Changes To “White Collar” Salaried Employee And “Independent Contractor” Exemptions

Be Aware of Changes To “White Collar” Salaried Employee And “Independent Contractor” Exemptions Or Risk FLSA Liability.

The United States Department of Labor (“DOL”) has recently taken several significant actions that impact or will soon impact employers’ obligations under the Fair Labor Standards Act (“FLSA”).  First, the DOL has issued proposed rules altering the salary threshold requirement for exempt white collar employees.  In addition, the DOL has issued an Administrative Interpretation clarifying the DOL’s position on “independent contractor” classifications.  These issues have the potential to significantly alter obligations for employers.

The “Salary Test” For White Collar Exemptions Will Substantially Change.

On March 13, 2014, President Obama issued a presidential memorandum directing the DOL to update certain regulations pertaining to overtime regulations under the FLSA.  Since that time, there has been much discussion about what those changes would encompass.  On July 6, 2015, the DOL issued its proposed new regulations and the public comment period has since come to an end.  It is anticipated that the final rule will be issued as soon as the fall of 2016, or possibly later.

In sum, the proposed changes are designed to update the white collar salary requirements. The proposal would move the present $23,660 annual salary threshold to $50,440.  In addition, the DOL intends to include a provision which would automatically update the salary threshold over the course of future years.

The move to more than double the salary threshold is likely to remove approximately 5 million workers from meeting this exemption according to the federal government.  This means employers would either need to restrict such workers from working overtime or pay them overtime rates.  In either event, it stands to have a substantial financial impact on employers even without taking into consideration the possibility of increased liability and litigation. As the final rule is issued and employers begin analyzing whether any of its employees are affected by this new requirement, it would also be an excellent opportunity to revisit and evaluate whether your company is in compliance with all other aspects of the FLSA and its nuanced exemptions.

The DOL Changed How “Independent Contractor” Status Will Be Analyzed.

The DOL also issued an Administrative Interpretation of already existing regulations concerning the definitions and classifications for independent contractors.  The DOL, operating under the assumption that employers have abused the independent contractor classification to avoid associated costs, seeks to shift the focus of the analysis away from the “control” aspect and instead focus on the “economic realities” aspects.

The Administrative Interpretation emphasizes that very few workers should qualify as independent contractors.  It discusses each of six factors and provides a useful example of applying these principles to each factor.  As a refresher, the six factors analyzed by most courts are as follows:  (1) the extent to which the work performed is integral to the employer’s business, (2) whether the worker’s managerial skills affect his or her opportunity for profit or loss, (3) the relative investments in facilities/equipment between the employer and the worker, (4) the worker’s skills and initiative, (5) the permanency of the worker’s relationship with the employer, and (6) the nature and degree of control exercised by the employer.

The Administrative Interpretation discusses the application of the six recognized factors but highly discourages relying significantly on the “degree of control” factor.  Rather, it encourages focusing on the “economic realities” of the situation.  In other words, a greater focus should be placed on whether the worker is economically dependent on the employer instead of focusing on whether the worker works offsite or is subject to supervision.   Further, the Administrative Interpretation states that an agreement between an employer and a worker concerning the independent contractor status essentially has no bearing on the determination and “is not relevant to the analysis of the worker’s status.”

Conclusion: The Changes Are Significant, The Liability Exposure is Large, And Personal Liability Could Ruin A Business, Its Owners And Its Managers.

It is abundantly clear–both from the proposed rule altering the salary threshold for the white collar exemptions and from the Administrative Interpretation of the independent contractor test–that the DOL is attempting to restrict the white collar exemption and afford overtime to as many workers as possible. Employers must keep abreast of these changes, analyze them carefully and closely, and make any warranted modifications to their policies and practices.  Even after taking these steps, litigation is likely to ensue as plaintiffs’ attorneys seize on these changes as an opportunity to file additional claims, especially as class actions.

Those employers that have analyzed the impact of these changes will be well-suited to defending such claims.  Those that bury their heads in the sand will be learning the hard way that non-compliance under the FLSA is costly.  Also, do not forget that company owners and higher level managers may have personal liability under the FLSA.  If owners/managers have the power to hire and fire employees, the power to determine salaries, the responsibility to maintain employment records and other signs of operational control over significant aspects of the company’s day-to-day functions they could have personal liability for FLSA violations.  The FLSA is truly one of those areas where an ounce of prevention is worth a pound of cure.

If you have questions about this article, please contact an attorney at Mallery & Zimmerman.