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‘Softer’ issues loom large in overtime planning


Franchisees and other small-business owners have a number of ways to comply with new overtime guidelines established by the U.S. Department of Labor and the Obama Administration, but attorneys and lawyers working with such clients suggest getting started sooner rather than later.

The Labor Department announced in May that, come December 1, it would double the minimum salary workers must be paid in order to qualify as exempt for overtime pay to $47,476, up from $23,660—a change it expects to impact 4 million workers around the U.S. in the first year.

“What we’re trying to advise our clients is don’t let it be that knee-jerk decision,” says Dee Boykin, a partner in charge of franchise services at Horne LLP.

Nitty gritty numbers test

The compliance task starts with a nitty gritty analysis of each employee’s compensation, says Erik Wulff, a partner with the law firm DLA Piper. In many cases, there will be an easy decision. The challenge comes in, he says, when there is an employee in the middle of the change.

When do you bump the salary of someone making $35,000 above the overtime threshold to retain the exemption? When do you keep the person at a similar rate but convert them to hourly?

Kevin Lang, a tax partner in the franchise group at the CPA firm Plante Moran, says one 30-unit quick service restaurant franchisee client of his plans to keep some of his managers exempt by increasing their salaries above the threshold, then create a new class of employee that is eligible for overtime but whose hours are strictly overseen, so they don’t often exceed regular pay hours.

Others are considering paying low hourly wages but supplementing pay with bonuses, in order to help workers maintain their standard of living while balancing out what could be a bumpy conversion from salary to hourly pay, if businesses are seasonal, says Michael Krucker, a specialist in the employee benefits consulting practice at Plante Moran.

While there can be some creativity in how the standards are met, Wulff and others say the basic choices are finite: Leave employees salaried and bump them above the exempt rate, leave them salaried but pay them overtime or convert them to an hourly rate.

The one option most legal and accounting experts advised against is converting a salaried employee to hourly and then reducing the wage such that they would require several hours of overtime to meet the amount they made previously.

“That’s not the purpose of the law,” Wulff says. “I think from a relationship perspective with your employees, that’s probably the worst thing you could do.”

Softer issues may be bigger

Krucker and Lang say the 30-unit franchisee they met with told them classifying his employees was actually pretty simple. From a pure numbers perspective, these changes could have less effect on a business than the Affordable Care Act or a dramatic increase in the minimum wage. But there is a softer side to the discussion.

For example, employees who have worked with a company for several years and have enjoyed the stability and status of being salaried may be converted to an hourly wage. If that happens, and that employee’s hours become more scrutinized, that person may feel less satisfied with their work, Lang says.

“There is a human element that may or may not get lost in all of this,” Lang adds.

DLA Piper’s Wulff says it is vital companies find a way to communicate “Why is Sally now being treated differently than Anne—and what does it mean to Anne?”

“It’s a matter of figuring it out but also messaging it to employees,” he adds.

Boykin, of Horne CPA & Business Advisors, says businesses should look beyond the numbers and see if they can turn the overtime changes into a competitive advantage, using pay as a recruitment and retention strategy. “We believe there could be some positives to that,” he says.

Take the duties test

While the increase in the salary ceiling has been the most heavily scrutinized part of the Department of Labor’s announcement, sources say companies should also take the opportunity to apply a “duties test” to ensure they are classifying employees properly in the first place.

While this part of the rule didn’t change, financial services experts say government officials believe there are significant abuses in this area and add that greater scrutiny is likely on the way.

Lori Stewart, director of human resources consulting at Honkamp Krueger & Co., says the administrative exemption is the most difficult part of the rules to interpret and she does believe the December 1 deadline provides companies an opportunity to get right with this part of the law.

The exemption for administrative job duties is for office or non-manual work that is directly related to management or general business operations and the employee’s work must involve the exercise of independent judgment and discretion on matters of significance.

“We’re looking and asking the question, do you have your employees classified correctly to begin with?” she says. “There are lobbyists who maintain that employers have this one shot to get their house cleaned up. That’s their perception. The number of auditors will be increased.”

This could present a larger financial issue for some employers than the threshold change. Wulff and others say companies should not try to sort these matters out themselves, but should talk to their accountants, lawyers and other consultants who work with small businesses.

“If they don’t meet that test, even though you may be paying him $47,476 or more, you may still have to pay them overtime,” he says.

Joint employer concerns

While larger and more business-savvy franchisees probably can find the resources necessary to deal with these changes, there is some concern among tax and law professionals about the smaller franchisees with less business background.

While traditionally a franchisor may have wanted to jump in and help them find ways to comply with the new regulations, increased scrutiny surrounding the issue of “joint employer” status has some legal experts suggesting they think hard about how they do so.

“You’ve got to look at the overall landscape,” says Andrew Murphy, a partner with Faegre Baker Daniels law firm. “It becomes a really big deal for franchisors too. It expands the potential for employment liability.”

Murphy suggests that franchisors have to ensure they do not exercise control over the way their franchisees come into compliance. They probably would be fine compiling a list of potential employment experts a franchisee could consult to help ensure compliance, but best avoid telling them they must use a certain firm.

“Advising as to where they can look for resources is probably a good sweet spot to hit,” Murphy says.

IFA aims to help

With franchisors concerned about joint employer challenges and, thus, in less of a position to provide direct assistance to franchisees, the International Franchise Association has created a tool it thinks will help franchisees make better decisions as they attempt to navigate overtime limits. The association teamed up with ComplianceHR to build and test the web-based program that will allow companies to enter information on how each of its employees is paid and receive advice on the best way to handle them under the new rules.

“It’s extremely customizable, extremely capable at serving companies with very diverse work forces,” says Michael Layman, IFA’s vice president of regulatory affairs. “We saw a particular moment here where there is going to be a vacuum for counsel and guidance for franchisees, so we wanted the trade association to be able to fill that void.”

The organization hopes to make the product widely available well before the December 1 compliance deadline. Information will be available at the IFA’s website, www.franchise.org.

Tackling the new overtime rule

The first step is to classify all employees as exempt and non-exempt and make sure who is who via duty and salary tests.

“The one big misunderstanding ... is you can’t just take a manager and pay them hourly or pay them salary; that has nothing to do with being exempt or non-exempt” from overtime rules, said Dustin Small of PayTime.

Casual diners pay an average salary of $39,900 to an average 4.95 managers per store, according  to Small. Sub sandwich concepts pay $36,190 to 1.25 managers.

Restaurateurs had no obligation to track hours for exempt workers before, so most didn’t. But plotting a move to hourly or figuring out where to shuffle hours will require a new conversation with managers.

—Nicholas Upton

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