Client Alert - Employment Law Update
US Department of Labor Makes Important Administrative Pronouncements
On July 6, 2015, the U.S. Department of Labor issued proposed regulations that could have a sweeping effect on the number of employees entitled to overtime pay. In addition, on July 15, 2015, the Department issued an Administrator's Interpretation, stating that most independent contractors are actually employees under the Fair Labor Standards Act (FLSA).
Overtime Rules
Under the FLSA, an employee must be paid time-and-a-half for work performed in excess of forty hours per week unless they fall within an exemption. In order to be classified as exempt, an employee must be paid a minimum salary and perform certain executive, administrative, or professional duties. The current minimum salary is $455 per week, or $23,600 annually.
Under the new proposed rule, the minimum salary for a worker to qualify as exempt would be raised to $50,440. The proposed changes would also raise the annual salary threshold for highly compensated employees from $100,000 to $122,148. The last significant proposed change seeks to automatically adjust these thresholds each year. If the rule is implemented, it is estimated that over 5 million workers that are currently exempt will no longer qualify, and will have to be paid overtime.
Independent Contractor Misclassification
Like many other federal and state agencies, the Department of Labor has been focusing in recent years on the misclassification of workers as independent contractors. Because labor laws only apply to employees, classifying workers as independent contractors is often seen as a means of avoiding burdensome regulations, or reducing payroll expenses.
As explained in an earlier Client Alert, a 6-factor test is used to decide whether a worker is an independent contractor under the FLSA. While not departing from that framework, the Department plainly stated that in its view, "most workers are employees under the FLSA's broad definitions." It reached this conclusion by introducing a new consideration - the economic dependence of the worker, and by interpreting the six factors in new and aggressive ways. According to the Department, "Ultimately, the goal is not simply to tally which factors are met, but to determine whether the worker is economically dependent on the employer."
What to do
Although the overtime rules will not be finalized for some time, the Department has clearly indicated its intention of expanding the number of employees entitled to overtime pay. As such, employers should begin evaluating possible steps that can be taken to minimize the economic impact of the new regulations. This could include raising the salary of employees to meet the new standards, hiring new staff and limiting overtime, giving workers more responsibilities, or reclassifying workers from exempt to non-exempt.
The Administrative Interpretation on independent contractors does not carry the weight of a law or court decision, but plaintiffs will undoubtedly use it in future legal proceedings to argue for an expansive definition of employment. Although the traditional factor analysis remains, the concept of economic dependence has now become central, and could reshape this area of law. Now more than ever, employers should evaluate their use of independent contractors to ensure they are truly working with self-employed individuals.
If you would like more information about these developments, or have questions about your employment policies and practices in general, please contact Mr. Gonzalez at 312-558-9779 or at egonzalez@elvisgonzalezltd.com.