A regulatory change expected to make some 5 million more employees eligible for overtime pay likely won’t take effect for a year or more, but employers are urged to plan now how they will cope with the change. 
David Fortney and Judith Kramer, attorneys with Fortney & Scott, LLC in Washington, D.C., recently conducted a Business and Legal Resources webinar on the subject to explain changes employers will need to make because of the new rule. They also urged employers to make their views known while the proposal is up for public comment. The comment period ends September 4.
Employers are wondering how they will be affected by the U.S. Department of Labor’s (DOL) proposed new rule dramatically altering which employees can be classified exempt from the Fair Labor Standards Act’s (FLSA) guarantee of overtime pay.
“The answer is potentially in fairly significant ways,” Fortney said, adding that wage and hour claims continue to outpace other claims employers face. “So understanding these changes, what’s intended, and what we think is going to occur, and the timing of it I think is particularly important.”
Since employers often plan for the next year during the third quarter, it’s time to develop an understanding of the changes, Fortney said.
What changes are coming?
Employers look at the “salary test” and the “duties test” when determining whether an employee can be classified as exempt from the FLSA. The salary test refers to a minimum salary an employee can make and still be exempt. The duties test refers to the kind of work an exempt employee can perform. Exempt workers’ duties must be executive, administrative, or professional. Also, certain computer workers can be classified exempt.
To meet the salary test, exempt employees currently must be paid on a salary basis and earn at least $455 a week, which comes out to $23,660 a year for full-time employees. Under the proposed rule, exempt employees would have to earn no less than an estimated $970 a week in 2016 ($50,440 a year) to be considered exempt—more than double the current threshold.
The proposed rule as published doesn’t change the duties test, even though change was widely expected. The DOL instead is seeking comments from employers and other stakeholders on what changes, if any, should be made.
Currently, employees don’t have to spend all or even most of their time on exempt duties to be classified exempt. For example, a fast-food restaurant assistant manager classified exempt may spend most of his or her time doing the same work the nonexempt workers do as long as the assistant manager’s primary duty is supervisory and he or she also meets the salary test.
Even though the proposed rule doesn’t change the duties test, change may be on the way after the DOL considers comments. Fortney said cynics say those changes may be included when final regulations are released, but he said making changes without putting them in the form of a proposed rule released for comment would invite legal challenges.
Even if the rule currently up for comment doesn’t include changes to the duties test when it is finalized, some expect the DOL to propose another new rule changing the duties test. Such a rule might follow the California model, which requires exempt employees to spend at least 50 percent of their time on exempt duties.
What to do now
Fortney and Kramer say they don’t expect a final rule to take effect until fall 2016, but employers need to plan now how they will handle the increased overtime and/or higher salaries.
Kramer advised employers to look at their currently exempt employees and see where they stand on pay. Find out how many would have to have to have a raise to stay exempt and decide whether they should be switched to nonexempt status and therefore eligible to earn time and one-half overtime pay for any hours they work over 40 in a workweek.
Kramer said employers may want to reassign some employees’ duties so that certain work continues to be performed by exempt employees even if the employees currently performing that work are reclassified nonexempt after the new rule takes effect. She reminded employers that they always have the right to limit the amount of overtime employees are allowed to work.
Fortney warned employers to ensure that they are in compliance under the current rules because after the new regulations take effect, there likely will be “a slew of audits,” and auditors won’t be checking employers just on the new regulation. Instead, they will have at least a two-year look-back period and therefore will find out if an employer was out of compliance under the old rules.
Independent contractors
In addition to a focus on which employees should be exempt from the FLSA, the DOL is cracking down on whether workers can properly be classified as independent contractors instead of employees. Fortney said although the employee versus independent contractor issue is “not within the four corners” of the proposed new rules, employers need to scrutinize their use of contractors.
Kramer reminded employers of the administrator’s interpretation the DOL released in July emphasizing that the strong presumption is that all workers are employees. The DOL and the IRS have teamed up and also forged agreements with many states in recent years in an effort to ensure that workers aren’t misclassified as contractors when they should be considered employees under the law.
Since independent contractors aren’t employees, they don’t get overtime pay and other benefits employees are entitled to. Employers also don’t pay taxes and premiums on their independent contractors.
Kramer said the factors for determining whether a worker is a contractor or an employee haven’t changed, but under the new interpretation “the strong presumption is that all workers are employees,” and employers will be put to the test with such a broad definition of employee.
In the past, the “economic control test”—who exercises control over the day-to-day work, how it is performed, when it is performed, where it is performed, and the quality of the performance—has been the key factor in determining whether a worker is an independent contractor, Kramer said. But now the DOL is saying no one factor is more important than another and it is looking at all factors to determine if a worker is economically dependent on an employer or truly in business for himself or herself.
“So that’s become the touchstone now, if someone is independent economically, and I don’t know even an independent contractor who is economically independent of the person for whom they’re providing services, but that’s going to be the touchstone,” Kramer said.
If you use independent contractors to perform services for your organization, the burden is on you to rebut the DOL’s presumption that those workers are not actually your employees. Even if you’ve been able to do so in the past, the new interpretative guidance means you have another compliance hurdle to clear. Do you need to know more about the DOL’s new guidance explaining its interpretation of the FLSA’s “suffer or permit to work” standard in the context of independent contractors? Tune in Friday, August 14, to the BLR webinar Are Your Freelancers Really Employees? Avoid Misclassifications Under New DOL Independent Contractor Guidance?