant work) that is directly related to the management or general business operations of the employer. Also their primary duties should involve "the exercise of discretion and independent judgment in matters of significance," said Duerr. For example, this would include someone who independently maintains inventory levels or hires contractors. As an illustration, if the employee's duty is to order the wines specified by a manager, that employee would not be considered exercising discretion or independent judgment over matters of importance. But if the employee's duties include ordering wines with the responsibility to determine which wines to order, that would be considered the exercise of independent judgment. As Duerr noted, the administrative exception usually pertains to multiunit operations, with specialized job functions such as trainers.

Professionals. The rules also exempt so-called "learned professionals" and "creative professions" from the overtime laws. A learned professional's primary duty has to involve an advanced degree of knowledge, predominantly intellectual, with extensive exercise of discretion and judgment. Typically, they must be in a field of science or learning, and have obtained their professional status through a prolonged course of study. These include lawyers, doctors, engineers and CPAs.

How does this relate to the hospitality industry? According to Duerr, the DOL has come to recognize that a four-year college degree in the culinary arts meets this standard. Executive chefs who manage a kitchen already qualify under the executive exemption. Under the new laws, an employee with a four-year culinary arts degree would be exempt from overtime pay as a learned professional, as long as they were applying their training as a primary duty, such as menu planning. The restaurant industry has the National Restaurant Association to thank for this exemption, which resulted largely from its comments.

Of course, a lot of chefs don't possess a culinary arts degree. In this case, they might fall under the "creative professional" exemption. To qualify, they must earn at least $455 per week. Their primary duties must require "invention, creation, originality and talent in a recognized field of artistic or creative endeavor," said Duerr, adding that the regulations recognize that "chef" fits this category.

But here's the rub: The regulations seem to limit this exemption "to chefs who work in gourmet and 5-star restaurants," said Duerr. "Line cooks are definitely not included," he continued, noting that, typically, all they do is follow strict guidelines set forth by the chef or kitchen manager.

Other exempt employees. The new regulations provide exemptions for computer programmers and analysts, as well as highly compensated employees (those who make at least $455 per week in salary, but have a total compensation of $100,000 a year). These positions are few and far between in the restaurant business.

A more common class of exempt employees in the restaurant business is the sales representative, such as the guy or gal who promotes catering or banquet operations. According to Duerr, there is an exemption for outside sales representatives, defined as those who make sales and obtain orders and contracts away from the office. "You need to be away from the office when you are selling, versus inside sales representative," said Duerr, citing the door-to-door salesman as a classic example. In fact, "most catering sales representatives are nonexempt, since they are sitting in a corporate office, running an advertising campaign and taking orders on the telephone."

State Counterpart Legislation

In this article, we have discussed the FLSA. Various states, such as California, Hawaii, and New York have different standards, such as minimum wages and the minimum salary required to be exempt. "The FLSA is a floor," said Duerr. You need to apply the law that requires more money to be paid to the employee.

If you have uncertainty about the requirements of your state laws, or are in doubt about how to apply the FLSA new overtime requirements to one or more of your employees, you should always consult a local labor law attorney for guidance.

A Hypothetical Case in Point

Let's say you've hired an employee whom you have called "kitchen manager." She's been with the operation for a long time, and is not a learned professional (i.e., she is not a culinary school graduate). Her duties include opening the restaurant in the morning, prep cooking, and ordering for established inventory levels. Is she exempt? According to Duerr, "most kitchen managers don't qualify as exempt executives. Many kitchen managers are working foremen. The question is, what is their primary duty? Is it management or cooking and other nonexempt tasks?"

Referencing the Treetop Enterprises (Waffle House) case, Duerr noted the court found the managers' primary duty wasn't to manage. Their primary duty was to cook, and that was the key factor: What are they spending most of their time doing? "This can be particularly complex, when assistant general managers have circle management," he said. "The new regulations look at what they are doing 50 percent of the time, and how closely the employee is supervised."

Duerr used the analogy of a ditch digger supervisor. "He is a ditch digger like anyone else but can tell other ditch diggers what to do. Still, if his primary job is to dig ditches, he is not considered exempt for the purposes of the FLSA. Although the title is kitchen manager, if it is not her primary job to manage, she is not covered by the executive exemption."

It's OK Until It is Not

The problem with improperly classifying the aforementioned kitchen manager, and others, as an exempt employee will not be apparent until something goes wrong. "Everything is fine until it's not," said Duerr. "If she believes you've done her wrong, you might have to compute her salary at 55 hours a week, and pay her an additional time and a half for 15 hours a week for the past three or whatever years she has worked for you."

It's important to note that employees cannot agree to waive their rights under the law. If they're entitled to minimum wage or overtime on the basis of the law, they are entitled to it," said Duerr. "You can have a 20-page paper drawn up by the best attorneys in the world, and it has no effect unless it is approved by the DOL or judge."

Complying With the Fair Labor Standard Act's New Overtime Laws

Labor attorney Douglas H. Duerr of the Atlanta-based hospitality employment law firm Elarbee, Thompson, Sapp & Wilson, LLP, recommends the following advice for staying within the boundaries of the new overtime laws:

• Review the salaries and duties of all employees who are categorized as exempt. This will include general managers and assistant general managers and some of your office workers. Make sure that they qualify with the new regulations.
• Put all current and future conduct rules in writing. Infractions of written conduct rules are a permissible deduction now. Include even common-sense rules, including policies against workplace violence, sexual harassment, and alcohol rules. (This is particularly important if, like many restaurateurs, you do not have employment practices liability insurance.) List unpaid suspension or termination as a penalty for violation.
• Adopt a compensation rule that provides that exempt employees will not be subject to improper deductions and provides a complaint mechanism for raising those objections.