On July 6, 2015, in response to an executive order signed by President Obama, the U.S. Department of Labor (DOL) published a proposed rule that could significantly impact overtime regulations under the Fair Labor Standards Act (FLSA). Among other changes, the proposed rule will increase the minimum salary threshold to qualify for the “white collar” exemptions to $50,440 per year, which could affect an estimated 4.6 million workers.
Under the current regulations, an employee must be paid at least $455 per week on a salary basis and meet a certain job duties test in order to be exempt from minimum wage and overtime requirements under the FLSA exemption for executive, administrative, professional, outside sales, and computer employees (the “white collar” exemption). The proposed rule more than doubles this requirement, raising the minimum to $970 per week, or $50,440 annually.
As part of the proposed rule, the DOL also requested comment regarding possible automatic updates to the salary threshold to keep it from becoming outdated and changes to the job duties test for overtime eligibility under the “white collar” exemptions.
Now that the proposed rule is published, it is subject to a 60-day comment period. After the comment period ends on September 4, 2015, the DOL will begin drafting the final regulations and will consider any public comments in finalizing the rule. There is no required deadline to issue the final rule.
The proposed rule will significantly impact current overtime policies and employee exemptions. Should the proposed rule become final, employers will need to make sure that any affected employees are appropriately categorized and modify overtime policies accordingly.
DOL Issues Administrator’s Interpretation on Worker Misclassification
On July 15, 2015, the Department of Labor (“DOL”) issued “Administrator’s Interpretation No. 2015-1” regarding the classification of workers as independent contractors. The Interpretation is aimed at reducing the misclassification of workers as independent contractors, and explains that under the Fair Labor Standards Act’s broad definition of employment, most workers should be classified as employees.
The Interpretation does little to change well settled law applying the “economic realities” test to determine if workers are employees or independent contractors. In fact, the Interpretation explains the six factors of the test and summarizes court cases applying the factors:
(1) the extent to which the work performed is an integral part of the employer’s business;
(2) the worker’s opportunity for profit or loss depending on his or her managerial skill;
(3) the extent of the relative investments of the employer and the worker;
(4) whether the work performed requires special skills and initiative;
(5) the permanency of the relationship; and
(6) the degree of control exercised or retained by the employer.
No single factor of this test is considered dispositive; instead, the determination of worker status should be made based on the totality of the circumstances.
The Interpretation examines each factor and its application in detail, citing to cases where courts applied the test broadly to classify workers as employees rather than independent contractors. Notably, the DOL explains the six factors in such a way as to limit the likelihood that workers could be classified as independent contractors. For example, when considering the worker’s relative investment, courts often look at the amount of money the worker spent to conduct his or her business. In the Interpretation, the DOL limits this consideration to only those expenditures “necessary to perform the specific work for the employer.”
Not surprisingly, the Interpretation shies away from cases or factual scenarios where the determination of worker classification is difficult, or where courts applied the economic realities test narrowly to find that workers were properly classified as independent contractors. As such, the Interpretation does not provide much helpful guidance to employers for determining the appropriate worker classification.
Ultimately, the Interpretation should not come as a surprise, given the DOL’s aggressive stance in pursuing misclassification cases. However, it remains to be seen how much deference courts will give to this Interpretation, which will likely vary by jurisdiction. Employers are also likely to challenge any deference courts give to the Interpretation because it did not follow the notice and comment procedure of formal rulemaking.
Employers should work with counsel to evaluate the classification of its workers to ensure that all workers are properly classified as employees or independent contractors. Although the reclassification of workers from independent contractor to employee comes with consequences, including potential tax liability and obligations under the Fair Labor Standards Act, Title VII, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family Medical Leave Act, and the Affordable Care Act, employers should carefully audit worker classification to avoid potential liability.