Employee Misclassification

I suspect you have all heard by now, but on September 5, 2017, Judge Mazzant of the Eastern District of Texas declared the proposed overtime overhaul regulations to be invalid. As a result, the minimum salary levels remain as before the revisions -$23,600 annually, or $455 per week. For highly compensated employees, the amount will remain at $100,000 annually.

I know what you’re thinking – I did all that work and preparation for nothing!?  Fear not!  With a few exceptions, this was actually a good exercise for many employers who, upon doing an internal audit, discovered that based on the duties test, some employees were likely misclassified. Remember, you can never err by paying overtime, only by not paying overtime if the employee is entitled to it. Accordingly, I’d caution advisers to hesitate before reverting an employee back to exempt (no matter how bad they want it to) without really performing an exempt analysis of the position.

So, now what happens?  The U.S. Department of Labor has moved to withdraw its Fifth Circuit Court of Appeals case, and will not appeal the Order. Instead, it has noted its intention to revisit this entire issue, and is seeking public comments on changes to consider making in the future. For employers, continue to evaluate positions as you have been before the revisions, although it wouldn’t hurt to look especially carefully at positions whose annual salary is less than $47,476.

checklistThe old adage is right on – prepare for the worst and hope for the best. In this case, my spring cleaning tip #3 is to review your policies, practices and records as if the U.S. Department of Labor (DOL) were to investigate your business practices tomorrow.  A few issues I’ve dealt with (a lot) this year are listed below:

  • Verify employees are properly classified as exempt/non-exempt.
    • Pay particular attention to sales employees, marketing, and office workers.
    • The DOL overtime regulations overhaul is still on hold pending the Trump administration’s decision whether to pursue the appeal. However, as I mentioned before, the DOL’s revised salary threshold was not all that far from what is usually reality for what an exempt person makes in many industries (excluding small business owners, small towns, etc.). Point is, just because it is on hold does not mean you shouldn’t ensure that salaried employees meet the duties test (and current salary threshold).
  • Ensure independent contractors are properly classified.
    • Have a contract with the entity, and keep records of payments made and Form 1099s.
    • Think twice before a former employee is made an independent contractors…no matter how badly the individual asks for it.
  • Be sure you are properly calculating travel time for non-exempt employees.  I’ve blogged about this in the past as this can get very tricky.
  • Ensure employees are provided “sufficient time” to eat a meal.  Record meal time on time cards for hourly employees.
  • Recordkeeping – these are the easiest violations to spot. You’ve either kept the required records or not.
    • Have a document retention policy and use it.
  • Have employee time cards accessible for three years.
  • Have payroll stubs/history and employee wages accessible for three years, including W-2s.

Keep in mind that, should you receive a visit, the DOL investigator is just there to address and audit compliance with federal wage and hour laws. I just sat in an audit where the DOL investigator instructed the employer as to a withholding issue that is inconsistent with Minnesota law. Accordingly, recall that just because the FLSA permits something, does not mean that Minnesota law allows it. If Minnesota laws are more strict (advantageous to employee), Minnesota law must be followed instead.

The United States Department of Labor has added yet another website, this time providing a framework for individuals to research whether they are properly classified as an “independent contractor” or an “employee”. This new site provides information about pay and misclassification; health and safety concerns on the job; unemployment insurance and misclassification; anti-retaliation/anti-discrimination rights; federal taxes and misclassification; health care and retirement benefits; and state and federal government resources. Why is classification important? Independent contractors have no taxes withheld (responsible for paying their own), are not provided benefits, minimum wage, overtime, fringe benefits, unemployment compensation, workers’ compensation and the like through the hiring business. So, the DOL is responsible to ensure that an employer does not skirt those obligations by falsely labeling a worker.

There has been no change in the law, just heightened awareness and enforcement. Accordingly, employers who are heavy users of independent contractors (outside of the computer sciences arena) should take a look at how the individual is being utilized to ensure a true independent contractor relationship is appropriate. There is no bright line test, unfortunately, and the IRS, DOL and courts all have different factors they consider. The IRS uses the “control test” which looks at the degree of control over the worker based on three areas: (1) behavior control; (2) financial control; and (3) the relationship of the parties. For more information on this method, click here. Keep in mind that, especially with long-term independent contractors, if the degree of control changes, a worker may start out in one classification and end up in another. Thus, when you are doing an HR audit of wages and compensation, that is a good time to also look at your independent contractor classifications as well.

 

 

clickAs a result of President Obama’s White House Summit on Worker Voice, on October 28, 2016, the U.S. Department of Labor’s Wage and Hour Blog announced its new beta website – Worker.gov. This website is, according to the DOL, designed to provide “easy-to-access” solutions for employees who need answers “fast”. The DOL admits that “Even the best government websites can be difficult to navigate” – true, true. That being said, it makes it only about 4 clicks for a worker to file a claim electronically.

In short, the website, which is in beta and therefore undergoing constant changes, is designed to provide employees with an easy way to determine whether their rights are being violated, then provides them with a simple click to file a claim against an employer. Partnering with the NLRB, EEOC, and DOJ, the DOL wants the website to provide “critical information” to employees about their rights, who may not know whether they have a “FLSA” or “FMLA” problem, but an “unfairness-on-the job problem”. Employees answer a “few simple questions” and voila! The website will supposedly provide the relevant information, expanding in the weeks and months to come, and “learning” from the workers that use it about what kind of information is being sought – and the site will supposedly begin to feature that information prominently for similar workers.

The beta site provides a drop down, under which five job titles are currently available – day laborer; office worker; nail salon worker; restaurant worker; and construction worker. From there, it takes to you a “Tell Us what happened. We can help.” screen with several options such as – “You have the right to be treated equally.”, “You have the right to engage with others to improve wages and working conditions”, “You have the right to a safe and healthy work environment”, and “You have the right to be paid.”  From there, the employee can chose what happened (i.e. suggestions – all are in the negative – such as “I was not paid for work I performed”) , and then be taken to a “File a Claim” screen.

What does this mean for employers? I have to believe we will see an increase in filed complaints, as that is the whole purpose of the website – to make it easy for employees to complain about unfair work treatment – and provide a simple click to do so.

MinneapolisMinneapolis recently “reaffirmed” its commitment to the 2015 Minnesota Responsible Contractor Act, Minn. Stat. 16C.285, and enacted additional factors and implementation procedures when determining whether a contractor is “responsible” for purposes of being awarded public construction projects.  Are you a responsible contractor?  If you are a contractor doing business with the State of Minnesota pursuant to a contract of over $50,000, you must be, or you may be prohibited from doing business with the State.  For more information on the actual Act, click here for the Minneapolis PowerPoint presentation.  In any event, the Act states that a contracting authority (such as a city), may establish “additional factors for defining contractor responsibility.”  Of course, Minneapolis has done just that.

On April 21, 2016, Minneapolis passed Resolution No. 2016R-127, stating that, in order to be “responsible”, a contractor must verify that, for the past 3 years, it has not violated the requirements for payment of wages for construction work as provided by any Minneapolis ordinance, resolution, policy or contract.  Specifically, the contractor must not have had to pay back wages or penalties in excess of $10,000 on one or more projects during this 3 year period.  Further, the contractor must not have made any false statements in a verification of compliance submitted to Minneapolis during the 3 year period.

How is this implemented? Contractors should see these additional factors in solicitation documents for all covered projects. Keep in mind, nobody is excluded; it applies to the general and subcontractors alike. Failure to comply with these new procedural requirements will render the contractor ineligible to be awarded the bid.

 

Salary plus overtimeFollowing the big news about the overtime regulations overhaul, I’ve been fielding several calls from concerned HR professionals regarding the actual conversion of certain employees (paid less than $47,476) from exempt to non-exempt by December 1, 2016.  As I predicted, many employees are already voicing concerns about not being paid a salary (and thus, not having a definite salary each workweek, even when 40 hours are not worked). While not interchangeable, people often will say employees are either exempt (salary) or non-exempt (hourly). However, this is not the case.  As I touched upon in my earlier post announcing the new overtime regulations, a non-exempt employee can actually be paid a salary. Here’s how, in 3 easy steps.

Step 1: Pay the Employee a Salary of At Least Minimum Wage 
First, the employee is not exempt from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime protections.  This means no matter what, the employee must be paid at least minimum wage for all hours worked in a workweek. Federal minimum wage is currently $7.25/hr. Minnesota minimum wage is currently between $7.25/hr. and $9/hr., depending on the employer size. Accordingly, a non-exempt employee’s salary must be at least $7.25 x 40 = $290/wk (small employer) or $360/wk (large employer).  Annually, this equates to $15,080 and $18,720, respectively.  However, for the most part, employers will typically use this method for paraprofessional employees (that will be misclassified as of December 1) in the $30k-$47k range, so the minimum wage issue is rarely a factor.  Either way, the employee’s salary must be at least (but can be more) the minimum wage.  Keep in mind too, the whole point is that if the employee works LESS than 40 hours, you are still going to pay the salary. Thus, the employee has a guaranteed income each week, no matter what.  Work gets slow, the employee gets the salary.  Work gets crazy, the employee gets the salary (plus overtime).  However, as you’ll see below – the employer actually pays less for overtime each hour the more overtime the employee works, so it is generally a wash in the long run.

Step 2: Pay the Employee Overtime at the “Regular Rate” for the Workweek

Next, the employee must, like any “hourly” employee, record all hours worked. There are several ways this can be done, which I blogged about here. Why? Because the employee is not exempt from the FLSA, the employee is entitled to overtime (time-and-a-half), for all hours worked over 40 in a workweek (or 48 hours in a workweek for Minnesota businesses if the FLSA does not apply to your business – I’ll stick with FLSA 40 hours for this example).   So, the employee’s paycheck will show the salary for 40 hours plus the additional pay for overtime hours at 1.5 x the regular rate.  What is the employee’s “regular rate” for overtime purposes if the employee is paid a salary?  The regular rate is (unlike an hourly rate), an hourly rate that is determined by actual hours worked and actual monies paid to the employee for a workweek.

To determine the regular rate for any workweek (for a salaried employee), divide the total compensation paid to the employee in the weekly payroll by the total number of hours actually worked in that workweek.  For example: $500/40hrs = $12.50 (regular rate).  $500/45hrs = $11.11 (regular rate).  $500/50hrs = $10.00 (regular rate).  As I noted above, the overtime rate will actually decrease with each additional hour worked.  Thus, the overtime rate for working 45 hours in this example is $11.11 x 1.5 = $16.66.  The overtime rate for 50 hours is 10 x 1.5 = $15.  While this seems odd (that the employee actually gets paid less overtime the more he or she works), the trade off is that the employee makes his or her salary even when working less than 40 hours in a workweek.  Otherwise, if the employee was a straight hourly worker, let’s say $12.50/hr, the overtime is always going to be $18.75, but the employee will only get paid for actual hours worked at the $12.50.  So, if the employee only worked 30 hours in a workweek, the employee would only get paid $375 that week versus the $500.

Also, many employers have pay periods of two week or more.  In this case, the “regular rate” still needs to be broken down to a workweek.  In the case of a semimonthly salary, multiply the salary by 24 (number of payrolls in the year) and divide by 52 (number of weeks in the year).  In the case of a monthly salary, multiply the salary by 12 (number of payrolls in the year) and divide by 52 (number of weeks in the year).  If the employee agrees, the regular rate for a monthly salary may also be determined by dividing the number of working days in the month and then by the number of hours of the normal or regular workday.  I know you know this, but again, the resulting regular rate may never be less than minimum wage for a non-exempt employee (even if salaried).

Step 3: Pay the Employee Additional Overtime After a Non-Discretionary Bonus

Finally, if a non-exempt employee is paid a non-discretionary bonus, that bonus must be layered into the corresponding pay period and included in the “regular rate” (hourly rate) in order to determine the rate for overtime. Remember, as I noted above, the regular rate is used to determine the overtime rate – and the regular rate is determined based on “actual” compensation – which includes all compensation paid to the employee for work (even if that compensation is paid in a later payroll).  Non-discretionary bonuses are compensation paid to the employee for work – unlike discretionary (“just because”) bonuses – such as holiday bonus, summer bonus, whatever.  I won’t lie – this is an administrative nightmare for your accounting team.  For example, the employer must determine what workweeks the bonus is related to (monthly bonus, quarterly bonus, something else?), and then add that compensation to the already earned compensation for that time period, then pay additional overtime for the overtime hours worked during that time period on the now-increased regular rate.  While daunting – it can be done – and in the case of these paraprofessionals who are not often given a nondiscretionary bonus, it can still be worth it.  See my post here for a step-by-step on this process: Paying An Additional Overtime Premium After Paying An Additional Overtime Premium.

So, there you have it.  Three easy steps – (1) pay the salary; (2) pay the overtime based on the regular rate; and (3) pay the additional overtime on any non-discretionary bonus paid.  Voila!

DOL Wage Hr DivThe wait is finally over!  Tonight the Department of Labor (DOL) announced that it is releasing the final rule tomorrow, May 17, 2016, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees” which will mandate the new minimum salary level to be $913/wk or $47,476 per year. The DOL’s Fact Sheet was released tonight, along with a wealth of information that is available such as Q&A, Comparison Table of the proposed rule and final rule, a Small Entity Compliance Guide, a Guidance for Private Employers, and many others. Commonly referred to as the “white collar exemption”, the Fair Labor Standards Act (FLSA) provides that all employees subject to the FLSA are entitled to overtime, unless they are otherwise exempt.  The actual rule was not released (go figure), so I’ll certainly post an update tomorrow (probably when you are reading this anyway as I’m having my wage and hour geek-out tonight).  Although, according to one of the fact sheets, the Final Rule should be posted here: dol.gov/whd/overtime/final2016.

In order to exclude an employee from minimum wage and overtime requirements, three thresholds must be met: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work (the “salary basis test”); (2) the employee’s salary must be a minimum amount (the “salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative or professional duties as defined by the FLSA (the “duties test”).  Neither the salary level test nor the salary basis test applies to outside sales (I stress outside).  The Rule does not change the duties test.

Increased Salary Level & 3 Year Automatic Updates

As I wrote about in my earlier post when the rule was in the approval phase, the current threshold for executive, administrative or professional employees is that the employee must be paid a salary of at least $455/week ($23,660/year).  The significant change is that this base threshold is now increased to $913/week ($47,476/year) effective December 1, 2016.  For Computer-related employees, they may be paid the $913/wk or at least $27.63/hr.  The threshold for “highly compensated employees” (these folks do not need to meet the duties test because it is presumed they will meet it since they are highly paid) is increased from $100,000/year to $134,004/year effective December 1, 2016. Notably, unlike before (the previous thresholds were set in 2004), the new rule provides that the salary and compensation thresholds will be automatically updated every three (3) years, the amounts of which will be posted in the Federal Register at least 150 days prior to their effective date.

Also, keep in mind that there are, as always, quirks and nuances to the new rule and this blog is just a general overview of what’s to come.  For example, employees may be paid on a “fee basis” rather than a “salary basis”.  In this way, the employee is paid an agreed sum for a single job, no matter how long it takes.  However, to determine if the fee payment meets the threshold, you consider the time worked on the job and determine if that payment is at a rate that would equal at least $913/week if the employee worked 40 hours.  Thus, a computer programmer is paid $800 to fix an app and takes 10 hours to do so, this meets the test as $800/10=$80/hr x 40 = $3,200 (much more than $913).

Don’t Forget About the Duties Test – the Employee Must Be “White Collar”

Regardless of an employee’s salary, an employee may make more than the threshold amount and still not qualify for the exemption. Continue Reading Overtime Exemption Rule Announced: $47,476 Is the New $23,600, Effective December 1, 2016

DOL iphone-logoOn March 14, 2016, the Department of Labor submitted its “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees” final proposed rule to the Office of Information and Regulatory Affairs.  Commonly referred to as the “white collar exemption”, the Fair Labor Standards Act (FLSA) provides that all employees (subject to the FLSA) are entitled to overtime…unless…they are otherwise exempt.

Changing Weekly Wage Thresholds

Currently, one of the thresholds for “executive, administrative or professional employees” is that the employee must be paid a salary of at least $455/week ($23,660/year).  The significant change is that this base threshold will be increased to $921/week ($47,892/year).  The same sort of threshold for “highly compensated employees” is being increased from $100,000/year to $122,148/year.  Notably, unlike before (the previous thresholds were set in 2004), the new rule provides that the salary and compensation thresholds will be updated on an annual basis with 60 days notice in the Federal Register.  In addition, the revisions will clarify that an employer may pay an exempt employee additional compensation (bonus) without violating the salary basis requirement, so long as the employee makes the minimum $921 per week.

“White Collar” Work Still Required

Having done my fair share of wage and hour audits for employers, and defending lawsuits regarding overtime misclassification (exempt v non-exempt), this new rule actually is not too far off from reality from what I’d find after a quick review of a job description.  Two workersEmployees who are classified as exempt but making less than $50,000 – that is a number I often use when doing the first sweep for potential misclassifications (I like round numbers) – are rarely properly classified.  If an employee is making less than $50,000, the chances are pretty low that he or she: (1) has primary duty of the performance of office or non-manual work directly related to the management or general business operations; (2) has independent discretion with matters of significance or supervises two or more employees; or (3) is in an advanced field of science or other specialized prolonged education background, is a specialized creative artistic field, is a school teacher, or computer analyze/programmer/engineer.

43 Million Workers Will Be “Misclassified” – Time to Audit

The Department of Labor estimates this regulation revision will affect 43 million workers, 21.4 of them misclassified as executive, administrative or professional employees.  So, how do employers handle the new regulations?  First, now is the perfect time to do an internal wage and hour audit with employment law counsel and get your ducks in a row.  It is not every year that employers who may have one (or several) employees on the fence, have a good reason to look at and reclassify employees.  It is not usual for an employer during a wage and hour lawsuit to look at payroll practices and then realize that as the company has grown or job descriptions change, employees may not be properly classified.  How do they fix it without throwing out red flags to employees that they may have been misclassified (and thus owed backwages, etc.)?  Enter the regulation overhaul.  Now is the time to do that audit, or shortly after the new rule is finalized, and make a sweep of your salaried classifications.

There are certainly employee perks with being paid a salary (consistent minimum paycheck) – and many will take a re-classification to non-exempt as a demotion of sorts.  Accordingly, how can an employer handle this issue with an employee who is seen as professional but makes less than the threshold?  Don’t forget – the FLSA mandates that overtime be paid after 40 hours a week.  That does not mean the employee cannot be paid a salary PLUS overtime!  I shock many employers with this little known concept.

Regulations Still Allow Salary PLUS Overtime – Bridge For Transitioning to an “Hourly” Employee

So, here it is… an employee who is not exempt from the overtime regulations must be paid time and a half (1.5) for all hours worked over 40 in a week (unless they are paid under the fluctuating workweek method, but that’s a whole other issue for mostly seasonal employers).  That employee may be paid hourly plus overtime or a salary plus overtime.  An hourly employee is going to have fluctuating hours each paycheck typically – some weeks he or she may be paid less than 40 hours, some weeks more (unless you prohibit overtime which is also okay so long as you pay when they go over – you can still discipline for that).  This is typical for a “blue collar” type worker.  However, many office workers or lower sales type folks would expect a salary.  That employee may be paid a set weekly salary plus overtime.  DollarsSome weeks that employee may work less than 40 hours, but they still get their salary.  If they work more than 40 hours they get their salary plus overtime.  Yes, the employer ends up paying more, but this is a very common occurrence in middle management, new professionals, or long-term highly valued support staff or other employees.

Don’t Forget About Bonuses Affecting Overtime!

Last cautionary note (I could talk about wage and hour all day)…don’t forget about bonuses for non-exempt employees!  If a non-exempt employee is paid a non-discretionary bonus, that bonus must be layered into the corresponding pay period and included in the “regular rate” (hourly rate) in order to determine the rate for overtime.  This is something that few employers realize, and many dread as an administrative nightmare.  Not only is the issue of a bonus discretionary or non-discretionary, but then how it affects the regular rate can be daunting.  For example, after paying a non-discretionary bonus, the employer has to go back and pay an additional amount for the overtime hours worked.  But I digress and get off track – if you want a quick overview – the DOL has some great examples.

In short, the final rule is coming, so it is now the time to embrace the change and prepare for its enactment.  If you haven’t done a wage and hour audit from top to bottom, now is the time.  It is easy to knock out the top and the bottom folks, but it is the middle that employers need to take a good, hard look at.