New overtime rule to reshape hospitality environment

Hotel Staff

Labor may become more expensive for the hotel industry thanks to the publication of the Department of Labor’s final rule updating overtime regulations, announced on May 18. Effective Dec. 1, the standard salary level will be reset to the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region—currently the South—from $455 weekly to $913 per week or $47,476 annually for a full-time worker. This change increases the salary level at which employees no longer qualify for overtime, allowing millions of additional workers to be eligible. Future automatic updates to this threshold will occur every three years, beginning Jan. 1, 2020.

“This was an express mandate coming out of an executive order from President Obama telling the DOL to take this action and I think the DOL was single tracked to raise the salary threshold with the theory that it would mean higher wages for workers,” noted Richard Black, partner at Littler Mendelson, a global employment and labor law practice. “…The DOL overlooked the concerns of a number of groups, …including industries without high profit margins, like restaurants, retail [and] hospitality.”

Good Intentions

While the DOL expects the new rule to automatically extend overtime pay protections to more than 4 million workers within a year of implementation, Brian Crawford, vice president of government affairs at the American Hotel & Lodging Association, is less optimistic. “With roughly half the hotels in the U.S. owned and operated by small or independent property owners, this regulation could force many hoteliers to reduce hours and flexibility or cut jobs in order to stay in business,” he said. “Regrettably, it will ultimately harm the very employees that it purports to help, preventing employee advancement and reducing opportunities in the workplace while impeding industry growth and job creation.”

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Overtime chart

Andria Ryan, partner at national labor and employment firm Fisher Phillips, also anticipates the new rule having adverse effects on hotel employment.  “Employers aren’t going to pay these employees more money. Most employers don’t want to cut pay, but they can’t afford to give thousands of dollars’ worth of raises,” she said.

Although some hotel staff could receive salary increases, many salaried employees may become hourly workers with constraints placed on overtime hours. Full-time positions could also be reduced as part-time employment has potential to surge. “Larger corporations will see the benefit to raise to the minimum while smaller companies may end up removing management titles from people’s jobs, which will negatively impact morale and career tract,” said Christopher Muller, professor of practice at Boston University’s School of Hospitality Administration.

Elements Overlooked

Muller’s comment isn’t just academic conjecture, but a reality that hoteliers like Doug Denman, president of Wichita Falls, Texas-based Worth Hotels and chair of the IHG Owners Association’s Industry Advocacy Committee, are already facing. “For a small business owner like me, geography isn’t taken into account," he said. "It may be easier for an owner in a large primary market like New York or San Francisco to absorb $47,000 before an owner in a secondary or tertiary market.”

The Midwest is one market for which this represents substantial payroll increases, according to Terry Schieber, area director for Michigan and Ohio at consulting firm Hospitality Business Resources. “Hotels need to start budgeting for this and manage their businesses accordingly,” he said.

The use of nondiscretionary bonuses and incentives to meet the new salary threshold could be factored into revised budgets, but Ryan notes that the DOL will have to clarify this before the rule goes into effect. “One area that has some inconsistent language and confusion is where the DOL indicated that an employer can meet a portion of the threshold, up to 10 percent, by using commissions and bonuses paid on a quarterly basis,” Ryan said. “It’s unclear how an employer can do that if it can be allocated on a quarterly basis; how do you allocate it to the weekly salary minimum?”

The Upside

But John Self, professor at the Collins College of Hospitality Management at California State Polytechnic University, Pomona, believes the new overtime measure will separate the wheat from the hotel industry chaff, noting that “you’re going to see change between really progressive companies that want to see their company culture and employee morale go straight up while others will do whatever they can to sabotage and strip managers of their titles to turn them into hourly workers, which will destroy morale and hurt them in the long run.”

Self’s sentiments are echoed by Stephen Barth, attorney, founder of HospitalityLawyer.com and professor of hospitality law at the University of Houston: “The industry needs labor just as much as labor needs the industry and a fairly paid workforce is a good step in the right direction,” he said.