By Mark Shank of Gruber Hurst Elrod Johansen Hail Shank
(July 21) – In two recent announcements to the Department of Labor (DOL) has demonstrated they have taken seriously direction by President Obama to address overtime issues under the Fair Labor Standards Act (“FLSA”).
On July 15, the DOL issued an Administrator’s Interpretation No. 2015-1 (“Interpretation”) which addressed the application of the FLSA in the “Identification of Employees Who Are Misclassified as Independent Contractors.”
The Interpretation provides detailed guidance on the DOL’s interpretation of the “economic realities” test which determines whether a worker is properly classified as an employee or an independent contractor under the FLSA.
The economic realities test focuses on whether the worker is economically dependent on the employer or in business for him/herself. If the worker is economically dependent the worker is an employee. To be classified as an independent contractor, the worker must truly be in business.
The Interpretation spends significant time analyzing economic realities test in the context of the six factors it will use to determine employee/independent contractor:
- Is the work an integral part of the employer’s business?
- Do the worker’s managerial skills affect the worker’s opportunity for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work performed require special skill and initiative?
- Is the relationship between the worker and employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
This Interpretation clearly signals, as the DOL’s blog indicates, that the wage/hour division is “tackling employee misclassification because so much depends upon the answer to that question.”
According to the DOL, employees who are misclassified as independent contractors lose overtime, unemployment insurance, workers compensation and other benefits that come with employee’s status. Misclassification also “generates substantial losses to the federal government and state governments in the form of lower tax revenues.”
The Interpretation comes on the heels of June 30, 2014 DOL proposed revisions to the rules governing the “white-collar” overtime exemption to the FLSA. (This Interpretation, as an interpretation of existing policy, does not require any formal approval process. The rule change does.) To qualify for the exemption, employees must perform certain types of work as their primary duties (“duties test”), and be paid a minimum salary (“salary test”).)
The DOL did not propose changes, at least for now, to the duties test, but did provide proposed revisions to the salary test. In doing so, it proposed a significantly increased minimum salary required for an employee to be considered exempt. (Exempt employees are not entitled to overtime.)
The DOL estimates that these increases would extend overtime pay and minimum wage to nearly 5 million American workers within the first year of its implementation.
At present, employees must be paid a minimum salary of at least $455.00 per week ($23,660 per year) to quality for the exemption. The DOL proposal increases this amount to $970.00 per week ($50,440 per year) effective 2016.
The DOL is also proposing that this minimum amount be increased annually. The DOL is also suggesting that the minimum for highly compensated employees be increased from $100,000 in total compensation to $123,000 in 2016 annual compensation. The highly compensated employees test requires less stringent application of the duties test.
For now, these proposed regulations do not impact the duties test, but the DOL indicated it is seeking comments on whether the tests are working as intended, meaning whether too many individuals are being classified as exempt. The DOL has advised it is considering revisions to the duties test such as requiring white-collar employees to spend a certain amount of time performing their primary duties. We should expect the DOL to make changes to the duties test also.
The DOL has invited written comments on its proposed rules which must be submitted within 60 days after the proposed rules are published, which are expected soon. After comment period, the DOL will issue a final rule, after which the changes will take place. The changes will likely be implemented before the end of 2015.
From the points of view of both employers and employees, these developments are significant. The proposed change in the white-collar exemption test will, in the first year affect 5 million workers. And, the Interpretation and the proposed rule change will make it more difficult for employers to classify workers as independent contractors, and to claim exemptions for “white-collar workers.”
The end result will be more overtime, higher costs to employers (and higher pay to employees) and less ability for employers to characterize employees as independent contractors (and significantly greater risk to employers who misclassify employees).
These changes are significant also in terms at what is at stake. Already, the largest source of litigation in the employment context is cases involving claims under the FLSA. These two developments will accelerate that trend.
The amounts at stake are significant, because these cases are typically litigated as class (collective action) cases, which often involve hundreds of employees with substantial aggregate claims.
Mark Shank is a partner at Gruber Hurst Elrod Johansen Hail Shank. He specializes in labor and employment law.
- Is the work an integral part of the employer’s business?
- Do the worker’s managerial skills affect the worker’s opportunity for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work performed require special skill and initiative?
- Is the relationship between the worker and employer permanent or indefinite?
- What is the nature and degree of the employer’s control?