By James R. Grasso, originally published in The Daily Record on 8/26/15.

Labor and Employment: U.S. Department of Labor Proposes New Overtime Restrictions and Issues Employee Misclassification Guidance

The U.S. Department of Labor recently made two announcements that could significantly affect employers. The first was the DOL’s issuance of a Notice of Proposed Rulemaking on June 30 that would dramatically alter the Fair Labor Standards Act’s overtime exemptions for “white collar” and highly compensated employees. The second was the DOL’s issuance of an Administrator’s Interpretation (“Interpretation”) on July 15, containing the DOL’s position that virtually all workers are properly classified as employees and that it is the rare exception when a worker qualifies as an independent contractor. Issuance of a Final Rule consistent with the NPRM (which is expected next year) and application of the Interpretation will dramatically alter employers’ ability to exempt employees from overtime and to engage workers as independent contractors.

The NPRM

The NPRM is the result of President Obama’s March 13, 2014, directive to the Secretary of Labor to update the existing overtime regulations for exempt executive, administrative and professional employees. The NPRM contains three key provisions:

  1. The weekly salary level for the “white collar” exemptions would increase from $455 per week to $970 per week ($50,440 annually);
  2. The total annual compensation required for the highly compensated employee (HCE) exemption would increase from $100,000 to $122,148; and
  3. Salary and compensation levels required for the “white collar” and HCE exemptions would be automatically updated on a periodic basis.

 

Although the NPRM does not propose any changes to the “duties” test associated with the exemptions, it invites “comments on whether the current duties tests are working as intended to screen out employees who are not bona fide ‘white collar’ exempt employees.” This has led many observers to speculate that the DOL may propose changes to the duties test in the future.

The FLSA requires that most employees earn at least the federally-mandated minimum wage ($7.25/hour), plus time-and-a-half for all hours worked over 40 in a workweek. (The minimum wage in New York is $8.75/hour.) Currently, a “white collar” employee is exempt from the minimum wage and overtime requirements if:

(1) the employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid meets the minimum amount specified by the FLSA regulations; and (3) the employee’s job duties primarily involve either executive, administrative or professional duties as defined by the FLSA regulations. Certain HCEs are also exempt from minimum wage and overtime if they are paid total annual compensation of at least $100,000 and if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative or professional employee.

The NPRM would index the new salary level for “white collar” employees at the 40th percentile of weekly earnings for full-time salary workers and index the salary level for HCEs at the 90th percentile. The DOL states it determined that the 40th percentile level “represents the most appropriate line of demarcation between exempt and nonexempt employees.” The NPRM also establishes a mechanism for the DOL to automatically increase the “white collar” and HCE salary levels in the future “to ensure that they will continue to provide a useful and effective test for exemption.” This would allow the DOL to increase the salary level periodically without further rulemaking. The NPRM also invites comments on other issues, including whether to allow nondiscretionary bonuses to satisfy a portion of the salary requirement.

Before becoming final, the DOL’s proposed regulations are subject to a 60-day notice and public comment period. After considering comments, the DOL will issue a Final Rule that may or may not differ from the NPRM. A Final Rule is expected in 2016. If the Final Rule contains the salary levels contained in the NPRM, then upon it becoming effective, exempt employees earning less than the increased salary levels would have to be re-classified as nonexempt and would be subject to minimum wage and overtime requirements. The DOL estimates that the proposed higher salary levels would result in 4.6 million employees no longer qualifying as being exempt from minimum wage and overtime.

To prepare for the expected Final Rule, an employer should consider doing the following:

  • Inform the appropriate personnel of the proposed changes and the increased costs of complying with the new regulations once they become effective.
  • Review the salary level of exempt employees and be prepared to increase their salaries to maintain their exempt status or to reclassify them as nonexempt.
  • Review and update or implement policies regarding the reporting of hours worked and the authorization required to work overtime.
  • Review health and welfare benefit plans to determine if changing an employee’s exempt status may affect his or her benefits.

The Interpretation

The DOL issued the Interpretation to address what it believes to be the growing misclassification of workers and the attendant result that workers improperly classified as independent contractors are deprived of the protections and benefits provided to employees by federal and state laws, and that the federal and state governments are deprived of tax revenue. The Interpretation reiterates the DOL’s long standing position that whether a worker is an employee or independent contractor under the Fair Labor Standards Act is determined by a five-factor “economic realities” test that focuses on whether the worker is economically dependent on the employer or in business for him/herself.

The five factors are: 1) whether the work is an integral part of the employer’s business; 2) whether the worker’s managerial skill affects his/her opportunity for profit of loss; 3) how the worker’s relative investment in the work compares to the employer’s investment; 4) whether the work performed requires special skill and initiative; and 5) whether the relationship between the worker and employer is permanent or indefinite. According to the Interpretation, no one factor is controlling. Rather, the factors are considered in their totality to determine whether a worker is economically dependent on the employer. The Interpretation notes that this test is substantially broader than the common law control test applied under many state statutes, such as unemployment and workers’ compensation laws, and is intended to apply to all workers, except those who are truly in business for themselves.

The Interpretation is a vivid reminder that even if a worker qualifies as an independent contractor under state law, he/she will not qualify as an independent contractor under the FLSA, unless the facts conclusively show that the worker is in business for him/herself and not economically dependent on the employer. Improperly classifying a worker under the FLSA could subject an employer to damages for, among other things, unpaid wages (minimum wage and overtime) and benefits, as well as having to pay federal income and FICA taxes that should have been withheld and penalties and interest. Given that application of the FLSA economic realities test will result in most workers being classified as employees, employers who engage independent contractors should ensure that such workers qualify as independent contractors under the FLSA and not just under the common law test applied under most state laws.

James R. Grasso is a partner with Phillips Lytle LLP and a member of the Labor and Employment Practice Team, where he concentrates his practice in counseling and representing management in all areas of labor and employment law and litigation. He can be reached at jgrasso@phillipslytle.com or (716) 847-5422.