Federal Judge Temporarily Blocks New Overtime Law

On November 23, 2016, a federal Judge in Texas issued an order temporarily barring the Department of Labor (“DOL”) from enforcing its much-publicized new overtime rule, just over one week before the rule’s December 1 effective date.

As explained HERE, the new rule would have represented a landmark change to the overtime rules under the Fair Labor Standards Act (“FLSA”), by more than doubling the minimum annual salary threshold for the FLSA’s “white collar” executive, administrative and professional exemptions.  By raising the threshold from $23,660 to $47,476 per year, the DOL estimated that approximately 4 million workers would have become immediately eligible to earn overtime premium pay or have their salaries raised to the new threshold. The new rule would also have automatically increased the new minimum salary threshold every three years, starting on January 1, 2020, to keep pace with inflation.

To prevent these sweeping changes from taking effect, twenty-one states and fifty businesses filed cases in the U.S. District Court for the Eastern District of Texas.  In their case, the states moved for a preliminary injunction on the grounds that the DOL exceeded its authority in promulgating the new rule on several statutory and constitutional grounds.  The business organizations were also permitted to present certain of their arguments in supporting the states’ motion for a preliminary injunction.

The Court ultimately sided with the states, finding (among other grounds) that the rule was unlawful because it emphasized the salary component of the exemption test rather than an employee’s actual duties.

Given the changes to the federal government that will take place in January, this ruling likely places the future of the new FLSA rules in serious jeopardy.

On December 1, Are You Ready for the New Overtime Laws?

In a few short weeks, most startups and small businesses will be required to either raise the salaries of employees making less than $47,467.00, or else risk paying overtime wages.

Effective December 1, 2016, updates to the Fair Labor Standards Act are significantly limiting the category of employees who can be classified as “exempt” from compulsory overtime laws.  Unless employers are prepared to meet the new salary threshold, employees who were previously ineligible for overtime pay will now be categorized as “non-exempt” and entitled to time and a half for any hours worked in excess of a 40 hour work week.

The key updates can be summarized as follows:

  • The Department of Labor has set the new standard salary level at $913 per week or $47,476 annually (previously, the salary level was $455 per week or $23,600 annually).
  • Employers will be allowed to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new salary threshold.

What does this mean for businesses?  At a high level, the new rules require employers to evaluate employees in the range of $23,600 – $47,400 and determine the most cost effective compensation structure compliant with the new rules.

For some workers, employers may determine that it is more affordable to reclassify them as “non-exempt” (and therefore eligible for overtime wages) rather than raise the salary in order to meet “exempt” status.  As a consequence, the amount of overtime hours will have to be closely monitored (or eliminated altogether) to ensure payroll margins remain justified by that approach.

Some employers may prefer to designate one or more “exempt” employees (who already make above the statutory threshold) to serve as the “on call” point of contact for any customer needs or work obligations that arise after regular business hours.  This way, overtime wages can be avoided altogether without a forced salary adjustment.

Although a solution in only rare cases, some employers may be able to convert employees to an independent contractor relationship.  This would allow employers to circumvent the overtime obligations under the FLSA, altogether.  However, caution should be taken here to ensure that workers are properly classified, as employers face significant consequences for improper independent contractor designations.  More information about the proper classification of employees and independent contractors can be found HERE.

For more information about these rule changes and other strategies to mitigate the cost of compliance, it is best to speak with an attorney.

Is Your Company’s Hire Properly Classified as an Independent Contractor?

Virtually every young company struggles to properly classify workers as independent contractors or employees. Initially, when everyone involved in a startup is working on a part-time basis and pursuing other interests, it is easier to justify an independent contractor designation for most workers. But as the organization increases in stability and the first few hires start working 40-hour work weeks and more, when is a founder in danger of illegally classifying someone as an independent contractor? What is at stake for the company when workers aren’t properly classified?

1. General Overview of Independent Contractor Law

The issue of whether an independent contractor is properly classified is a dense, confusing, multi-layered analysis that invokes at least 48 different factors, weighed differently depending on whether federal or state law is applied.  For example, the IRS uses one particular test to determine if an employer should be subject to withholding obligations, the Dept. of Labor uses another test to determine if an employer has violated federal minimum wage laws and states apply yet another test to determine if an employer is liable for failure to pay unemployment tax or to secure workers’ compensation insurance.  In short, there is no slam dunk when it comes to assessing whether an employer is properly classifying workers as independent contractors.  This is totally unfair and annoying for employers, but especially startup founders, where employer liability is simply untenable in the early days.

With that said, there are some guiding principals to keep in mind when thinking through whether to classify someone as an employee or an independent contractor.  Despite the many factors courts/government agencies consider, fact finders are essentially trying to determine whether:

  • The individual has an independent business and contracts to work according to his own methods; and
  • Whether the employer controls only the result of  the work, not the means by which that result is accomplished.
  • If the above statements are generally true, the worker is properly considered an independent contractor.

2. Factors that Support Independent Contractor Classification

Here, the following common factors can be used to support classification as an independent contractor:

  • The Company hires a a contractor with a specific expertise that no one else on the founding team possesses by virtue of her unique background (in other words, the company does not train the hire in this area).
  • Both parties intended to create an independent contractor relationship, which is evidenced by an Independent Contractor Agreement.
  • The company does not direct the contractor’s work and does not have authority to require her compliance with any specific directives in terms of how to accomplish her deliverables.
  • The contractor is responsible for supplying the tools and equipment needed to support the services she provides to the company and to her other commercial pursuits.
  • The contractor is not subject to a company schedule and is permitted to come and go as she pleases based on her determination of how to best execute her services.
  • The contractor is solely responsible to structure her own work schedule based on her independent judgment and develops her own goals, method or manner of completing work, forms her own priorities regarding completing assignments, etc.
  • The contractor is not held to a full-time schedule and is not prevented from securing outside work.  Importantly, there should be no exclusivity arrangement or non-competition clause in  an independent contractor agreement (or else very narrowly construed) that would permit a company to restrict her commercial activities.

3. Common Areas of Vulnerability for a Company

The following issues could be problematic to a Company if the relationship were ever scrutinized by a court or governmental agency:

  • The consultant’s services are inherently directive, meaning that the position occupied by a contractor is operational in nature and inherently subject to the direction/control established by management and less likely to be viewed by a court as an area where independent expertise is required.
  • The contractor is hired for an indefinite period of time and paid a salary.  (Ideally, an independent contractor would be hired for a set project or a specific duration of time and would invoice for its services).
  • The contractor is the recipient of any employee benefit, such as stock options.
  • There is no liability if the contractor were to terminate her business relationship at any time (in other words, there is no specific deliverable that was contracted for her services).
  • If the contractor does not in fact hold herself out to the public as providing the particular service that she offers to the company, this would undermine her economic independence.  (does she have business cards?  a website? advertisement in the phone book or any other way that she secures additional projects?)

This is not an exhaustive list as there may be other factors that may detract from a contractor’s economic independence or reflect an impermissible level of company control.  Also, not all the above factors are considered depending on which type of scrutiny is applied (for example, the workers’ compensation board may look at/ place different significance on different factors than the IRS).

4. Enforcement Mechanisms

If a contractor were inclined to pursue a position that the Company had wrongly classified her as an independent contractor, there are a couple of ways she could go about it.

  • If she argued that she was entitled to certain employee benefits provided by the company for employees, she could file a lawsuit against the company in federal or state court.
  • She could file a claim with the federal Dept. of Labor if she were to contend that she did not receive federal minimum wage for her work or sufficient overtime pay.
  • She could also file a claim with the IRS for the Company’s alleged failure to pay Social Security/Medicaid taxes and to properly withhold her portion of those taxes.
  • She could file a claim with a state Worker’s Compensation or Unemployment Insurance Agency claiming that she is improperly classified as an independent contractor and that her employer is not properly paying unemployment or workers’ compensation insurance.