IFA Expresses Concerns Over Proposed Increase, Citing Challenges for Small Franchised Businesses

The U.S. Department of Labor has proposed a Rule guaranteeing Overtime Pay to an additional 3.6 million salaried white-collar workers when they work more than 40 hours in a week. Most hourly workers are entitled to overtime pay, but non-hourly workers in executive, administrative and professional roles are currently exempt unless they earn below $35,568 annually. The new rule would raise the threshold to $55,000 annually, with employees earning less than that amount per year entitled to time-and-a-half wages for overtime.

The Labor Department estimated that the rule would result in a transfer of $1.2 billion from employers to employees in its first year, according to a New York Times report. Starting Aug. 30, the Labor Department will receive public comments for 60 days before it issues the final rule to take effect several months later.

Workers Who Would Benefit

In a statement from the U.S. Department of Labor, Julie Su, acting department secretary, said “the Biden-Harris administration is proposing a rule that would help restore workers’ economic security by giving millions more salaried workers the right to overtime protections.” Salaried positions that are affected would include dining, hospitality and retail – all well-represented within franchising – as well a manufacturing.

To give an example of someone covered under the proposed regulatory change, a Washington Post report said: A salaried restaurant supervisor or clerical worker now earning above $35,568 but less than $55,000 would now receive overtime pay. The rule also calls for automatic changes to the salary ceiling every three years based on wage data. This is similar to the inflationary indexing that triggers increases in Social Security benefits.

IFA States Opposition

The International Franchise Association expressed concerns over the jump in the wage ceiling for overtime pay; its members include franchised restaurant and retail brands with assistant managers who might benefit from the new overtime pay rule. In a statement from the association, Michael Layman, IFA senior vice president of government relations and public affairs, said the proposal “comes at the wrong time for small businesses who continue to struggle in the post- pandemic economy with continued inflation and labor shortages, and as wages are at an all-time high. Franchised businesses already pay higher wages and offer better benefits than their non-franchised counterparts on average, and we look forward to sharing our members’ perspectives on this new, unnecessary regulation.”

The Wall Street Journal quoted Layman as saying, “It’s going to raise the cost of doing business.“ He added that “automatic increases do not preclude future administrations from making additional changes.”

Upending Trump-Era Rule

The current annual pay threshold was set by the Trump administration in 2019. When the Obama administration had tried to raise the pay overtime-exempt maximum to $47,000, a federal judge in Texas set it aside. That ruling stated that the Labor Department lacked the legal authority to raise the overtime threshold to such an extent. The new rule also is likely to face court challenges.

The Biden administration promotes the rule change as part of its Bidenomics policies, which it says are designed to aid middle-class Americans. Other components of Bidenomics include pay increases for workers doing federal projects and its boost to manufacturing via green energy projects and semiconductor production.

Unintended Consequences?

Some industry groups, The Times reported, have argued that expanded overtime eligibility could prompt employers to switch some salaried workers to hourly status and set their base wage so that their ultimate pay, when working their typical overtime hours, would remain the same. In particular, this is likely in the dining, retail and hospitality sectors, experts predicted.

Industry groups argue that the proposed expansion of overtime obligations could undermine promotions to junior management positions because the employer would have to pay overtime when long hours are worked, according to The Times. These jobs are considered to be potential stepping stones to well-paying careers.

Trade Groups Lash Out

Obviously, the rule is not going to take effect without pushback and criticism. Nation’s Restaurant News said the National Restaurant Association has stated that the increase in overtime pay requirements could force many small businesses to close.

Sean Kennedy, executive vice president of public affairs for the restaurant association, told NRN that “the average small business restaurant runs on a 3 to 5% margin… [and] the changes proposed in this rule will increase costs for affected restaurants by 2.5%. Adding this kind of cost to the already high price of food and years of increasing labor costs will leave many of these operators in the untenable position of raising prices, cutting costs, or closing their doors.”

One Way Employers Now Skirt Overtime Pay

Research indicates that many companies avoid paying overtime is by raising workers’ salaries just above the annual pay cutoff and giving them a managerial title even though they minimally engage in managerial tasks, according to The New York Times. The newspaper said many assistant managers at fast-food restaurants and retail establishments haven’t received overtime pay despite being legally entitled to it. The Times report said that the new rule, establishing the salary cutoff as an objective threshold, could reduce this tactic by eliminating the subjectivity in determining which workers are true managers.

“For too long, many low-paid salaried workers have been denied overtime pay even though they often work long hours and perform much of the same work as their hourly counterparts,” said Jessica Looman, an official in the Labor Department’s wage and hour division, in a CBS News report. “This proposed rule would ensure that more workers receive extra pay when they work long hours,” CNBC said in its report on the new rule.