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A regulatory change expected to make some 5 million more employees eligible for overtime pay will take effect on the 1st of December, but employers are urged to plan now how they will cope with the change.
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; that wage and hour claims continue to outpace other employment related claims that employers face. So understanding these changes, what’s intended, and what we think is going to occur, and the timing of it 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 as of December 1 must be paid on a salary basis and earn at least $921 a week, which comes out to $47,892 a year for full-time employees 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. However they did add more examples of how they defined the tests. For example, under the manager provision it is expected that in order to be exempt the employee must manage three internal full-time employees and be able to make decisions with matters of significance – which they gave the example they must be able to have check signing rights and able to lease a car in the company name.
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.
What to do now
We are encouraging employers need to plan now how they will handle the increased overtime and/or higher salaries.
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.
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. Employers always have the right to limit the amount of overtime employees are allowed to work.
Employers do need 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.
If an employer determines that they can’t or won’t be increasing to the salary minimum, we do encourage you to begin with clocking in and out now – better to have it buttoned down today rather than figure that out December 1st.
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. 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.
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.
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. 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,