Tag Archives: FLSA

DOL Issues New Guidance on Employee/Independent Contractor Classification

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This week the Department of Labor (DOL) issued an Administrator’s Interpretation of the Fair Labor Standards Act’s (FLSA or Act) definition of employment and worker classification–i.e. whether workers are employees entitled to the protections of the FLSA (including overtime pay) or independent contractors not covered by the Act. The DOL did not create a new test for employment classification, instead restating the same six factors of the “economic realities” test from its May 2014 Fact Sheet.  However, the Administrator’s Interpretation re-examines each of the six factors and provides specific examples of how the DOL believes the factors should be applied.

Why should you care?  It is estimated that nearly one-third of businesses misclassify their workers, subjecting themselves to possible governmental audits and litigation. The new guidance reinforces DOL’s intention to go after employers it believes are misclassifying workers. It also increases awareness of independent contractor/employee classification issues, much to the delight of plaintiff’s attorneys.  Of course, worker classification suits and FLSA litigation in general is already on the rise (up nearly 32% from 2009 to 2014).  Just last month Federal Express settled a worker misclassification class action for $228 million.  Uber is also facing a class action lawsuit after the California Department of Labor found it misclassified a driver as an independent contractor.

FLSA Test For Employee vs. Independent Contractor

The FLSA is the federal law that governs overtime and minimum wage requirements for employees.  Independent contractors are not covered by the FLSA. The FLSA’s rather circular definition of an “employee” is “any individual employed by an employer.”  The Act’s definition of “employ” is incredibly broad and includes anyone the employer “suffer[s] or permit[s] to work.”  This is not the same test used by the IRS to determine whether payroll taxes need to be withheld, or by state agencies to determine eligibility for unemployment or workers compensation benefits.  A discussion of the IRS’ 20 factor test can be found in a previous blog post here. While many of the same factors are found in each of these tests, the DOL’s new Administrator’s Interpretation of how the FLSA applies clearly focuses on a bigger picture, the nature of the worker’s business as a whole and not just the job the worker is performing for the alleged employer.  According to the DOL, whether the worker is an employee under the FLSA depends on how dependent the worker is on the employer:

The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for himself or herself.  If the worker is economically dependent on the employer, the worker is an employee.  If the worker is in business for himself or herself (i.e. economically independent from the employer), then the worker is an independent contractor.

There is no mechanical formula for determining whether someone should be classified as an employee or an independent contractor.  The facts must be reviewed on a case-by-case basis depending on the specific facts of the relationship between the worker and the company. To help with this analysis, six factors, called the “economic reality” test have been applied for years. The DOL’s new guidance includes the same six economic reality factors has its 2014 Fact Sheet.  While these six factors are not new, there are some changes in how the DOL is interpreting them.

  1. Is the Work an “Integral Part” of the Employer’s Business?  The more closely related the work being performed is to your business, the more likely the person doing that work is an employee.  For example, if you own a construction company that frames houses, carpenters are integral to that business and should be classified as employees, but a software developer who creates software to track bids or schedule appointments is not integral and may be an independent contractor (depending on other factors).
  2. Does the Worker’s “Managerial Skill” Affect the Worker’s Opportunity for Profit or Loss? The focus here is not on whether the worker can work more hours to make more money.  Instead it is whether the worker can exercise managerial skills, i.e. purchasing equipment and materials, advertise, manage time tables.  In addition, the focus is not limited to the current job, but also looks to whether the worker’s managerial skill will affect their opportunity for profit or loss in the future.  If the only way the worker can make more money is to work more hours, then they are more likely to be an employee.  However, if the worker can decide how much to charge for a job, whether to hire helpers, whether to advertise, etc., they are using their managerial skills to affect their opportunity to profit or suffer a loss in their business and are more likely to be an independent contractor.
  3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment? This factor looks not only at the amount of the investment, but what the worker is investing in.  Investments that support the worker’s business beyond any particular job (i.e. improve the worker’s business capacity, or reduce their cost structure) are more likely to support an independent contractor classification. Simply investing in the tools necessary to do the job is not sufficient to indicate independent contractor status.
  4. Does the Work Performed Require Special Skill and Initiative?  The “skills” the DOL is focusing on in applying this factor are not the technical skills necessary to do the work, but “business skills, judgment and initiative.” Specialized technical skills will not support an independent contractor classification if those skills are not exercised in an independent manner.  For example, a carpenter may be highly-skilled technically, but if that carpenter is simply told “what work to perform where,” they are not demonstrating the skill and initiative of an independent contractor.  However, if the carpenter provides specialized service to several different construction companies, marketing his services, and determining which orders to fill, he is demonstrating the skill and initiative of an independent contractor.
  5. Is the Relationship Between the Worker and the Employer Permanent or Indefinite?  The longer and more continuous the engagement, the more likely an employee-employer relationship exists. Independent contractors, by contrast typically work on a project basis (when the project is over, the engagement is over) and do not necessarily work repeatedly for an employer. The key to this factor is whether the lack of permanence or indefinite nature of the work is due to the worker’s own business initiative.  For example, a worker who intermittently works with multiple businesses, marketing her services, negotiating rates and decides which work to accept and which to turn down is more likely to be an independent contractor.
  6. What is the Nature and Degree of the Employer’s Control?  To be an independent contractor, the worker must control meaningful aspects of the work performed “such that it is possible to view the worker as a person conducting his or her own business.”  The DOL warned that the reasons why the alleged employer exercises control–i.e. because quality control measures or regulation of schedules are “the nature of the business”–is not the question.  According to the DOL, if the nature of the business requires a company to exert too much control over workers, “then that company must hire employees, not independent contractors.”

No one factor is determinative.  The specific facts related to your business, the worker’s business and the relationship you have with them need to be examined carefully.

The Bottom Line

Worker classification is one of the most difficult and far-reaching employment law compliance issues.  Getting it wrong could mean you or your company may have to pay unpaid wages, taxes, penalties and depending on the circumstances could face criminal penalties.  The best way to protect yourself and your company is to have an employment attorney to objectively assess each of the relevant factors and determine the appropriate classification.

If the worker can properly be classified as an independent contractor, it is essential that you ask the right questions and get the necessary documents from the contractor to protect the company’s classification.  You also need a written Independent Contractor Agreement, specifically drafted for the engagement.  The agreement should be drafted by an employment attorney who can include provisions addressing the applicable factors and help protect the independent contractor classification.

If you have contractors who may need to be reclassified as employees, it is important to have legal advice to assist you in making that transition is such a way as to minimize the risks to you and your company.

Given the significant risks businesses face for misclassifying workers, businesses are encouraged to carefully review their relationship with their workers, including any written agreements, policies and procedures used to govern the relationship. Moreover, before businesses enter into an independent contractor relationship, they are encouraged to seek the advice of a tax professional and/or employment attorney. Businesses should also keep detailed notes of how the determination was made and all facts that apply to each factor.

Questions?

If you have any questions or would like more information about this or any other employment matter, please contact Julie Kinkopf, Esquire at 610-660-7786 or julie@kinkopflawfirm.com.  You can also find previous articles written on the proposed overtime changes here, here and here.  Additional articles regarding employment matters can be found here.  We know this is a confusing area of the law and are here to help protect you and your company from liability.

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

Disclaimer: The contents of this post are for informational purposes only, are not legal advice and do not create and attorney-client relationship.

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Changing Overtime Rules: What You Need to Know and Do to Prepare

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This week the U.S. Department of Labor (DOL) announced changes to federal overtime pay regulations expected to make an additional 5 million workers nationwide–including an estimated 200,000 in Pennsylvania and 130,000 in New Jersey–eligible for overtime in 2016. The proposed regulations would change who is eligible for overtime under the Fair Labor Standards Act (FLSA) now and in the future.  Since the FLSA is one of the most far-reaching employment laws, covering millions of employers and well over a hundred million workers, and since wage and hour claims (including class actions) are the fastest growing type of federal employment litigation, employers must take notice of the proposed changes and how they could impact their business.

Background

The FLSA is the federal law that governs overtime and minimum wage requirements. The law requires non-exempt employees be paid 1 1/2 times their regular rate of pay for all hours worked over forty in a work week.  While all employees are presumed to be eligible for overtime, the FLSA includes specific exemptions to the overtime requirements. The most popular exemptions to overtime under the FLSA are the so-called “white collar” exemptions–administrative, executive and professional. There is a three-part test to qualify for one of the white collar exemptions:  (1) employees must be paid on a salary basis, meaning they are paid a predetermined amount not subject to reduction because of variations in the number of hours worked; (2) employees must be paid a minimum salary of $455 per week ($23,660 per year); and (3) their primary job duties must satisfy certain “duties tests” set forth in DOL regulations. These “job duties” tests vary depending on the exemption sought.

The FLSA also exempts certain “highly compensated” employees from overtime.  To qualify for the “highly compensated” exemption under the current regulations, employees must be paid at least $100,000 per year (not including insurance cost or other fringe benefits), must perform office or non-manual work and must meet at least one of the exempt duties of an exempt executive, administrative or professional employee.

The salary requirements in the FLSA have been changed only seven times since the FLSA was enacted in 1938.  They were last adjusted in 2004. Since the salary and compensation minimums have not kept up with inflation, the percentage of employees eligible for overtime has dramatically decreased over the years.  According to the DOL, only 8% of full-time salaried workers currently fall below the salary threshold for the white collar exemptions.  The DOL wants to set the standard for the white collar exemptions at the 40th percentile of weekly earnings for full-time salaried workers and the highly compensated employee exemption to the 90th percentile of weekly earnings for full-time salaries workers.

The Changes

Three key changes to federal overtime law are proposed.  First, the weekly minimum salary to qualify for one of the so-called “white collar” exemptions (administrative, executive and professional) would more than double from $455/week to $921/week in 2015 and $970 in 2016.  This means first line supervisors and other employees currently covered by the executive, administrative or other white collar exemptions making less than $921 per week ($47,892 per year) would suddenly be eligible for overtime–regardless of their job duties. Clearly this proposed change will have the greatest impact on the service industry, but its impact will be broader than that.  Many companies have supervisors, managers or administrative staff (such as human resources personnel, financial managers, etc.) who make more than $455 per week, but less than $921. Under the proposed regulations, these employees would now be entitled to overtime for all hours worked over forty and would be required to track all hours worked.

The second proposed change would increase the yearly salary required to be exempt for overtime as a highly compensated employees.  That annual salary “threshold” would increase from $100,000 to $122,148. Employees making less than $122,148 in 2016 would be changed from exempt to non-exempt, thereby being forced to track all hours worked and becoming eligible for hours worked over forty in a work week.

The DOL estimates that these changes will affect 4.6 million workers in the first year.  The changes will also require employers to revise compensation structures and work schedules.  Additionally, the changes will also require employers (and employees) to start tracking the hours worked for employees previously paid salary.

Finally, the regulations would create a mechanism to automatically update the salary and compensation level without requiring action by future administrations–basically an auto-pilot for increasing the levels in the future.  This change seeks to keep the level of employees covered by the white collar exemptions to the 40th percentile of weekly earnings for full-time salaried workers and those covered by the “highly compensated” exemption to the 90th percentile.  Thus, the minimum weekly salary in 2016 for the white collar exemption would automatically increase to $970 per week ($50,440 per year) and would continue to increase in the future.

Clearly, these changes will be far-reaching and will require employers to re-evaluate employee classifications and pay practices.

Steps Employers Should Take Now

First, it is important to note that these are proposed regulations and nothing has changed in the FLSA regulations as of yet.  There will be a public comment period until September 4, 2015 and following that, final regulations will be enacted.  Because the changes proposed are to federal regulations (not statutes), and because the FLSA itself does not define the the administrative, executive and professional exemptions, Congressional approval is not required before the changes to the regulatory definitions are enacted.  Thus, employers should begin preparing now.  Suggested actions include:

  • Review your pay practices and employee classifications.  Do you have written job descriptions and are they up to date?  Do they accurately reflect the actual duties being performed by the employees?  Will employees exempt under the current regulations still be exempt under the new regulations? Could the employee qualify for another overtime exemption that does not include a minimum salary requirement, or could the employee’s duties be changed to make them qualify for such an exemption? Consider having your job descriptions reviewed by a qualified employment law attorney who can provide a third party analysis based on existing law and the proposed changes.
  • Prepare to convert employees currently making less than $921 per week (or $122,148 per year for highly compensated employees) to overtime-eligible, non-exempt employees.  In order to minimize the additional expense related to this conversion and keep total compensation close to the current salary, employers will want to evaluate the number of hours these employees work, whether those hours fluctuate, and how those hours can be tracked.  Review budgets to determine if adjustments need to be made to take the increased labor costs into account.
  • Review work schedules and work flow needs.  Will converting currently exempt employees to non-exempt, overtime eligible employees require hiring of additional personnel?
  • Review your processes for tracking hours worked.  The changes in the law will mean that employees who were formerly salaried, but are changed to hourly, non-exempt will be required to track all hours worked. This may be difficult to implement and require additional training and the implementation of better time tracking systems.
  • Review your employee handbook and/or personnel policies.  It may be advisable to revise policies regarding approval of overtime, after-hours work, email and/or “Bring Your Own Device,” given the increased number of hourly, non-exempt employees covered by those policies. In addition, supervisors may need additional training about work time, after hours or off-site work and time tracking.  Remember, the FLSA requires non-exempt employees be paid for all hours worked, whether approved or not.
  • Prepare employees who may be converted from exempt employees paid a salary to non-exempt, hourly employees.  Many employees take pride in being salaried and may resent and resist having to track their hours. The FLSA requires that employers pay employees for all hours worked.  Resistance to proper time recording practices could result in employee management issues as well as overtime liability.
  • Employers must remember that these changes are to the federal laws and that states have their own wage and hour laws. State laws may provide impose greater restrictions on employers or may contain different tests for exemptions from overtime, or the calculation of overtime. Thus, employers must be mindful to comply with state laws in addition to the FLSA.
  • Employers should hire qualified counsel to assist with a general wage-and-hour audit or to review particular job positions and ensure that hidden compliance issues do not catch them by surprise.

Companies should also be prepared for an increased focus on their pay practices, worker classification and employment policies now and in the future.  News coverage of the overtime rule changes may prompt employees (and independent contractors) to question their employment classification.  There is an army of plaintiff’s side law firms ready to assist these workers with potential claims.  Even without the increased scrutiny and press, wage and hour lawsuits (including class actions) are the fastest growing type of employment litigation.  There is little doubt that will continue at an even faster rate.  Moreover, the DOL will be monitoring employers for non-compliance and has doubled the number of investigators since 2008, making it ready to conduct audits to monitor compliance with its regulations.  

Questions?

If you have any questions or would like more information about the changing overtime laws, state overtime laws–or any other employment matter, please contact Julie Kinkopf, Esquire at 610-660-7786 or julie@kinkopflawfirm.com.  You can also find previous articles written on the proposed overtime changes here and here.  Additional articles regarding employment matters can be found here.  We know this is a confusing area of the law and are here to help protect you and your company from liability.

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

Disclaimer: The contents of this post are for informational purposes only, are not legal advice and do not create and attorney-client relationship.

Image courtesy of 1shots at FreeDigitalPhotos.net

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President Obama Seeks Significant Changes to Overtime Regulations

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As expected, today President Obama directed the Department of Labor to review and revise the regulations that govern the Fair Labor Standards Act (FLSA).  The President said he directed the review “to give more Americans the chance to earn the overtime pay that they deserve.”

The Fair Labor Standards Act was originally passed in 1938 and requires employers to pay most employees overtime pay at a rate of time and a half for all time worked in excess of forty hours per week.  However, Section 13(a)(1) of the FLSA provides an exemption from overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees (so-called “white-collar” positions).  To qualify for the “white-collar” exemption, employees must be paid at least $455 per week on a salary basis and their job duties must meet specific tests. In general, their duties must include managing a part of the enterprise and supervising other employees or exercising independent judgment on significant matters or require advanced knowledge.

The President’s remarks clearly take aim at the $455 per week threshold.  According to the White House, “only 12 percent of [current] salaried workers fall below the threshold that would guarantee them overtime and minimum wage protections (compared with 18 percent in 2004 and 65 percent in 1975).”  The President also noted that the threshold has been only been changed twice in the last 40 years–once in 1975 and once in 2004. According to Bloomberg News, the 1975 threshold of $155 is the equivalent to $970 in today’s dollars whereas the $455 amount set in 2004 is the equivalent to $553 in today’s dollars.

In addition to increasing the salary threshold for the “white-collar” exceptions, it is expected that the Department of Labor will seek to narrow the duties that qualify employees as exempt.  The jobs duties tests went through major revisions under President George W. Bush in 2004.  However, the regulations are often criticized by employee groups as being overly broad and allowing employers to give employees minimal executive or administrative tasks to avoid paying the employees overtime.  It is expected that the Obama administration will push for rules similar to those in place in California which require employees to spend a certain percentage of their time on “exempt duties” before they qualify for the “white-collar” exemption.

What does this mean for employers?

No doubt the changes to FLSA regulations could affect millions of workers and employers.  The FLSA protects 135 million workers in more than 7.3 million workplaces nationwide.  However, none of the changes sought by President Obama will happen overnight.  In fact, it is expected that any changes to the FLSA regulations will take years to complete and become effective.  However, one likely effect of the President’s remarks and directive–and the extensive press coverage of them–will be increased litigation over whether employees are properly classified as exempt under the current regulations.

FLSA claims are already the biggest litigation threat to employers.  In fact, in 2013 the amount of FLSA claims filed increased by 10% over 2012 according to Federal Judicial Caseload Statistics and have increased by roughly 400% since 2000.  Another concern for employers is that many Employee Practices Liability (EPLI) policies specifically exclude overtime claims.  Thus, employers must be especially vigilant about overtime classifications.

Employers are encouraged to review their overtime classifications and job descriptions to make sure that they comply with the current state and federal overtime laws.  If you have any questions or would like more information on these or other employment issues, please contact Julie Kinkopf, Esquire at 610-660-7786 or julie@kinkopflawfirm.com.

Image courtesy of Renjith Krishnan /FreeDigitalPhotos.net

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

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