Costly Choices: New Overtime Rule Could Reshape Hospitality Environment

Hotel managers have choices when it comes to the new rule on overtime pay from the U.S. Department of Labor. Some might lead to higher costs for not only the hotels, but also for the employees whom the rule is supposed to help.

Montine McNulty, executive director for Arkansas Hospitality Association, said the choices will be the biggest challenge for employers who must make an important decision before the law goes into effect Dec. 1.

They might decide to increase an employee’s salary to the new threshold, place the employee on a time clock or limit the number of hours the employee works, she said.

But it’s not just a hospitality issue. Other companies such as Wal-Mart Stores Inc. — the largest private employer in the United States — have yet to announce how they will proceed with the rule.

A Walmart spokesman said the retailer plans to speak to its employees soon about the new regulations, but until then, little if anything is expected to be announced.

The rule will require employers to pay overtime, or time and a half, for salaried full-time employees who work over 40 hours a week and earn less than $47,476 annually. The existing threshold to be exempt from overtime pay is $23,660.

On May 18, President Barack Obama and U.S. Labor Secretary Thomas Perez announced the rule would extend overtime pay protections to more than 4 million workers.

In 2014, Obama directed the Labor Department to update regulations in the Fair Labor Standards Act. This past year, the agency received more than 270,000 comments from stakeholders that helped to shape the final rule.

Coping With The Rule
Hotel managers of some of the largest area hotels are determining the best course of action before the rule goes into effect.

David Lang, general manager of Embassy Suites Northwest Arkansas in Rogers, said at this point no decisions have been made regarding the new rule.

“We haven’t dove into it,” Lang said.

He expects to receive corporate guidance on the rule in the next 30 days.

Emmanuel Gardinier, general manager of 21c Museum Hotel in Bentonville, said hotel staff is collecting data to study how the rule will impact business. He expects they will know the direction to take in September, which is also when work starts on the new budget.

“By September, we start to see the big picture,” Gardinier said.

Roger Davis, general manager of Holiday Inn Northwest Arkansas in Springdale, said he’s received no direction from human resources on the rule.

“Nothing’s happened yet,” Davis said. He’s unsure when he’ll receive the direction but knows that human resources is working earnestly on it.

Businesses must determine how best to proceed based on their business model, McNulty said. “Businesses have to stay within their footprint. You’re going to have a major change in December. It changes the business model.”

The rule might not result in things that are beneficial to employees, she said.
It’s 104 pages and has “a lot of nuances,” McNulty said. The basis of it is that “if they work, you pay them.”

It won’t be an easy change because in hospitality, “our mode of operation is we jump in and do whatever we need to do to take care of the guest,” McNulty said. “I see more limiting of hours, more cutting of hours.”

If a hotel were to recruit a UA hospitality graduate to work as a junior executive making $32,000 annually, the employee would be exempt from overtime pay, under the existing rule.

“Maybe they are making $36,000 now,” McNulty said. Under the new rule, the employer could increase the employee’s salary to the new threshold, or require them to use a time clock.

The latter would be a “setback for that young college degree professional,” McNulty said. And limiting the employee’s hours might be another setback for the junior executive eager to learn and receive training.

“These are people that are highly motivated,” McNulty said. “This is telling me I may have to limit what I do.”

And, no, they can’t use their smartphone to check work email afterhours, unless they are paid for it.
But the rule does come with benefits for employees.

“If someone is close to the threshold, they may get a little raise out of it,” McNulty said.

Impact Study
Congress has introduced bills to determine the economic impact of the rule on businesses and to look at the regional economics of it, McNulty said.

She explained that the same rule that’s going into effect in New York, San Diego and other big cities is also “going to be in small town USA.”

How will it impact smaller cities and towns in Arkansas?

On the surface, it looked as if the Labor Department addressed this concern when it selected the salary threshold. It’s based on the 40th percentile of earnings for full-time salaried workers in the South, which is the lowest wage census region.

According to the agency’s website, the ‘40th percentile’ means that, according to the Census Bureau and Bureau of Labor Statistics’ figures, 40 percent of the full-time salaried workers in that region earn at or below that amount.”

Based on the fourth quarter of 2015 population, “the 40th percentile for the South census region is $913 per week,” or $47,476 annually.

In 2015, the Labor Department had proposed a $50,440 threshold but reduced the amount for the new rule, which also will allow for bonuses to count for up to 10 percent of the threshold.

In Arkansas, 52,055 workers are expected to be affected by the overtime rule.

Costs Increase
While employers have choices to make, they also might consider a combination of the previous choices.

Employers can “play with hours,” said Michele Burns, director of classification and compensation at the University of Arkansas.

As a state agency, the UA gets an additional choice under the rule because it can offer comp time instead of overtime pay.

“We don’t have that limitation,” Burns said. The university can either offer overtime pay or compensatory time, which is paid time off in lieu of overtime pay.

Burns, who is also state director for the Arkansas Society for Human Resource Management, said the organization’s members wanted an increase in the threshold for overtime pay, but the problem for many was that it more than doubled.

“It’s a pretty steep measure to take overnight,” Burns said.

Another concern is that the Labor Department is responsible for making changes to the threshold and not Congress, she said.

Since the 1970s, it’s been changed once, 12 years ago, to the existing amount of $455 per week.

Initially, the Labor Department had proposed changing the threshold annually. But, under the new rule, it will be changed every three years, starting Jan. 1, 2020.

Burns sees the cost as the biggest hurdle for hotels under the new rule.

She also sees costs increasing if hotels have employees working over 40 hours. This would lead to an increase in consumer costs. But she doesn’t want to see this affect the consumer that it is supposed to help.

“My concern has always been inflation,” she said.

To mitigate costs, she suggests hiring more people and limiting the number of hours that managers work. While this might not help the manager in earning overtime pay, she doesn’t expect the job being outsourced.

“It’s going to help temporary-type agencies,” Burns said.

She also expects to see turnover in the hotel industry. “Managers in a hotel locally may not be in that industry for a long time.”