The proposed updated and revised regulations, as issued by the Department of Labor on 6 July under the Fair Labor Standards Act, would directly affect an estimated 4.8 million workers who are now exempt under the EAP (or so-called “white collar” exemption), but would fall under the proposed 40th percentile of earnings for full-time salaried workers ($50,440 in 2016 dollars). The rules also would automatically update the salary level in future years based on 40th percentile of earnings in the workplace or on inflationary change.
The potential impact of these rule changes greatly exceeds the impact of raising the minimum wage to $10.10 over a two-year period. It was estimated that about 3.3 million workers earn at or below the minimum wage, about 2% of the workforce. In order to increase the minimum wage and tie it to inflation required an act of Congress. What the president has done with a stroke of his pen is to authorize DOL through rulemaking, as stated in the proposed rule, “to update the salary level to ensure that FLSA’s intended overtime protections are fully implemented.”
Overtime in Hospitality
To better understand how the overtime rules might be applied in the hospitality sector, I spoke with key people in a number of management companies who would be responsible for the implementation of new overtime rules.
It was very clear from the discussions that the disruption to operations will be severe as will be the financial impact on the bottom line of the companies. The performance of the hospitality industry has been strong in the last two years with record levels of occupancy as well as 14 straight months of record employment. Hospitality has been a leader in the growth and performance of the United States economy. The overtime rules will definitely affect the industry’s performance.
The salaried positions that likely will require reclassification to nonexempt or substantial raises to comply with the overtime rules will include:
• assistant general manager;
• night manager;
• director of sales;
• sales manager;
• restaurant manager;
• front office manager;
• executive housekeeping;
• chief engineer; and
• banquet manager
Of course, this will vary by size and service level of the hotel. In general, it is estimated that about 180,000 to 190,000 employees of the 1.9 million workforce or about 10% will be affected.
The strategies I mentioned above, reclassification to nonexempt and pay raises, each have their own set of problems. Starting with reclassification to nonexempt, the logic for this is to calculate an hourly rate that takes into consideration the manager’s average weekly hours worked. Many middle managers work around 50 hours a week. For example, a front office manager is making $40,000 a year, which works out to be an hourly rate of about $19.20 an hour based on a 40-hour work week. Adjusting the hourly rate to account for the overtime pay rate of 1.5 and 500 hours of overtime a year, works out to be about $14.20 an hour, a perceived decrease of $5 an hour.
Now the front desk manager is clocking in and technically is not considered part of management for collective bargaining purposes. They may no longer view themselves as part of management. Furthermore, on an hourly basis, he or she is paid about the same rate as the front desk supervisors, who have not been working overtime. So now, the front desk supervisors may work overtime and the front office manager may have less take-home pay. The term for this would be reverse wage compression or even wage inversion.
The hotel now could have internal equity problems. The management team has shrunk because the reclassified employees may no longer view themselves as part of management. In essence, this will have overturned one of the key components of the Taft-Hartley Act in the late 1940s where middle managers and supervisors were for the first time since the passage of the Wagner Act in 1935, considered “Soldiers of Management” and were expressly prohibited from participating in union organizing. Along with the NLRB’s continued re-analysis of Supreme Court precedent in Kentucky River and other decisions from that agency and the DOL attacking employer use of independent contractors and temporary agencies, it is evident that there is a union-fueled effort to expand the number of individuals exposed to organizing. And this push works conversely to decrease the number and potency of middle managers as a force to oppose unionization efforts.
The second strategy of pay raises to keep middle managers above the $50,440 floor would be very costly, adding three to four points to labor expense, reducing profitably and resulting in a loss of equity to shareholders and a lower valuation.
It also could cause wage compression problems. For example, do the assistant GM and front office manager both receive pay raises to $50,440, or does management give the AGM 10% more in order to avoid wage compression? If the AGM gets an additional bump in pay, then the GM now needs a raise in order to maintain a fair and acceptable differential.
There are many other issues that will be raised by the new overtime rules. For instance, what do you do about off-the-clock time at home or at lunch when an employee calls with an issue that needs your attention? What about telecommuting?
As you can see, this will not be an easy adjustment for the Leisure and Hospitality supersector of the U.S. economy or for other service sectors, which will be affected by DOL’s new overtime rules.
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