timeclockNew Overtime Rules will Impact Managers

Fast-food companies are bracing for a blow to employee morale when their salaried managers have to start punching the clock. Bad vibes, not higher pay, may be the biggest impact of the new Obama administration overtime rule. It will take effect Dec. 1.

In a second-quarter earnings call with analysts, CEO Dan Accordino of Carrols Restaurant Group (TAST), whose 717 Burger King locations make it the Restaurant Brands International (QSR) chain's largest franchisee, said that his company is "putting all of our salaried managers on an hourly basis."

Carrols anticipates no effect on the bottom line. "It will not cost -- I mean we're not going to change the compensation of the managers," Accordino said. "We're taking (a) 50-hour or 55-hour work week and convertingĀ  current salaries into an hourly rate, assuming the overtime."

Making the Change From Salary to Hourly

The Bojangles' (BOJA) chicken-and-biscuits chain plans to convert assistant managers to hourly employees at its 295 company-operated restaurants and closely track their overtime hours to keep labor costs in line.

"I think what our biggest concern is, is just the morale of converting those employees from being a salaried person to an hourly team-member," said Chief Financial Officer John Jordan.

That's not the feeling that President Obama aimed for when he previewed the overtime rule more than a year ago.

"We've got to keep making sure hard work is rewarded," he wrote in a Huffington Post column. "Right now, too many Americans are working long days for less pay than they deserve," partly due to out-of-date overtime regulations.

Raising the Overtime Threshold

The new overtime rule guarantees time-and-a-half pay for overtime hours for salaried workers earning up to $47,476 a year. Therefore, raising the threshold from $23,660.

Obama highlighted the plight of salaried workers who worked so many hours under the previous threshold. These workers effectively made less than a minimum hourly wage.

Yet, the minimal gains may accrue mostly to people already making roughly a middle-class income. At Bojangles', for example, the overtime rule stands to benefit just the top manager at each company-operated restaurant.

"Preliminarily, we have decided that we are going to keep all of our unit directors (on) salary. That's going to cost us" about 0.25% to 0.3% of sales, Jordan said.

He signaled that Bojangles' would raise prices to cover at least part of the added cost.

Even some Democrats think the overtime rule change is too much, too fast. A bill backed by five "Blue Dog" Democrats in the House would phase in the new threshold over three years.

What This Means for the Fast Food Industry

The overtime change hits the fast-food industry at a time when sales growth has slowed. Rising compensation costs threaten to push up meal prices. This makes eating at home look like even more of a bargain.

"That's the key, how do you mitigate the labor pressure, so you don't have to (raise prices) to widen that gap further (between) food at home vs. food away from home," Wendy's (WEN) CEO Todd Penegor said Wednesday.

The discussion on the second-quarter earnings call with analysts came as Wendy's sliced its guidance for same-store sales to an increase of 1% to 2% in 2016, down from a prior 3% target.

For Wendy's, technology is a primary answer to labor inflation, including self-service kiosks and mobile ordering and payment. "Those things can create a great customer experience, but then have an outcome of actually helping lessen some of the pressure on labor," Penegor said.

He also spoke of "a lot of back-of-the-house automation opportunities" out of the view of customers.

Much like the overtime rule is shaping up to be, the ObamaCare employer mandate, intended to help workers, has turned out to be pretty easy for employers to dodge, though often to the detriment of employees. Bojangles' CEO Clifton Rutledge acknowledged limiting some workers' hours below 30 per week, the threshold at which the company has to offer health insurance or face a fine.

Now Bojangles' is looking to extend the hours of some workers who have been forced to hold two jobs to build morale and create more of a connection with customers. The company is hoping the change will be "somewhat neutral" with respect to labor costs. Many modest-wage employers have found that few workers are taking up the offer of insurance. Coverage is often deemed "affordable" under ObamaCare -- costing a worker up to 9.66% of pay in 2016. This is much more than they can afford.

JED GRAHAM | jed.graham@investors.com | @IBD_JGraham