With just more than a year left in this administration, the U.S. Department of Labor (“DOL” or “Department”) has rolled out two major initiatives that promise to keep employers busy ensuring they are in compliance. First, in a long-awaited regulatory decision, the DOL announced that it will be increasing the salary threshold for the most commonly used exemptions from minimum wage and overtime pay. Second, the DOL has issued a new guidance document for employers signaling that the Department will be launching a campaign to combat the misclassification of workers as independent contractors instead of employees. Together, these efforts indicate that the Department wants to use the remainder of the President’s term to push for significant changes in wage and hour law enforcement.
Employers may currently meet the “salary basis” test for the Executive and Administrative exemptions by paying a salary of no less than $455 per week - $23,660 per year. Although most observers expected an increase in that number in the new regulations, the DOL chose to make a fundamental change to the federal overtime pay scheme by raising the number to $970 per week – more than $50,000 per year. Although no change to the duties tests for the exemptions has yet been announced, the Department is soliciting input and still may modify those criteria next year.
For the time being, employers are coming to grips with the possibility that many of the employees they currently classify as exempt from overtime may soon lose their exemption. Indeed, any exempt employee who currently makes under $50,000 will either need to:
get a raise;
qualify for another exemption (one that does not require pay on a salary basis); or
be paid overtime as a non-exempt employee.
Employers also will need to evaluate the different methods of compensating their newly non-exempt employees. For example, for employees whose hours vary significantly from week to week, the fluctuating workweek method allows an employer to pay a set salary for all hours worked, with only a half-time premium due for hours over 40 in a week (rather than the standard time-and-a half the employee’s hourly rate).
The conventional wisdom holds that there will be a wave of litigation as unsuspecting employers fail to engage in the necessary analysis, and highly paid employees file lucrative back overtime claims. While this may be true, those employers who do pay attention to the new rules may be in a better position to avoid overtime litigation going forward, as the action moves to whether employees who make more than $50,000 exercise the duties of an exempt Administrative or Executive employee. Presumably, these more highly paid employees will be far more likely to meet the duties requirements than some of the borderline workers earning in the mid-twenties. In the short-term, however, there will be significant scrutiny on those in the formerly exempt range from $23,660 to $50,440.
The DOL will simultaneously be pursuing claims against employers who have incorrectly classified a worker as an independent contractor. In new guidance issued in July, the Department opined that “most workers are employees” and stressed that the definition of “employee” for purposes of federal overtime law is the broadest possible. The DOL is expressly adopting the entrepreneurial control model of analysis, which stresses the economic reality of the relationship rather than focusing simply on control over the performance of tasks by the worker. It is clear that many employers are using contractors who do not meet this test, so not only should they consider reclassifying misclassified workers as employees, but they will need to undertake the same exempt versus non-exempt analysis described above. Failure to do so will cause an employer to be caught in both of the DOL’s new enforcement plans.
If you have any questions about these new regulations, or any labor and employment issues, please contact us.