On the Margin
More overtime will result in higher prices

More overtime will result in higher prices

This post is part of the On the Margin blog.

New overtime regulations expected to be put in place in as soon as a month will almost certainly cost restaurants money. And that will result in price increases.

How much, of course, depends on the concept. But lower volume quick-service restaurant chains, expected to be hit hardest, could have to raise prices by more than 5 percent to offset the higher costs, according to an analysis from Piper Jaffray.

The regulations are expected to increase the pay threshold for a worker to be declared exempt from overtime pay — thereby greatly increasing who could qualify for overtime.

The final regulations aren’t yet known but, as proposed, the weekly pay threshold for exemption would increase from $455 per week to $970 per week — or from $23,660 per year to $50,440. That would make the lowest paid 40 percent of the workforce eligible for excess pay if they work more than 40 hours a week.

Restaurant managers tend to work a lot of overtime. So it doesn’t take a rocket surgeon to figure out that effectively doubling the overtime threshold would cost operators a lot of money. And the restaurant industry, which is focused heavily on unit margins, will almost certainly respond with higher prices.

Chains that pay their managers lower wages will be hit hardest, according to Piper. As we wrote last week, chains like Dunkin’ Donuts, Burger King, Bravo Cucina Italiana, Brio Tuscan Grille, Popeyes Louisiana Kitchen and Noodles & Company could be hit hardest — based on Piper’s analysis of information from Glassdoor.

Piper also analyzed the potential pricing implications, and how much a company would have to raise prices depends on volume. Piper said that lower volume quick-service restaurants would have to raise prices by 5.1 percent to offset all the incremental overtime labor costs.

Higher volume quick-service restaurants would have it easier, having to raise prices 2.7 percent.

Similarly, lower volume fast-casual restaurants would have to raise prices by 2 percent to offset the higher costs. Higher volume fast-casual restaurants would have to raise prices by 0.7 percent.

One side lesson of this is that volume tends to mask a lot of problems.

High-end restaurant chains that pay more, such as Del Frisco’s Restaurant Group and Ruth’s Hospitality Group, would see a lessened impact from the new overtime rules, according to Piper. Of course, those companies are also likely to see reduced traffic from higher prices like quick-service restaurants.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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