11/4/2015

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8:40 – 9:30 am

Wage & Hour Update

David R. Golder

Shareholder, Hartford Jackson Lewis P.C.

Calls for a “21st Century Workplace”

• “21st Century Workplaces” are different:

• Dual earner couples are the norm

• Older workers need to work longer

• Men and women share care-giving responsibilities

• There are many more single-parent families

• More people with disabilities are working

• Legislative initiatives focus on:

• Flexible work arrangements

• Time off

• Career flexibility

• Georgetown Law: Workplace Flexibility 2010

• Hastings Law: Center for WorkLife Law

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Background: March 13, 2014

Presidential Memorandum • “[R]egulations regarding exemptions . . . particularly for

executive, administrative, and professional employees . . .

have not kept up with our modern economy”

• Directs the Secretary of Labor to propose revisions in order to:

– “[U]pdate existing protections consistent with the intent of the Act”;

– “[A]ddress the changing nature of the workplace”; and

– “[S]implify the regulations to make them easier for both workers

and businesses to understand and apply.”

• “Because these regulations are outdated, millions of

Americans lack the protections of overtime and even the

right to the minimum wage”

Overview of the NPRM • Released on the DOL website on June 30, 2015 as a 295-

page .pdf

• Published in the Federal Register on July 6, 2015, occupying

97 pages of small three-column print. See 80 Fed. Reg.

38,516.

• Proposes substantial increases to the salary thresholds for the

executive, administrative, and professional exemptions, as

well as for the highly-compensated variant of those

exemptions

• Presents no changes to the duties standards for any

exemption

• Solicits input on a number of topics, though, including duties

• Provides for a 60-day comment period. Comments were due

on or before September 4, 2015. That date has now passed.

DOL received 250,000 comments.

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Proposed Salary Standards • Would increase the current minimum salary level of

$455 per week ($23,660 per year) to $921 a week

($47,892 per year), subject to annual increases

thereafter

• DOL indicates that it intends to update the salary figure

based on new economic data when it publishes the

Final Rule, stating an expectation that the final number

is likely to be $970 a week ($50,440 per year)

• These changes would amount to a 102% increase

($921) or a 113% increase ($970) over the present

salary requirement

• DOL’s rationale is that the new salary level reflects the

40th percentile of earnings for full-time salaried

employees

Proposed Salary Standards • For highly compensated employees, in addition to salary-

basis compensation of $921 (or $970) a week, the total minimum compensation increases from $100,000 a year to $122,148, subject to annual increases thereafter. DOL set this level at the 90th percentile for full-time salaried employees.

• For American Samoa, DOL sets the salary at 84% of the level applicable in the rest of the country, except that the general salary requirement shall apply when the highest industry minimum wage in American Samoa equals the general federal minimum wage

• For the motion picture industry, the NPRM increases the alternative weekly standard allowing for partial-week pro-rating from $695 to $1,404, and in effect raises the minimum daily rate from $115.84 (i.e., $695 / 6) to $234.00 (i.e., $1,404 / 6)

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Scope of the NPRM • The proposed changes apply only to the executive,

administrative, and professional exemptions. They do not apply to outside sales employees, nor do they affect computer employees paid on an hourly basis at a rate of at least $27.63 per hour.

• The proposed regulations do not affect other exemptions not based on section 13(a)(1) of the Fair Labor Standards Act, such as: – Certain commissioned employees of retail or service

establishments (section 7(i));

– Employees of seasonal amusement or recreational establishments (section 13(a)(3));

– Motor Carrier Act exemption (section 13(b)(1)); or

– Certain employees of rail and air carriers (sections 13(b)(2) and (b)(3)).

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Anticipated Impact

• DOL expects that these increases to the salary thresholds will render 4.6 million currently exempt salaried employees ineligible for exempt status, or about 25% of all exempt employees currently subject to the salary basis standards

• Over the next ten years, annual increases in the salary thresholds will cause an additional 500,000 to one million currently exempt salaried employees to become ineligible for exempt status

• The effects of these regulations will fall most heavily in the South, the Midwest, and in rural areas, where salary levels tend to be more moderate than in coastal and urban locations

• Industries like retail, restaurants, healthcare, and manufacturing, with large numbers of front-line supervisors, will be hit hard

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Other Areas of DOL’s Interest

• “The Department is not making specific proposals to modify the standard duties tests but is seeking comments on whether the tests are working as intended to screen out employees who are not bona fide EAP employees; in particular, the Department is concerned that in some instances the current tests may allow exemption of employees who are performing such a disproportionate amount of nonexempt work that they are not EAP employees in any meaningful sense.”

• The NPRM solicited input from the public on a variety of issues, without stating one way or the other whether it intends to incorporate these issues into the Final Rule

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Other Areas of DOL’s interest

• DOL sought comments regarding:

– Whether to adopt the California “primarily engaged in” standard for exempt status

– Whether to place other limits on the amount of non-exempt activity an exempt employee may perform

– Whether to allow nondiscretionary bonuses or even commissions to satisfy a portion (perhaps up to 10%) of the required salary

– What industries commonly have nondiscretionary bonuses and incentive compensation

– Whether requiring these bonuses to be paid monthly (or at some other frequency) is most appropriate

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Other Areas of DOL’s Interest

• DOL sought comments regarding:

– Whether to readopt a long test / short test approach to exemptions, as existed before the 2004 revisions to these regulations

– Whether the concurrent duties concept for executive employees is working

– To what extent exempt executive employees are performing non-exempt work

– What further examples to list illustrating types of jobs that would be exempt under the computer employee exemption

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What Happens Next?

• The 60-day comment period ended on September 4 with DOL receiving a quarter million comments

• There may be congressional oversight hearings challenging the proposed regulations on any number of grounds. Congress could also attempt to block the regulations through either the Congressional Review Act or the appropriations process.

• In the end, it seems likely that some form of these regulations will eventually become law

• Unless blocked, DOL will issue a Final Rule, probably in early to mid 2016, effective 60-120 days thereafter

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What Should You Do Right Now?

1. If you haven’t already done so, identify all employees currently classified as salaried exempt who earn less than $50,440 a year

2. If you use the highly-compensated exemption, identify all employees earning between $100,000 and $122,148 a year

3. Begin to develop a strategy for responding in the event that the minimum salary threshold for exemption increases to $50,440

– Increase employees to that level if their pay is close?

– Set an hourly rate that assumes the same number of working hours after the conversion as before, and for the same total pay?

– Manage the workload by reducing schedules to avoid overtime and increasing headcount or shifting exempt duties to other employees?

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What Should You Do Right Now?

4. For employees who are in the zone for possible reclassification if these changes become effective, do you know how many hours they currently work? If not, consider taking steps to begin tracking their working time in order to assist with modeling post-reclassification pay

5. Consider treating these regulations as an opportunity to make other changes for which adequate messaging has previously not been available

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DOL Guidance on Classification of Independent Contractors

U.S. Department of Labor

Wage and Hour Division

Administrator’s Interpretation No. 2015-1

http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm

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DOL Guidance on Classification of Independent Contractors

• “When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation.”

• “Although independent contracting relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws.”

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DOL Guidance on Classification of Independent Contractors: FLSA Definitions

• “Employee” is defined as “any individual employed by an employer.”

• “Employ” is defined as “to suffer or permit to work.”

• Because of these broad definitions, courts have traditionally used a multi-factor “economic realities” test to determine employee vs. independent contractor status

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DOL Guidance on Classification of Independent Contractors

• The DOL’s guidance recognizes the multi-factor economic realities test, but shifts emphasis to the worker’s “economic dependence” on the employer

• “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 of herself (and thus its independent contractor).”

• This shift in emphasis is more likely to lead to conclusion of employee status. Independent contractors are dependent upon their customers.

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DOL Guidance on Classification of Independent Contractors

• “In undertaking this analysis, each factor is examined and analyzed in relation to one another, and no single factor is determinative.” (Consistent with prior interpretations)

• “Moreover, the economic realities of the relationship, and not the label an employer gives it, are determinative.” (Consistent with prior interpretations)

• DOL guidance then gives examples of each factor

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DOL Guidance on Classification of Independent Contractors

Factor #1 – Is the work an integral part of the employer’s business?

• Worker answering calls in a call center along with many others is performing work integral to the call center’s business even if interchangeable with many others. (Appears to be an attempt to call out call centers)

• Considering developments in telework and flexible work schedules, work can be integral to employer’s business even if performed at home or away from employer’s premises

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DOL Guidance on Classification of Independent Contractors

Factor #1 – Is the work an integral part of the employer’s business?

• Example: For construction company that frames homes, carpenters are integral to the employer’s business.

• Same company may contract with software developer to track bids, schedule projects, and track material orders. Software developer is performing work not integral to the company’s business (which is indicative of an independent contractor).

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DOL Guidance on Classification of Independent Contractors: Factor #2 – Does the worker’s managerial skill affect his opportunity for profit or loss?

• Decisions to hire others, purchase materials, advertise, etc. reflect management skills that will affect profit or loss beyond a current job

• On the other hand, the ability to work more hours and amount of work available from employer are not managerial skills

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DOL Guidance on Classification of Independent Contractors: Factor #2 – Does the worker’s managerial skill affect his opportunity for profit or loss?

• Example: Worker provides cleaning services for corporate clients as assigned by cleaning company. He doesn’t schedule his own assignments, solicit work, advertise, or seek to reduce costs. Works additional hours if offered. Here, he does not exercise managerial skill. Earnings only fluctuate based on his willingness to work more.

• Worker provides cleaning services, produces advertising, negotiates contracts, decides which jobs to perform and when, hires helpers, and recruits new clients. He exercises managerial skill indicative of an independent contractor that impacts his profit or loss.

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DOL Guidance on Classification of Independent Contractors: Factor #3 – How does the worker’s relative investment compare to the employer’s investment?

• The worker should make some investment in order to indicate the he or she is an independent business

• Worker’s investment should not be relatively minor compared to the employer’s because suggests economic dependence on employer

• Investing in tools or equipment is not necessarily an investment indicating independent contractor status

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DOL Guidance on Classification of Independent Contractors: Factor #3 – How does the worker’s relative investment compare to the employer’s investment?

• Example: Worker provides cleaning services for company that provides insurance, vehicle, advertising, equipment and supplies. The worker occasionally brings his own preferred cleaning supplies.

• Worker providing cleaning services invests in a vehicle not suitable for personal use, rents space to store vehicle and supplies, advertises services, hires a helper, provides all supplies and equipment needed. Her level of investment is similar to that of local cleaning company for whom she sometimes works, indicating independent contractor status.

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DOL Guidance on Classification of Independent Contractors

Factor #4 – Does the work performed require special skill and initiative?

• A worker’s business skills, judgment, and initiative aid in determining whether the worker is economically independent

• Technical skills to perform the job are not considered in determining economic independence. A highly skilled machinist likely remains an employee, without a showing of additional business skills.

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DOL Guidance on Classification of Independent Contractors: Factor #4 – Does the work performed require special skill and initiative?

• Example: Skilled carpenter provides services to a construction firm, but does not decide sequence of work, order materials, bid the next job. He is told what work to perform, when and where.

• Skilled carpenter provides a specialized service such as customized cabinets for a variety of construction companies. He markets his services, determines when to order materials and how much, which orders to fill, and when to fill the orders. Shows the skill and initiative of an independent contractor.

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DOL Guidance on Classification of Independent Contractors: Factor #5 – Is the relationship between the worker and employer permanent or indefinite?

• Permanency or indefiniteness suggest that the worker is an employee

• Independent contractor typically works one project and does not work continuously or repeatedly for an employer

• Lack of permanence does not automatically suggest independent contractor status (i.e., temporary employees)

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DOL Guidance on Classification of Independent Contractors: Factor #6 – What is the nature and degree of the employer’s control?

• Worker must control meaningful aspects of the work such that it is possible to view the person as conducting his own business

• Employer’s lack of control is not particularly telling if the workers work from home or offsite. Fact workers can control hours worked and are subject to little direct supervision are typical of homeworkers and largely insignificant in determining their status.

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DOL Guidance on Classification of Independent Contractors: Factor #6 – What is the nature and degree of the employer’s control?

• Example: R.N. listed with nursing home registry to be matched with clients. Registry interviewed nurse, provided training, sends the nurse a weekly list of potential clients, sets nurse’s wage, nurse must inform registry if hired and must inform registry if will miss scheduled work. Degree of control is indicative of an employee.

• R.N. listed with nursing home registry to be matched with clients. Registry sends weekly list of potential clients. Nurse is free to call as many or as few clients as she wishes. Nurse negotiates her own pay and schedule. Indicative of independent contractor.

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DOL Guidance on Classification of Independent Contractors: Conclusion in Administrator’s Interpretation

• “In sum, most workers are employees under the FLSA’s broad definitions.”

• “[E]ach factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee).”

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DOL Guidance on Classification of Independent Contractors: Three Ways to Minimize Risks of Misclassification

• Restructure relationships so as to increase the chance of a finding of independent contractor status

• Convert treatment from independent contractor to employee status

• Shift duties in question to staffing companies or other outside vendors

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