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Industry expects costs and complications from new overtime rules

<p>New regulations could make life difficult for restaurant owners and operators</p>

New overtime rules published Wednesday aren’t coming at a good time for Brij Agrawal.

Agrawal owns VKC Group, which operates more than 150 restaurants, including more than 100 Subway units. The past couple of years haven’t been especially strong for the sandwich chain.

Now he worries that new regulations could force him to close some of his money-losing locations.

“Ten to 20 percent of our shops are losing money already,” Agrawal said. “One way we’re surviving is that we have more than 100 shops. Some are losing money and some are making money. We’re able to compensate as long as there is light at the end of the tunnel.


“That’s what I’m worried about: My shops on the bottom line are losing a little bit of money. What do they do? We’ll have to make a decision there.”

The new overtime rules promise a host of new complications for restaurant owners and operators as they prepare for them to take effect in December.

The rules greatly expand the salary threshold for workers to be considered exempt — from $23,660 to $47,476 — a giant, one-time move that could affect 4.2 million workers across the country, many of them employed at restaurants.

It’s an increase that Agrawal called a “shock,” and that many critics say is too much, too soon.

“The problem that still stands out is that it’s such a large jump at a single point in time,” said Steve Pockrass, chair of the wage and hour practice group at the Atlanta law firm of Ogletree Deakins. “If you’re going to increase it to this high a level, phase it in over time.”

The requirements also include automatic increases in the eligibility standard every three years. 

The expanded salary requirement comes at a time when the restaurant industry faces a host of other labor challenges, including minimum wage increases in numerous states, mandated health insurance coverage and intensified competition for workers. All of these factors are driving up labor costs.

“It’s not exactly a great time to increase costs to restaurateurs that have faced record increases in the minimum wage during our working lifetimes,” said Carolyn Richmond, co-chair of the labor and employment department and the hospitality practice group at Fox Rothschild LLP.

The Department of Labor did give employers one break: The rules won’t take effect until Dec. 1. That will give employers more time to plan and determine which employees get raises and which are converted to an hourly schedule.

“Most of us thought the Department of Labor would have wanted it effective prior to the presidential election in November,” Pockrass said. “Most employers will look at the Dec. 1 date as a little bit of a silver lining.”

Additionally, the rules do not include a new “duties test” that could have required exempt workers to perform management-like tasks to qualify as exempt — a change that could have affected assistant managers that bus tables or sous chefs who work in the kitchen.

“It could have been a whole lot worse,” Richmond said. “I think the whole concern coming in today was how bad would it be.”

That might come as small comfort to some restaurateurs, especially those at low-volume concepts with little wiggle room when it comes to price. 

For instance, Subway’s estimated sales per unit is less than $500,000, according to Nation’s Restaurant News data, and sales have struggled in recent years. Therefore, Subway may be less able to handle a big increase in overtime pay or management pay because it operates on thin margins.

“When you have shops where they’re doing annual volumes of $500,000, they can’t afford to pay $47,000 for a manger,” Agrawal said. “We may have to change some managers from salary to hourly. We may have to have smaller shops where the manager is capable, and he manages two shops, rather than just one shop.”

Agrawal could raise menu prices. But given Subway’s recent struggles, he worries that he can’t raise prices enough to account for higher costs — if he did, his restaurant could lose more customers.

“You can take a price increase, but we’re already having challenges about how to increase customer count,” he said. “If we take a price increase, we know for sure the number of customers won’t increase. We need more customers in the shop, not less.”

The time to prepare is now

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While employers have known the regulations were coming — the Department of Labor signaled its intention on overtime in 2014 — preparing for the new requirements will still be complicated and expensive.

Experts suggest that operators must first analyze how much they’re paying workers who are currently exempt. 

“Break them into salary bands,” Pockrass said. “Identify what bands you’re willing to increase to meet the new salary requirements, and which ones you wouldn’t.”

For those operators who won’t get higher pay, he said, “You’ll need to put together a strategy for how you’re going to pay those individuals and how you’ll control your overtime costs.”

Experts also said that operators have to calculate how many hours exempt employees work now, to get a good handle on how much they work and how much overtime they might be forced to pay.

“Take a fresh look at your timekeeping strategy, and make sure you accurately captured hours worked by those employees,” said Mark Sinatra, president of the Dallas-based human resources firm Staff One. “There needs to be a job review where you sit down with an employee and figure out exactly how many hours they are actually working.”

Experts also suggest not waiting to figure it out. 

“The time is now,” Sinatra said. “Dec. 1 will be here before you know it.”

For his part, Agrawal plans to sit down with staff and employees to determine how to address the changes. Despite his shock and fears, he says he’ll be okay in the end.

“We will figure it out,” he said. “We have a great team of people. We’ll figure out how to survive and optimize. I’m optimistic in that sense.”

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

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