So you’ve mastered your menu, built rapport with your regulars, and created an ambient, pleasant atmosphere that attracts new patrons… sounds like you’re well on your way to running a successful restaurant. But HR functions, such as hiring, managing, and compensating your staff, play an equally important role in your restaurant’s success. Poor labor practices, such as incorrectly classifying employees or miscalculating overtime, wreak havoc on your books, cause conflict with employees, increase your risk of drawing the attention of the DOL’s wage and hour division, and leave you vulnerable to expensive lawsuits.
Classifying Exempt Employees, Nonexempt Employees & Independent Contractors
Not all workers are employees, nor are they all eligible for overtime. Exempt employees are not eligible for overtime. Employees paid by salary are exempt, as long as they are entitled to a monthly base pay higher than the FLSA minimum threshold, regardless of the number of hours of work during their workweek. The minimum salary threshold of the FLSA is reevaluated and may change every year, so it’s important for employers to stay up-to-date on the related regulations. The minimum earnings thresholds for exemption were the same in 2020 and 2021: $684 per week or $35,568 per year.
Each state has its own minimum earnings thresholds for exemption as well. In Massachusetts, the minimum earnings thresholds for exemption are currently aligned with the federal thresholds. Five states (California, Colorado, Washington, Maine, and New York) are increasing the minimum salary requirement for overtime exemption on January 1, 2022. Employers that are covered by both state and federal law must comply with the law that sets the higher standard of protection for employees.
Exemption generally only applies to employees who hold professional roles that require a higher level of expertise and knowledge. Administrative employees, such as employees in human resources, accounting, legal, compliance, finance, and payroll, may be exempt if their primary role is providing support services to production and operation staff. Executives, such as CEOs, managers, and supervisors, may be exempt if they primarily work in a decision-making role for the organization.
The DOL’s previously issued final rule regarding the standard for employee versus independent contractor status was withdrawn on May 6, 2021, just one day before it was set to become effective. To that end, employers have been directed to use previous standards to make the determination. In addition to the FLSA, the Federal Government and individual states have several laws addressing the classification of employees and their rights as well.
Nonexempt employees earn an hourly wage. Under the Fair Labor Standards Act (FLSA), if an eligible employee works more than 40 hours during a standard workweek, the employer must pay an overtime rate of one-and-a-half times the employee’s regular rate of pay for those hours.
Calculating Overtime for Non-Tipped Employees
While the workweek is a seven-day fixed period, different employees can have different workweeks. One person’s workweek might run from midnight on Sunday through 11:59 pm on the following Saturday, while another employee’s workweek might run from noon on Thursday through 11:59 am on the following Thursday. So it is possible for two employees with the same pay rate to work side-by-side, Monday through Sunday, and still end up with different overtime earnings.
For non-tipped, nonexempt employees, start by verifying the number of hours exceeding 40 that they worked during their standard workweek. To determine the pay rate for each hour of overtime, multiply the employee’s regular pay rate by 1.5.
Calculating Overtime for Tipped Employees
Calculating overtime is perhaps most complicated for restaurant workers and other tipped employees. The confusion around overtime for tipped workers stems from the difference between the tipped minimum wage and the general minimum wage. These employees must be paid at least the federal minimum wage or, in states with their own minimum wage laws, the state minimum wage. While some states deem workers who work over a certain number of daily hours eligible for this overtime rate, Massachusetts law does not specify a daily overtime limit. But because tips make up part of these workers’ wages, employers are allowed to pay a lower tipped minimum wage provided the employees earn enough through tips to bring their hourly earnings to at least the state minimum wage. The difference between the two amounts is called a tip credit.
Employers that pay overtime must pay close attention to changing minimum wage laws. In Massachusetts, both the general minimum wage and the tipped minimum wage are scheduled to go up over the next few years. The current minimum wage in Massachusetts is $13.50. On January 1, 2022, that will increase to $14.25 and to $15.00 on January 1, 2023. The current minimum wage for service employees (tipped employees receiving more than $20 per month in tips) in Massachusetts is $5.55 per hour. On January 1, 2022, that will increase to $6.15 and to $6.75 on January 1, 2023. Many other states are also adjusting minimum wages, which will affect overtime calculations in coming years.
When tipped employees earn overtime pay, some employers make the mistake of multiplying the tipped minimum wage by 1.5 to calculate the overtime hourly rate. The correct way to do this is to multiply 1.5 by the full minimum wage, then subtract the tip credit to find the hourly overtime rate.
What tipped employees earn varies from state to state. Here in Massachusetts, the 2021 minimum wage is $13.50, so tipped employees are guaranteed to earn at least that amount per hour. The tipped employee minimum wage is $5.55. Assuming an employee earns at least $7.95 in tips per hour, the employer can take a $7.95 tip credit and pay the worker that $5.55 hourly rate.
Let’s say a Massachusetts employer needs to pay a tipped worker for 55 hours of work in one week. In this case, the first 40 hours of pay would be calculated using the $5.55 tipped minimum wage, assuming the worker earned enough in tips to reach the $13.50. Overtime pay for the additional 15 hours should be calculated using the general minimum wage:
- $13.50 x 1.5 = $20.25 per hour
- $20.25 – $7.95 = $12.30 overtime rate
- $12.30 x 15 hours = $184.50
In 2022, the first 40 hours of pay would be calculated using the $6.15 tipped minimum wage, assuming the worker earned enough tips to reach the $14.25. The tip credit would rise to $8.10, and overtime pay for the additional 15 hours should be calculated as follows:
- $14.25 x 1.5 = $21.38 per hour
- $21.38 – $8.10 = $13.28 overtime rate
- $13.28 x 15 hours = $199.20
Blended Rate Overtime
Demand for workers is high in both front and back of the house, and sometimes there just aren’t enough that are available to work without asking some employees to work more than 40 hours per week, so many restaurant employees may take on several roles that each have different rates leading to the need to calculate blended overtime.
Overtime must be applied to the blended rate, which combines all the rates and hours worked at those rates to get to 40 hours. Here is an example of this calculation.
- 10 hours worked at $10 per hour earns $100
- 25 Hours worked at $15 per hour earns $375
- 8 hours worked at $20 per hour earns $160
- That’s 43 total hours worked and $635 total earned.
To determine the blended rate:
- $635/43 hours = $14.77 as the hourly blended rate
- The first 40 hours would be paid at $14.77, which is $590.80
- and the 3 hours of overtime would be paid at $14.77 x 1.5, or $22.16 x 3
- The employee would earn $66.48 in overtime.
In a hospitality setting, you would combine sub-minimum wage rates with rates at or above minimum wage and add in gratuities or service charges to the amounts earned and calculated for the employee’s blended rate. However, employee tips would not be included as they are considered paid directly by the customer to the employee and were never in custody of the employer.
Additional Considerations
Sometimes state and local laws conflict with federal laws. For example, Massachusetts law says that restaurant employees are exempt from receiving overtime – but they’re afforded overtime under federal law. However, restaurants are subject to the FLSA if they have gross sales exceeding $500,000 per year, and the FLSA also covers any person who participates in interstate commerce. Handling a credit-card transaction counts as interstate commerce. So many Massachusetts restaurant workers are entitled to overtime, just by working for large restaurants or processing credit card payments.
A complex payroll system is one of the constant headaches for the average restaurant. Different servers and managers earn different wages. Employees’ hours are inconsistent from week to week. Overtime fluctuates too, depending on how busy the restaurant is. Factor in cash tips, tax requirements, and maybe even multiple locations – it’s evident that payroll is more complicated in this industry than most. Restaurants must have consistent and efficient payroll systems to pay their workers fairly and stay compliant with the law.
Contact Commonwealth Payroll & HR
Because calculating overtime can be so complicated, wise employers take advantage of resources that help them get it right every time. At Commonwealth Payroll, our team can help with your restaurant’s payroll needs. Contact us today to learn more about how Commonwealth can help your business streamline your HR, employee benefits, and payroll processes.
*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites provided only for the convenience of the reader.
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