Recent changes to minimum wage and overtime pay laws in the restaurant industry are creating big waves of impact across the country. Know the impacts of these new laws and how they will affect your restaurant’s bottom line. By arming yourself with knowledge, you can take the right steps to circumvent disaster due to new laws.
Minimum Wage in the Restaurant Industry
Few economic policies are as hotly debated as the minimum wage. The race is on to assess the impact as businesses learn to cope with a spike in their labor cost. Will it cause businesses to move? Decrease the number of jobs? Reduce turnover?
While determining the impact will take time to assess on a regional and national level, according to Mark Kuperman, President of Consulting Services for Revenue Management Solutions, for every dollar increase in the minimum wage, restaurants will need to take in 1.25% to 1.5% in price to cover the increase.
Know your Law Several states have opted to use a tiered system based on population density to implement minimum wage increases, as rural economies are worse equipped to sustain hikes in pay. Recently, Oregon’s House of Representatives passed a bill that would make the state’s minimum wage one of the highest in the country. But what’s most noteworthy about the Oregon bill isn’t how high the proposed minimum wage will be. It’s that different minimum wages will go into effect in different parts of the state, based partly on population density. In the state’s largest metropolitan area of Portland, the increase will be the largest, with the minimum wage rising to $14.75 in 2022. Outside of Portland, other cities will see the minimum hourly wage in mid-sized counties increase to $13.50 over the next six years, with more rural areas increasing to $12.50.
Many proponents argue for raising the minimum wage with the cost of living each year, and some states have followed, tying their minimum wages to an inflation index. Do you know your state law?
Get Ahead of the Game One of the biggest assets to prepare for the change is to get ahead of the game and start making changes early, and incrementally. One upside of any changes to wage changes is that owners and operators know far in advance when they will take place. This gives plenty of time to implement and test any in-house adjustments, such as raising menu prices. If you are going to raise prices, consider your timing. Holiday season and summertime may mark the best opportunity to start any changes as they are the months in which consumers have less price sensitivity. Less ideal times are in January (following the holidays) and early fall, when many are heading back to school.
The Tipping Point Prompted by the increases, more restaurateurs are experimenting with no-tipping policies as a way to manage rising labor costs. Tipping etiquette has made recent headlines as some restaurants, from high-end eateries to national chain Joe’s Crab Shack, experiment with ending the practice in favor of higher hourly wages. Typically, servers are paid around $2.13 an hour, which is a deeply discounted, industry-specific iteration of the federally mandated minimum wage (currently $7.25). In an effort to balance the labor wages, more establishments are considering raising their hourly rate across the board. The movement is gaining momentum as it would also balance pay between BOH and FOH staff.
Even New York restaurateur Danny Meyer has announced that his entire Union Square Hospitality empire, which employs 1800, will cease their tipping practice at each of his thirteen full-service venues by the end of 2016. Meyer believes that the practice of tipping no longer impacts the quality of service and that wages are an outdated practice. For restaurants moving towards a no-tip policy, the key will be explaining the shift in ideology to customers.
Double Check your Amenities There’s a reason why you have loyal regulars that come in week after week and order the same thing. Then there are dishes that are specific to your restaurant, that guests can’t find anywhere else. These are the items where you have the most pricing power because they are unique to your brand; customers can’t associate a specific value to those items. Do something to differentiate your restaurant and menu, and you automatically have some leverage when pricing your menu. Revisit your menu, and take notes accordingly. Make a list of what’s working and plan accordingly. Is it time to revamp a font or re-check your price points? If you are raising any prices, double-check that the menu reflects the increase and train staff to explain the hike to customers. When it comes to an increase in prices, an overhaul of the menu or even a remodel or revamp can explain a rise in costs.
Save Time & Money with Smart Scheduling Poor scheduling can cause a serious budget deficit. Whether it is overstaffing, understaffing, or paying employees overtime, make sure to pay close attention to schedules and plan accordingly to avoid mistakes. To more effectively manage staffing needs, consider using an online scheduling platform to reduce human error when planning the schedule. These platforms can save managers up to 75% of the time it takes to create employee schedules, save restaurants up to 4% on labor costs, greatly reduce scheduling errors, and integrate with current POS labor and sales data for increased accuracy.
Overtime Costs and Impact in the Restaurant Industry
It’s no secret that restaurant managers put a great deal of time and effort into their work. What tends to be the case is that managers work more than 40 hours a week on restaurant operations, without earning paid overtime.
In the restaurant industry, it’s widely understood that restaurant managers are exempt from overtime protection rules. The Fair Labor Standards Act (FLSA) states that executive, administrative, and professional employees are exempt from receiving paid overtime when all three conditions below are applicable:
- The employee earns a salary of no less than $455 per week.
- The employee is tasked with directing the work of at least two full-time employees with regularity.
- The employee has the authority to fire and hire other employees, and his or her opinions on the work performance of other employees are given considerable weight.
Restaurant managers earn annual salaries between $40,000 and $59,000, placing many restaurant managers above the base pay minimum of $455 per week.
Behind the scenes, the US Department of Labor has been working on getting employees, such as restaurant managers, paid overtime. As stated by the FLSA, the minimum base rate of $455 per week is rising to $913 on December 1, 2016. Once in place, an estimated 4.2 million more employees across the country would start receiving overtime pay, with restaurant employees making up a considerable percentage of that number.
Moving forward, restaurant managers earning less than $47,476 per year will no longer be eligible for the executive exemption. To avoid paying overtime costs, restaurant operators are considering:
- Increasing the salary of restaurant managers to at least $47,476.
- Convert managers making an annual salary to an hourly rate.
Both would put a strain on restaurant owners. In a bid to help operators manage the rising salary costs, the bill allows for 10% of the salary to come from nondiscretionary bonuses and incentive payments—a first in labor cost rules. Despite that, a number of franchise and restaurant owners protested the change.
Refusal to Pay by the Restaurant Industry
While many restaurants were gearing up for December 1, 21 states and 50 business groups challenged the overtime rule. In an unexpected turn of events, an injunction was just issued, days before the new rule was set to begin. Federal judge Amos Mazzant from the US District Court for the Eastern District of Texas agreed with plaintiffs that the new condition established by the US Department of Labor would put too much strain on the restaurant industry.
Lobbying groups representing industry associations such as the National Restaurant Association (NRA) and the International Franchise Association (IFA) said that it was too much, too soon. According to Robert Cresanti, president and CEO of the IFA, the injunction is excellent news. In response to today’s injunction ruling, Cresanti said, “Today’s ruling is a serious and significant victory for the rule of law. While a modest increase in the overtime threshold would have been appropriate, many franchises were faced with difficult and costly decisions about how to reclassify their greatest assets—their employees.”
The Department of Labor has argued that updating the overtime rule would keep up with the current economy. However, Judge Mazzant says that the Labor Department has overstepped its boundaries. Instead, he suggests that the Labor Department examine the duties of employees to determine who is eligible for exemption. By raising the minimum base pay too high, the judge says, “The Department exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary such that is supplanting the duties test.”
The judge did reject the 21 states’ argument that overtime rules do not apply to states. The Supreme Court has determined that states are responsible for overtime rule, and Judge Mazzant wrote that by law, states are responsible for meeting future changes to overtime pay rules, despite the ongoing dispute.
