Is Your Restaurant Miscalculating the Regular Rate for 7(i) Compliance?
Yes, many restaurant owners use the wrong earnings number for FLSA 7(i) compliance. This often happens with the second key condition. Specifically, they frequently miscalculate the employee’s “regular rate of pay.” This miscalculation can lead to significant overtime wage violations. Therefore, it is essential to understand the correct way to run the Minimum Wage Test for this exemption. We will break down this complex rule into simple, actionable steps.
Understanding the FLSA 7(i) Exemption in Restaurants
The Fair Labor Standards Act (FLSA) provides a special exemption. It allows certain retail or service establishments to pay employees a fixed commission instead of traditional overtime. This is known as the FLSA 7(i) exemption. Restaurant operations often qualify as service establishments. However, meeting the exemption’s two core conditions is mandatory. Failing either condition means the exemption does not apply. Consequently, standard overtime rules are enforced.
The Two Conditions for 7(i)
First, let’s look at the two crucial requirements. Both must be met during every single pay period to maintain the exemption.
- The Commission Test: More than half of the employees’ compensation for a representative period must be from commissions.
- The Minimum Wage Test: The employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage.
The first condition is usually straightforward. However, the second condition the Minimum Wage Test is where many restaurants stumble. They often fail to correctly calculate the employee’s regular rate of pay.
The Critical Miscalculation: The Regular Rate of Pay
Restaurant owners commonly make significant mistakes. They often look only at the employee’s hourly rate for the Minimum Wage Test. They might think a server’s $7.00 hourly wage meets the test if the minimum wage is $7.25 per hour. This is incorrect. Furthermore, this approach completely ignores all other forms of compensation.
The Correct Calculation for the Regular Rate
The FLSA defines the regular rate of pay differently. It is not just the stated hourly wage. Therefore, the employer must divide the employee’s total earnings attributed to the pay period by the total hours worked during that period to get the regular rate.
Let’s look closer at “total earnings.” This includes all remuneration for employment. This means commissions, production bonuses, and shift differentials. It also includes other forms of compensation. Only a few specific types of payments can be legally excluded. Furthermore, tips are generally excluded from the calculation.
Regular Rate =Total Earnings for the Pay Period (excluding statutory exclusions)/Total Hours Worked in the Pay Period
In addition, this calculation must be performed every workweek. Consequently, it must include all non-overtime hours worked.
Running the Pass/Fail: The Minimum Wage Test
Once you calculate the actual regular rate, the next step is the Minimum Wage Test. The calculated regular rate must be greater than 1.5 times the applicable minimum wage.
Test : Required Regular Rate : Calculated Regular Rate > (1.5×Applicable Minimum Wage)
Let’s use a real-world restaurant, for example. Suppose the federal minimum wage is $7.25 per hour. One and a half times that is $10.875 (i.e., $ 7.25 × 1.5). Therefore, to pass the Minimum Wage Test, your employee’s regular rate of pay must be more than for that specific week.
Real-World Scenario: A Restaurant Server
Consider a week when a server works hours. They earn an hourly wage of per hour for those hours. They also earn commissions from catering sales.
- Total Hours Worked: 45 hours.
- Total Earnings: ($5.00×45 hours)+$300.00 commission=$225.00+$300.00=$525.00.
- Calculated Regular Rate: $525.00/45 hours = $11.67 per hour (approx.).
- Minimum Wage Test: Is $11.67>$10.875 (assuming $7.25 minimum wage)? Yes, it is. The condition is met for this week.
Now, consider a different week. The server only works hours. They only earn in commissions.
- Total Hours Worked: 30 hours.
- Total Earnings: ($5.00×30 hours) + $50.00 commission=$150.00+$50.00=$200.00.
- Calculated Regular Rate: $200.00/30 hours = $6.67 per hour (approx.).
- Minimum Wage Test: Is $6.67>$10.875? No, it is NOT.
The Pass/Fail Result: In the second week, the Minimum Wage Test fails. Consequently, the FLSA 7(i) exemption is lost for that week. The employee must be paid overtime for any hours over 40.
The High Cost of Manual Calculation Errors
As shown, the regular rate changes every week. It changes based on hours and commissions. Therefore, this calculation is very sensitive to variations in employee work. Many restaurant owners rely on manual calculations or basic payroll systems. These are incredibly prone to errors. Furthermore, even one week of non-compliance can trigger a costly lawsuit. This is true even if the non-compliance was an honest mistake. Ultimately, accurate and consistent testing is paramount to avoiding these risks.
We recommend that all restaurant owners review their current payroll practices. Specifically, check how you are determining the regular rate for the FLSA 7(i) exemption. For more on managing labor laws, see our comprehensive guide on wage and hour compliance.
Actionable Advice: Stop Manual Calculations Now
The complexity of running the Minimum Wage Test weekly is a significant administrative burden. It puts your restaurant at risk every pay period. Therefore, you must stop relying on manual calculations that are prone to error.
Your Solution: Integrated Compliance
You need a solution that runs this test for you automatically. Our platform integrates directly with your existing payroll system. It analyzes every single employee and every single workweek. It takes into account all forms of compensation. This ensures you are always using the correct earnings number for FLSA 7(i) compliance. Furthermore, it flags any potential non-compliance issue immediately. This gives you the chance to correct it before you run payroll. This proactive approach ensures 100% compliance and eliminates the guesswork.
See it in action Request a demo today. Let us show you how to automate your Minimum Wage Test and protect your business.