Identify the perfect franchise for you! Take our short quiz Take our free franchise quiz!
Identify the perfect franchise for you! Take our short quiz Take our free franchise quiz!
Identify the perfect franchise for you! Take our short quiz Take our free franchise quiz!

Big impact expected from U.S. Department of Labor’s Overtime Ruling

There’s little question that the small business marketplace has a significant impact on the U.S. economy. However, many of those small business owners, operators and employees will see some considerable changes come Dec. 1, thanks to a recent ruling from the U.S. Department of Labor.

In May, the Labor Department — under President Obama’s Administration — made the decision to increase the salary threshold for overtime pay for employees who work more than 40 hours a week. It’s the first time the threshold has been raised since 2004. The increase, which more than doubled from $23,660 per year to $47,476 per year, will also automatically update every three years based on wage growth over that time. 

Conflicting Beliefs 

With the ruling, DOL officials say the new threshold changes will improve the lives of working Americans by making up for cost of living inflation and stagnation in employee wage increases. The theory is that the new rule will give workers across America long-overdue pay raises. 

The International Franchise Association however, which has long battled the Labor Department’s ruling, doesn’t see it that way. Instead of “giving America a raise,” IFA President and CEO Robert Cresanti feels the new overtime rule will compel many business owners to reduce the hours being worked by those qualified employees to comply with the new salary threshold. 

There is also a serious concern from those opposed to the overtime ruling that the new changes will force employers to shift the pay status of their employees from salaried to hourly. With this employee status shift from salaried pay — which often correlates with job security and value — there is a chance that overall employee satisfaction and quality of work will diminish significantly.  

So, what does that mean for the small businesses and franchise systems that make up nearly 90 percent of business operating across the country?
Overtime and Owner-Operators

If you dig even deeper into the DOL overtime ruling, you can identify three specific areas in business and employer/employee relations the ruling will have telling implications on — increases in the exemption eligibility ceiling, redefined duties and employee-related litigation. 

Unequal Salary Threshold

According to a report from the National Retail Foundation, “Rethinking Overtime,” the increased salary requirements increase will create millions of dollars in extra expenses, and has the potential to unevenly impact retailers across the country; more specifically those businesses operating in rural areas. The report identified that states like Iowa, Oklahoma, Kentucky and the like, typically have fewer businesses and lower labor costs, making the salary threshold disproportionate to urban states like New York, California and Texas that have higher labor costs and higher employment opportunities.

In order to limit the financial impact of the new ruling, it is anticipated that small business owners and franchisees will evaluate their operations to determine if it’s more practical to limit employees to 40 hours or less a week, give raises to meet the new $47,476 threshold or reclassify those employees as non-exempt and pay them overtime.

Reclassifying Employees

Previously the exemption status standard was based on the Fair Labor Standards Act’s Primary Duties Test, which dictates an employee's exemption status by their assigned duties, rather than the amount of time spent on individual tasks. So, while a retail manager may log work hours helping customers or stocking shelves, they still qualify as a manager and are exempt from overtime pay, because their main job is to manage other employees.

The new DOL regulations would instead rely on what is known as the “California Test.” While California’s labor code and wage orders cover the same general areas of exemption as the FLSA, there are a number of differences. More specifically, California separates exemption areas differently and includes additional requirements on some. 

With this new classification, workers who spend more than 50 percent of their time on non-exempt tasks are now eligible for overtime pay, regardless of the non-exemption status of their primary job. In other words, under the new regulations, a retail store manager putting in more than half their time helping customers or stocking shelves would be entitled to overtime, regardless of whether their salary meets the new higher threshold.

Increased Liability

It’s also anticipated that the new DOL rules will affect small businesses and in particular the franchise industry in another way — by adding a dimension of legal risk. The DOL’s Wage and Hour Division has recently increased its investigations of wage complaints and compliance audits, with the number of FLSA cases having more than doubled since 2004. Some legal experts and expect the new rules will increase actions taken by state and federal agencies, as well as additional private litigant activity.

In the franchise model specifically, the new regulations are also expected to present challenges to joint employer liability, potentially opening the possibility of higher franchisor liability risks due to claims of incorrect employee classifications at the franchisee level.

Harold L. Kestenbaum is an attorney specializing in franchise law, engaged exclusively in the practice of franchise distribution and licensing law since 1977. He is the owner of HLK, P.C. ( and has served on numerous boards and committees over the past two decades. Kestenbaum represents franchisors on a regional, national and international level from existing franchise systems to first-time franchisors. He is the author of So You Want to Franchise Your Business, the first book dedicated to franchise entrepreneurs.


Build Layers of Loyalty to Strengthen Your Franchise

Loyalty adds long-term viability to a high-performance franchise when layered strategically. As such, Loyalty should encompass all four stakeholders of your business: your clients, employees, the local community and your franchisor.

Franchisee-Franchisor Fit Matters

There are numerous factors involved in franchisee-franchisor fit one such marker being the stage of growth of a franchise system. There are five predictable stages of growth.

Franchising and Succession Planning

The key is to create the best succession plan for your current circumstances. Revisiting, re-evaluating and if necessary, updating your plan should be done annually or whenever a major event takes place in your personal or the life of the business.