DOL Moves Closer to Finalizing New Regulations on Overtime Exemptions for 2020

The U.S. Department of Labor ("DOL") is one step closer to publishing final regulations on the FLSA's overtime exemptions for "white collar" workers in executive, administrative, and professional positions.  The DOL published its Notice of Proposed Rulemaking ("NPRM") on March 7, 2019, outlining its proposed final rule and inviting public comment.  That comment period is now closed, and the next step is the anticipated publishing of the final regulations.  If they become final, it is expected that the new regulations would go into effect sometime in calendar year 2020.

The proposed new regulations, like the failed 2016 proposed regulations, propose to update the so-called “white collar” or "EAP" exemptions applicable to executive, administrative, and professional employees.  However, the 2019 NPRM proposes more modest changes than the 2016 version.  The 2019 NPRM, if it becomes final, will increase the minimum salary level required for EAP employees to be exempt from overtime, and will increase the annual compensation level required for employees to be exempt as highly compensated employees.  No exception is made for small businesses.  Easing the compliance burden, the 2019 NPRM does not propose automatic cost of living increases for employers to keep track of, and will not change the duties tests that are currently in effect for the EAP exemptions.

As an executive summary, the key provisions of the 2019 NPRM are the following:

• The minimum salary level for the EAP exemptions will increase to $679 per week or $35,308 per year (which is a significant increase from the current level set in 2004 of $455 per week or $23,660 per year).

• For highly compensated employees, the total annual compensation level will increase to $147,414 per year (up from the current level of $100,000 per year).

• To meet the salary level, the proposed regulations will permit employers to include nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to ten percent (10%) of the salary level requirement.

• The DOL will review these levels periodically, but no automatic increases are proposed as part of the 2019 NPRM.

As businesses begin planning their budgets and thinking about salary increases for workers next year, they should keep an eye on the anticipated new regulations.  The DOL expects that the final rule will result in over one million workers that were formerly classified as exempt from overtime becoming eligible for overtime pay, unless their employers make a change to their pay or duties.  So, as a practical matter, the proposed regulations will mean that fewer employees will meet the requirements to be exempt from overtime, or that employers must pay higher salaries in order for many employees to remain exempt under the FLSA.

The DOL's helpful Fact Sheet on the NPRM can be found here, and its FAQs on the NPRM can be found here.

Proposed 2016 “White Collar” Regulations Struck Down; DOL Starts Work on New Regulations

The winding legal path of the 2016 “white collar” regulations has come to an end.  On August 31, 2017, the Honorable Amos L. Mazzant of the U.S. District Court for the Eastern District of Texas struck down the U.S. Department of Labor’s (“DOL”) regulation that would have, among other things, doubled the minimum salary requirements for workers classified as exempt from overtime under the FLSA’s executive, administrative, and professional exemptions.  The court held that the DOL overstepped its rulemaking authority by increasing the salary threshold to a point that rendered employees’ duties irrelevant.

As widely reported and commented upon (including here), the new regulations were to have gone into effect on December 1, 2016.  However, a group of states and business groups challenged the rules in federal court, asserting that the DOL exceeded its rulemaking authority and that only Congress had the authority to so greatly change the regulations.  To the surprise of many, the federal court agreed, and issued a preliminary injunction that prevented the regulations from taking effect.  The DOL, under the President Obama administration, appealed the preliminary injunction to the United States Court of Appeals for the Fifth Circuit.  However, following the election of President Trump, the DOL changed course, ultimately informing the Court of Appeals that the DOL would not advocate for the higher salary level, but instead intended to undertake further rulemaking to determine the appropriate salary level.

While that appeal remained pending, the lower court issued its final decision on August 31, granting summary judgment to the states and groups, and striking down the new regulations.  The court based its holding on the fact that Congress defined the FLSA’s executive, administrative, and professional exemptions with a focus on employees’ duties.   As a result, the DOL’s “authority is limited to determining the essential qualities of, precise signification of, or marking the limits of those bona fide executive, administrative, or professional capacity  employees who perform exempt duties and should be exempt from overtime pay.”  For this reason, the court held that the DOL “does not have the authority to use a salary-level test that will effectively eliminate the duties test.”  The court clarified that the DOL “has the authority to implement a salary-level test,” but the rule’s “significant [salary] increase would essentially make an employee’s duties, functions, or tasks irrelevant if the employee’s salary falls below the new minimum salary level.” 

Following the court’s decision, on September 5, 2017, the DOL filed an unopposed motion with the Fifth Circuit Court of Appeals asking it to dismiss its appeal of Judge Mazzant's preliminary injunction order invalidating the overtime rule, given that the lower court's new summary judgment decision rendered the preliminary injunction moot.  The Fifth Circuit granted the DOL’s motion and dismissed the appeal on September 7, 2017.  This leaves Judge Mazzant’s order striking down the regulations as the final legal word on the 2016 regulations.

However, that is not end of the story.  The DOL is committed to updating the white collar exemptions, and new regulations are in process.  This past summer, on July 26, 2017, the DOL issued started the rulemaking process anew with a request for information soliciting public comments on the overtime exemptions for certain executive, administrative, professional, outside sales, and computer employees.  The DOL’s Request for Information specifically acknowledges stakeholders’ concerns that “the new salary level [proposed in the 2016 regulations] inappropriately excludes from exemption too many workers who pass the standard duties test” and “would adversely impact low-wage regions and industries.”  The DOL hopes to receive comments regarding “whether the standard salary level set in [the final] rule effectively identifies employees who may be exempt, whether a different salary level would more appropriately identify such employees, the basis for setting a different salary level, and why a different salary level would be more appropriate or effective.”  The comment period closes September 25, 2017, and those interested in commenting can find the Request for Information in the Federal Register.

By:  John E. Pueschel and Patricia I. Heyen

Final "White Collar" Overtime Regulations Expected Soon

The final rule for the new "white collar" overtime regulations from the U.S. Department of Labor (“DOL”) is likely to be published in spring or summer of 2016.

 

As we previously reported, the DOL issued proposed regulations in July 2015 announcing significant changes to the law governing certain “white collar” workers who are exempt from minimum wage and overtime pay.  The DOL’s proposed regulations 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 the minimum salary level each year to account for the increase in the cost of living.  

The DOL’s Fall 2015 Semiannual Regulatory Agenda indicates that the timetable for publishing the final rule is July 2016.  However, there is reason to think that the final rule might come sooner.  In an interview with Bloomberg BNA on December 16, 2015, Labor Secretary Thomas Perez stated, “I'm confident we’ll get the final rule out by the spring of next year.” 

The final rule is expected to increase the minimum salary level for "white collar" exempt employees, and to add a mechanism for an automatic annual increase of that minimum level.  It is expected that fewer employees will meet the requirements to be exempt from overtime, and thus either will be entitled to receive overtime pay, or will have to receive a higher salary in order to remain exempt under the FLSA. 

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, NELP.org (July 15, 2015), http://nelp.org/news-releases/nelp-commends-u-s-department-of-labors-independent-contractor-misclassification-guidance/.

AI 2015-1 can be found in its entirety at http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm.
 
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

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.