The current salary threshold for executive, administrative, professional, computer, and outside sales employees is $684 per week ($35,568/year).  Effective July 1, 2024, that figure will increase to $844 per week ($43,888/year).  Then, on January 1, 2025, that figure will jump to $1,128 per week ($58,656/year).  For highly compensated employees, the final rule requires an annual salary of $132,964 by July 1, 2024, which will increase to $151,164 on January 1, 2025.  The final rule also includes a mechanism where all of these salary thresholds will automatically increase once every three years beginning on July 1, 2027.

This is a significant change to the FLSA exemption requirements and undoubtedly will result in more workers being classified as non-exempt and subject to overtime pay.  Bloomberg law anticipates that the change may impact 3 to 4 million workers.  While we expect lawsuits will be filed in an attempt to stop the final rule, the July 1 deadline is quickly approaching.  All organizations should review their employee roster and determine which positions and employees will be affected by the updated salary threshold and plan accordingly.  As always, Felhaber’s team of employment attorneys stands ready to speak with you about these changes and the impact on your organization.

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Note:  How time flies. We first reported on this issue back in October 2022 when the DOL released its proposed rule.  In that post, we discussed some of the (we think interesting) historical underpinnings and context surrounding these issues.  See article here.  

Back to the DOL’s final rule.  It is important to note that it applies only to the FLSA.  That is, for determining whether a worker is entitled to the protection under the wage and hour laws.   Be aware there are other tests and rules to determine independent contactor status depending on the context. For example, the federal Internal Revenue Service has its own rules and regulations for determining the applicability of employee payroll tax withholdings.  Therefore, when determining independent contractor status overall, it is not just about applying one set of rules.

The DOL describes the new rule as “a totality-of-the-circumstances economic reality test” where “no single factor or group of factors is assigned any predetermined weight.”   The primary focus of the analysis is whether the worker is economically dependent on the person or business that is providing the work.

The final rule adopts the following six factors to analyze employment or independent contractor status under the FLSA:

1. opportunity for profit or loss depending on managerial skill;
2. investments by the worker and the potential employer;
3. degree of permanence of the work relationship;
4. nature and degree of control;
5. extent to which the work performed is an integral part of the potential employer’s business; and
6. skill and initiative.

To reiterate, no one factor is determinative and the agency leaves open the possibility that other factors may shed light on whether the worker is in business for themselves versus being dependent on the alleged employer.   The rule provides detailed information regarding the application of each of these six factors.

Bottom Line

Regardless of whether the DOL’s rule will face legal challenges (as noted, it likely will), this development serves as an important reminder to review your independent contractor relationships and undertake a risk assessment.  As the DOL’s new rule makes clear, independent contractor analyses are factually intense.   The facts of any given situation often do not fit neatly within the tests which, in turn, requires judgment calls.   Members of our employment and labor group have the skill and expertise to help you navigate these murky issues.

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Background

Under the FLSA’s overtime pay regulations, employees are entitled to earn one-and-one-half times their regular rate of pay for hours worked in excess of 40 in a workweek. However, the FLSA contains overtime pay exemptions for executive, administrative, professional, outside sales, and computer employees who (1) are paid on a salary basis; (2) are paid at least the designated minimum weekly salary; and (3) perform certain job duties.

Under current law, the salary threshold for exempt employees is $684 per week ($35,568 per year).

Changes Under the DOL’s Proposed Rule

The DOL’s proposed rule contains the following significant changes from current law:

1. 1. Increase the salary threshold that must be met for an employee to be exempt from overtime pay from $684 per week to $1,059 per week ($55,068 per year).
   2. Increase the total annual compensation requirement for “highly compensated employes” to be exempt from overtime pay from $107,432 per year to $143,988 per year.
   3. Automatically update earnings thresholds every three years.

According to the DOL, if its proposed rule becomes law, 3.4 million currently exempt employees who earn at least the current salary threshold of $684 per week but less than the proposed salary threshold of $1,059 would become eligible for overtime pay.

Notably, as part of the proposed rule, the DOL is not proposing changes to the standard “duties” test, which is well known to employers and employees.

Next Steps

The DOL’s proposed rule is not yet the law of the land. Next, it will go through a notice-and-comment period during which interested parties can provide input and suggest changes to the rule. The comment period will be open for 60 days following publication of the rule in the Federal Register.

Once the comment period closes, the DOL will review the comments and determine whether to change the rule before it becomes final.

Bottom Line

If it becomes effective, the DOL’s proposed rule will have significant effects, as millions of currently exempt, salaried employees may become eligible for overtime pay. While the rule still must go through a lengthy process before becoming effective, employers should begin planning and budgeting for its implementation now.

We will continue monitoring the proposed rule. For now, employers should contact their trusted Felhaber attorneys with any questions.

The post Department of Labor Proposes Rule to Make More Employees Eligible for Overtime Pay appeared first on Felhaber Larson.

To understand the context of this proposed rule, it’s important to provide a quick and exciting review of the governmental rulemaking that got us to this point.

For more than seven decades, the DOL and federal courts across the nation have applied an economic realities test to determine whether a worker is “economically dependent on the employer for work” and, thus, an employee under the FLSA.  In determining whether a worker is economically dependent, the DOL and federal courts have historically applied a multifactor “totality of the circumstances test.”  While federal courts have differed on the exact factors to be weighed, they have largely settled on six (see below) with no one factor being determinative.  Then, in January 2021, the outgoing Trump administration published a new rule stating that two “core factors” – (a) the nature and degree of the worker’s control over the work and (b) the worker’s opportunity for profit and loss – should be given greater weight than the remaining factors.  The Biden administration at first delayed the effective date of the new “core factor” rule and then formally withdrew it.  Then, a federal court in Texas ruled that the DOL’s delay and withdrawal violated the Administrative Procedure Act and held that the “core factor” rule was effective as of March 8, 2021.  The Biden administration vowed to implement a new rule, which brings us to this new proposed rule.

The DOL’s proposed rule claims that the “core factor” test “would have a confusing and disruptive effect on workers and businesses alike” since it departs from the extensive case law that has historically applied the “totality of the circumstances” test where no factor has “a predetermined weight” and all are considered as a whole to determine whether a worker is economically dependent on the employer.  These are the six factors set forth by the DOL:

1. 1. Opportunity for profit or loss depending on managerial skill;
   2. Investments by the worker and the employer;
   3. Degree of permanence of the work relationship;
   4. Nature and degree of control;
   5. Extent to which the work performed is an integral part of the employer’s business; and
   6. Skill and initiative.

The proposed rule provides further detail and explanation as to what each of these factors means in practice. It also clearly states that these six factors are not exhaustive and that additional factors may be relevant depending on the circumstances.

The proposed rule will be officially published on October 13, 2022, and the public will have 45 days to comment.

Bottom Line

While the DOL’s rule does not necessarily propose a “new” test to determine independent contractor status, it is important to be mindful of this development if your company works with independent contractors.  The rule will largely revert to existing case law and past practice, but since the “totality of the circumstances” is not a bright line rule, it is important to always contact your trusted Felhaber employment attorney to review and discuss your specific circumstances to ensure compliance with the FLSA and minimize any potential liability from misclassifying workers.

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