BLOGS: Fair Labor Standards Act Law

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Monday, September 7, 2015, 4:39 PM

Labor Day Hot Topics

Happy Labor Day 2015!  In the spirit of the day, we thought it fitting to reflect on the three, hot topics that have been dominating the labor and employment news this summer, and which are certain to impact employers and employees in 2016. 
  1. Revision to FLSA's "White Collar" Regulations. In summary, these proposed amendments to the Fair Labor Standards Act regulations more than double the minimum salary level (from $23,660 to over $50,000 per year in 2016) for certain employees deemed to be exempt from overtime as administrative workers, executives, professionals, and computer employees.  The amendments also increase the minimum pay level necessary to be deemed an exempt "Highly Compensated Employee" from the current $100,000 to $122,148 per year. These proposed regulations are a compliance and budgeting issue for many businesses. Barring some unexpected event, the regulations are likely to become effective in 2016. 
  2. New DOL Guidance on Contractor Misclassification. The U.S. Department of Labor issued a new administrative interpretation for the legal test of whether a worker is an independent contractor or an employee.  The bottom line is that under the new interpretation, it will be more difficult than ever to properly classify a worker as a contractor.  This new guidance has significant implications for businesses who rely on contract labor, as there are substantial tax, wage and hour, and benefits consequences for misclassification.
  3. Expansion of NLRB's Test for "Joint Employment." The National Labor Relations Board (NLRB) announced in an August 27, 2015 decision that it was changing the test to determine whether two related businesses are "joint employers." In sum, the federal position announced in the NLRB decision is that many more businesses, like franchisors-franchisees, manufacturers-distributors, and staffing agencies and their clients can be held jointly liable for employment claims (wage and hour violations, discrimination and harassment, etc.) and could more easily organized by labor unions. This new legal test will be a major change for many businesses if it survives the expected court challenge. 
We will be watching these changes in the law closely in the coming months as businesses begin making adjustments to comply with them and to mitigate their legal risks.

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Thursday, September 3, 2015, 9:16 AM

Be Warned: Federal Guidance on Misclassification States that “Most Workers Are Employees,” Not Independent Contractors

On July 15, 2015, the United States Department of Labor (“DOL”) released official guidance addressing the misclassification of employees as independent contractors.  The guidance, Administrator’s Interpretation No. 2015-1 (“AI 2015-1”), explains how the legal test for classifying workers as either employees or contractors will be interpreted by the DOL, and states that most workers are employees covered by the Fair Labor Standards Act (“FLSA”), which is the federal wage and hour law. 

Strictly speaking, AI 2015-1 is not a new statute or regulation.  Rather, it sets forth how the DOL will apply the FLSA and the “economic realities test” used to determine whether a worker is a contractor or employee under the law.  The guidance makes clear that when the DOL considers the issue of classification in an enforcement action, employers will face a higher bar to establish that a worker should be treated as an independent contractor.  In addition, because the guidance is an official pronouncement of the agency charged with administering and enforcing the FLSA, courts will give weight to the DOL’s interpretation.  To the extent that courts consider and defer to the guidance, defending such classifications in lawsuits will be more difficult.

What is Misclassification?
Generally speaking, workers are deemed to be either employees or independent contractors, and different legal rules apply to each class.  Employees are subject to host of legal protections related to minimum wage and overtime pay, benefits, equal employment opportunity, on-the-job injuries and other issues.  Likewise, businesses are obligated to pay certain state and federal taxes for their employees.  On the other hand, workers who are contractors are considered independent of the business that engages them for work.  As such, contractors lack the legal protections afforded to employees, and no employment or payroll taxes are paid for contractors. 

There is an increasing focus by state and federal agencies, as well as by lawyers for workers who are treated as independent contractors, to challenge the classification of the contractors.  In those challenges, the worker is alleged to have been misclassified as a contractor when in reality, the worker should have been classified as an employee.  The exposure to the business for which he or she worked is often significant, in terms of claimed damages for unpaid wages, overtime pay, employment law violations, etc., as well as often substantial back-tax and penalty liabilities arising from the improper classification of the work for tax purposes.  The largest risk is for companies that use large numbers of similarly situated workers classified as contractors.  In those cases, a company may face the risk of a large, collective action suit that can imperil its entire business model.

The Economic Realities Test
The legal test to determine whether a worker is an employee or a contractor varies depending on the legal context, as there can be varying tests applied under tax law, employment law, workers’ compensation law, etc., and those tests can be different from state to state.  At bottom, the analysis typically turns on control, i.e., whether the worker is truly an independent agent who controls his or her own work (contractor), or whether the worker’s service was controlled and directed by the business (employee).
Relevant to this discussion, AI 2015-1 starts with the proposition that under the FLSA, the definition of “employ” includes to “suffer or permit to work.”  The FLSA’s “suffer or permit to work” standard is construed broadly, and brings within the coverage of the FLSA not only work that an employer directly requests or demands of an employee, but also work that the employer allows (i.e., suffers or permits) to be performed.

When analyzing whether there is an employment relationship under the FLSA, courts follow “the economic realities test.”  This test requires an analysis of all of the relevant factors concerning the work relationship. As AI 2015-1 notes, under the economic realities test, the factors include: “(A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.”  The test is a flexible one, judged on a case-by-case basis.  While all of the factors are to be considered, none are determinative.

AI 2015-1
The DOL’s interpretation announced in AI 2015-1 does not change the formulation of the economic realities test.  However, as it explains how the factors under the test should be considered, AI 2015-1 makes clear that the DOL’s interpretation will result in most workers being classified as employees under the FLSA.  As AI 2015-1 states:
All of the factors must be considered in each case, and no one factor (particularly the control factor) is determinative of whether a worker is an employee. Moreover, the factors themselves should not be applied in a mechanical fashion, but with an understanding that the factors are indicators of the broader concept of economic dependence. Ultimately, the goal is not simply to tally which factors are met, but to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor). The factors are a guide to make this ultimate determination of economic dependence or independence.

As the DOL applies the test, “a worker who is economically dependent on an employer is suffered or permitted to work by the employer.”  Accordingly, in the DOL’s view, such workers fall within the FLSA’s “suffer or permit to work” standard, and should thus be treated as employees.
What is perhaps dramatic, but certainly not unexpected to those who have been following the issue of misclassification, is the DOL’s conclusion that in most cases, the economic realities test will demonstrate economic dependence (rather than independence).  As the DOL directly states: “[A]pplying the economic realities test in view of the expansive definition of ‘employ’ under the Act, most workers are employees under the FLSA.”  Id. (emphasis added).

AI 2015-1 provides specific examples of workers in hypothetical cases and how the DOL says the cases should be analyzed under each of the six factors of the economic realities test.  These examples demonstrate that many typical facts (at least in the DOL’s view) necessarily weigh in favor of classification of workers as employees.  Indeed, following the DOL’s guidance on each factor of the test will, in most cases, make it very challenging to reach a conclusion other than the worker should be classified as an employee.  In addition, it seems plain that AI 2015-1 will serve to assist workers and plaintiffs’ attorneys with arguments and citations when bringing misclassification claims.

Unsurprisingly, reactions to the Administrator’s Interpretation have varied, with businesses and industry groups expressing concern and workers and advocates expressing approval.  For example, The Wall Street Journal reported that the National Association of Home Builders “blasted the new guidance as improperly introduced without public vetting and a boon to labor unions seeking to organize various industries.”  Melanie Trottman, Employees vs. Independent Contractors: U.S. Weighs In on Debate Over How to Classify Workers, Wall Street Journal, July 15, 2015.  On the other hand, National Employment Law Project (“NELP”) Executive Director Christine Owens praised the guidance, stating that it is “a wake-up reminder to companies playing fast and loose with labels and overusing 1099 hiring.”  NELP Commends U.S. Department of Labor’s Independent Contractor Misclassification Guidance, (July 15, 2015),

AI 2015-1 can be found in its entirety at
Action Items
As we have been suggesting to businesses for some time, and as AI 2015-1 underscores, it is imperative for businesses who classify any workers as contractors to evaluate whether there is a risk of misclassification.  The ideal time to address the issue (and correct any misclassification) is before the business is faced with a tax audit, DOL complaint or investigation, or a lawsuit.  For businesses whose model is premised on contract labor, particularly those with many similarly situated workers, they must understand that the legal environment is a hostile one and take steps to ameliorate the risks to the extent possible.  Dealing with these issues is never easy, but becomes exceedingly more difficult when trying to address them in the midst of a government investigation or a lawsuit

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Wednesday, August 26, 2015, 2:25 PM

Major Changes to Overtime Regulations for "White Collar" Workers

Authored by John Pueschel

On July 6, 2015, the U.S. Department of Labor (“DOL”) issued proposed new regulations that will significantly change the law governing certain “white collar” workers who are exempt from minimum wage and overtime pay.  All employers need to become familiar with these proposed rules, which may, if they become final, greatly impact wages and overtime pay to workers.  In addition, for those that want to have their voices heard, there is still time (until September 4, 2015) for the public to make formal comments to the DOL.
Under the Fair Labor Standards Act (“FLSA”), which is the federal wage and hour law, some employees may be classified as “exempt” from the Act’s minimum wage and overtime pay requirements.   The most well-known and commonly used exemptions are the so-called “white collar” exemptions applicable to executive, administrative, and professional employees.  The DOL’s proposed rules will change the current regulations to more than double the current minimum salary level for exempt employees, significantly increase the salary level required for employees to be exempt from overtime as highly compensated employees, and automatically adjust that minimum salary level each year to account for the increase in the cost of living. 
As a practical matter, the proposed regulations will mean that fewer employees will meet the requirements to be exempt from overtime (and thus will be entitled to overtime pay), or that employers must pay higher salaries in order for the employees to remain exempt under the FLSA.  Here are the specific changes proposed to the white collar exemptions, which are expected to become effective by 2016:
  • Increase (by more than double) the current minimum salary threshold (currently    $455 per week, or $23,660 per year) to $921 per week, or $47,892 per year, which will be adjusted annually by DOL.  Assuming the rules become final, the salary level is estimated to be set at $970 per week, or $50,440 per year for 2016.

  • Increase the minimum compensation for Highly Compensated Employees (HCE) from its current level ($100,000 per year) to $122,148 per year.

  • Create an automatic, annual adjustment mechanism for the minimum salary thresholds for the standard exemption and that for HCE.  (The DOL is asking for public comments to guide its determination to use one or the other of two adjustment mechanisms.)

The DOL states that under the proposed regulations, approximately 4.6 million workers would lose their exemption under the proposed rules (and thus be eligible for overtime pay), unless employers increase their pay.  In terms of economic impact, these changes are significant.  The DOL estimates that the “average annualized direct employer costs will total between $239.6 and $255.3 million per year.”  In addition, the DOL also states that this “proposed rulemaking will also transfer income from employers to employees in the form of higher earnings. Average annualized transfers are estimated to be between $1.18 and $1.27 billion, depending on which of the two updating methodologies is used.”

After a period of public comment, the DOL will publish the final rules, which will be codified as final and binding federal regulations.  It seems all but certain, barring some sort of exceptional set of circumstances, that the proposed rules increasing the salary levels and adding a mechanism for automatic annual increase will become final.

For those who wish to have their voices heard on these proposed regulations, the DOL is accepting public comments until September 4, 2015.  Details for submitting comments are can be found here.

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Friday, February 20, 2015, 3:11 PM

Womble Carlyle Launches Resource Page for Proposed Rules on "White Collar" Exemptions

The last week of February is upon us, and the Department of Labor has not yet issued the highly anticipated new FLSA regulations which will propose changes to the white collar exemptions.  Announced by President Obama nearly a year ago, the proposed rules (which have already been postponed once) are currently scheduled for release sometime this month.  If the FLSA proposed rules become law, they are expected to dramatically change which employees can be classified as exempt, which in turn may significantly impact wages and overtime pay to workers.

Womble Carlyle is pleased to announce a Resource Page to help businesses prepare for these proposed rules, which will be the most significant change to the FLSA in more than a decade.  The Resource Page provides businesses with the latest information and updates on these proposed rules, including background information and references to key materials. 

The Resource Page can found here.

When the proposed rules are finally released, we look forward to offering our analysis and practical recommendations to assist businesses with understanding the proposed rules, and meeting the expected compliance challenges if the proposed rules become law.

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Friday, February 13, 2015, 8:46 AM

As Intern Season Approaches, Remember That Unpaid Internships Can Be Risky

Right now, many organizations are getting ready for a new class of interns to arrive in May when schools and colleges finish for the summer.  With fully laudable intentions, many organizations offer summer internships as a chance to allow students to get their feet wet in a business or industry, fully recognizing that the students’ contributions and added value, if any, are not that great.

Experience teaches that many organizations do not pay interns.  However, this is often a risky proposition.  Under the Fair Labor Standards Act, the legal standard to qualify as an unpaid internship is actually quite high.  The consequence of failing to meet that legal standard—and in our experience many may not—is that the “intern” is deemed to be a misclassified employee, and would be entitled to be paid minimum wage and overtime for all of the hours worked as an unpaid intern. 

This exposure, including liquidated (i.e., double) damages and potential penalties and attorneys’ fees, can be significant. In addition, there could be tax exposure for any unpaid employment taxes and withholdings that were not made because the wages that should have paid were not.

So, if you are considering an unpaid internship program this summer, take the time to ensure it is legally compliant.  For those that want to take a closer look at their internship programs, our Client Alert on this issue provides a detailed summary of the compliance issues and risks, and practical tips for employers.  The Client Alert can be found here.

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Wednesday, February 4, 2015, 2:10 PM

Wisconsin Joins DOL’s Worker Misclassification Initiative

On January 20, 2015, the U.S. Department of Labor announced that Wisconsin has also joined the growing list of states that have entered into formal agreements with the DOL to share information about worker misclassification.  Under the terms of a "partnership agreement," the DOL and the Wisconsin Department of Workforce Development agreed to share information about workers who may be improperly classified as independent contractors instead of employees.  The DOL's news release can be found here.

As noted here previously, workers who are misclassified as contractors may be denied benefits, minimum wage, and overtime pay that they might receive if properly classified as employees.  Likewise, the federal government and state taxing authorities miss out on payroll and other taxes that they would receive if the workers were properly classified. 

By sharing information, the DOL and the states participating in the initiative hope to reduce misclassification and increase compliance with employment, wage and hour, and tax laws.  The DOL reports that similar agreements have been entered into with the states of Alabama, California, Colorado, Connecticut, Florida, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Utah and Washington.

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Wednesday, January 28, 2015, 8:21 AM

U.S. Supreme Court Rules That Time Spent In Mandatory Security Screening at the End of a Workday Is Not Compensable

The United States Supreme Court issued an interesting decision last month on whether employees who are required to undergo security screening after their work was done should be paid for that time. The Supreme Court found in favor of the employer, and concluded that workers did not have to be paid for that that time because the screening was a non-compensable “postliminary” activity under the Portal-to-Portal Act.

In Integrity Staffing Solutions, Inc. v. Busk, the employer was a company that provided staff to work in warehouses for the online giant, Amazon. A group of workers filed a class action in 2010 against the staffing company seeking unpaid wages under the FLSA. According to their complaint, workers were required to pass a security screening at the end of the day in order to deter theft of product from the warehouse. The workers alleged that it could take workers up to 25 minutes to compete the screening process, for which they were not paid. Because the screening was allegedly necessary and for the employer’s benefit, the workers claimed they should have been compensated for the time.

Initially, the federal district court dismissed the workers' case for failing to state a viable legal claim. The district court ruled that the security screening was a non-compensable "postliminary" activity under the Portal-to-Portal Act because it was not an "integral and indispensable part" of the warehouse duties the workers were hired to perform. The U.S. Court of Appeals for the Ninth Circuit disagreed and reversed, holding that the screening was a postliminary activity, but was compensable because it was necessary to the warehouse work and for the benefit of the employer. The employer successfully petitioned the U.S. Supreme Court to hear the case.
In a unanimous opinion written by Justice Thomas, the Supreme Court reversed. The Court started with the proposition that the Portal-to Portal Act makes noncompensable "activities which are preliminary to or postliminary to said principal activity or activities" of a worker’s job. Citing its long-standing interpretation of the Act, the Court stated that “the term ‘prin­cipal activity or activities’ [embraces] all activities which are an ‘integral and indispensable part of the prin­cipal activities.’”

The Court held that under the Portal-to-Portal Act, employers were not required to pay workers for postliminary activities that were not integral to the workers' warehouse duties. In a succinct analysis, the Court concluded:
The security screenings at issue here are noncompensa­ble, postliminary activities. To begin with, the screenings were not the “principal activity or activities which [the] employee is employed to perform.” 29 U. S. C. §254(a)(1). Integrity Staffing did not employ its workers to undergo security screenings, but to retrieve products from ware­house shelves and package those products for shipment to Amazon customers.

The security screenings also were not “integral and indispensable” to the employees’ duties as warehouse workers. As explained above, an activity is not integral and indispensable to an employee’s principal activities unless it is an intrinsic element of those activities and one with which the employee cannot dispense if he is to per­form those activities. The screenings were not an intrinsic element of retrieving products from warehouse shelves or packaging them for shipment. And Integrity Staffing could have eliminated the screenings altogether without impairing the employees’ ability to complete their work.
As savvy HR professionals and in-house counsel know, this case does not create a blanket rule that renders noncompensable every activity after a worker leaves his or her work station. Each situation is different and will generally require a detailed analysis of the particular facts. Indeed, in this case, it took about half a decade in the federal courts to come to a final answer.

The case is a relatively straightforward read, and contains a good history and discussion of the Portal-to-Portal Act. For those who are interested, the Supreme Court's decision can be found here.

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