The 2016 Overtime Upsurge … Are You Ready?
Michael G. Trachtman
Powell Trachtman Logan Carrle & Lombardo, P.C.
MEA General Counsel
In three very significant ways, the scope of an employer’s obligation to pay overtime will be substantially expanded in 2016 and, for many companies, the changes will be a budget buster. Advance planning can blunt some of the effects these changes will cause, but employers will have to work overtime now to minimize their overtime obligations later.
The Incredible Shrinking “White Collar” Exemption
For decades, the law has exempted certain so-called “white collar” employees from overtime requirements – the exemption includes not only top-level management, but also lower-level managers, supervisors and administrative employees who have significant management and discretionary authority or who are independently responsible for important administrative functions.
In June 2015, the Department of Labor announced a new rule which, when finalized over the next few months, will convert many of these exempt employees into non-exempt employees. For some companies, this will be a jarring cultural and financial change: currently exempt managers, supervisors and administrators – employees who are expected to put in whatever time is necessary to get the job done — will soon have to keep time, and will be entitled to overtime for all hours worked in excess of 40 hours per week.
The exempt/non-exempt distinction will pivot on the amount of annual compensation paid. Now, in order to be treated as an exempt employee, managers, supervisors and administrators must make at least $23,660 a year. Under the new rule, that threshold is slated to jump to $50,440 per year. In other words, employers will be required to pay overtime to all management, supervisory and administrative employees who make less than this threshold – even though they otherwise qualify for the “white collar” exemption.
The stated purpose of the change is to treat lower-paid, “white collar” employees more fairly, but it is just as likely to trigger an array of reactions that will do more harm than good to the new rule’s intended beneficiaries.
For example, many companies I represent are planning to prohibit the soon-to-be-non-exempt employees from working more than 40 hours per week, and will hire part-time personnel to fill in the gaps. Other employers I deal with plan to boost the salaries of managers, supervisors and administrators who make just under the threshold (while reducing benefits and delaying future compensation increases) in order to avoid the overtime requirement. Given current economic realities, companies will doubtlessly find other ways around the rule change, and the effects on efficiency and morale remain to be seen.
Advance planning, starting now, will be the key.
The Demise of the Independent Contractor
In July 2015, the Department of Labor emphatically and unabashedly stated that, in its view, most independent contractors are, in reality, employees, and that many of those employees are non-exempt employees entitled to overtime. The DOL has budgeted tens of millions of dollars to enforce this edict against offending employers, not only on a go-forward basis, but also through retroactive assessments of overtime payments (in addition to, for instance, assessments of FICA and income tax withholding obligations respecting both exempt and non-exempt personnel), plus penalties and interest.
The legal distinction between an independent contractor and an employee is not always clear, but the focus will be on certain key characteristics of an employment, as opposed to an independent contractor relationship. For example, if a worker is engaged on a long term basis to handle a job that is integral to a company’s business, that worker will likely be viewed as an employee. So, too, if the company dictates how and when the worker is to do the assigned work. It’s a “know it when you see it” test, but the DOL’s clear message is that it will lean toward finding an employment relationship whenever it can.
This is an issue that has solid, bipartisan support both in Washington and in state capitals. If you utilize independent contractors to fulfill what might be reasonably viewed as the traditional roles of employees, be forewarned.
The Problem with Loyal and Dedicated Employees
In May 2015, the Department of Labor announced that it was launching an inquiry “on the use of technology, including portable electronic devices, by employees away from the workplace and outside of scheduled work hours.” In other words, the DOL is about to decide if it will require employers to pay overtime to goal-oriented and dedicated non-exempt employees who, for example, prefer to catch up on emails after hours, or want to complete overdue projects over a weekend.
Given the proliferation of electronic devices used in the workplace – including employer-supplied devices – court decisions and other regulatory measures have already turned in this direction, and the writing is plainly on the wall. You can bet that when this inquiry ultimately becomes a DOL regulation, employers will be required to pay for anything beyond trivial amounts of work done after hours, whether or not the employer required it, whether or not the employer even knew about it, and even if the employer forbade it. Employers will be allowed to discipline employees who log unauthorized hours, but the rule will require payment for hours incurred.
Some companies are getting ahead of this curve by implementing and enforcing strict policies – even to the point of cutting off access to the corporate email system after hours. If, in your business culture, non-exempt employees are generally expected to deal with emails or catch up on overdue assignments after hours, you will have to determine whether the benefits are worth the forthcoming costs. If not, it will be well worth the effort to begin a culture shift now – it is very easy to see this train coming down the track.
Let us know if we can help.
Michael G. Trachtman is MEA’s general counsel and the President of Powell Trachtman Logan Carrle & Lombardo P.C., a 30+ attorney King of Prussia-based law firm that has represented businesses and business people for over twenty-five years. He can be contacted at firstname.lastname@example.org See www.powelltrachtman.com for more information.