The new rules were/are to apply to employees – not business owners or independent contractors (see http://tucsonazrealestateattorneys.com/spring-newsletter-2016.pdf for an analysis of employees versus independent contractors and http://tucsonazrealestateattorneys.com/MMBM-Newsletter-Summer-2016.pdf for the new Arizona law with safe contract provisions for independent contractors) – for overtime pay. The rules were to take effect on December 1, 2016, significantly raising the cost of human resources for many employers. Then, a week before its effective date, a federal judge in Texas issued an injunction to consider the legality of the federal Department of Labor’s new rules.
The Background: Since the Fair Labor Standards Act (FLSA) was adopted in 1938, the law has been that any employee who works more than 40 hours in a work week shall be paid overtime at a rate of time and ½. There is no provision exempting small employers; the law applies for even one employee. There are exemptions to the requirement for overtime for various white-collar salary positions. However, those exemptions are specific and limited. The exemptions from overtime include a duties component and a salary component. The 2016 changes impact only the salary component; the duties component remains the same.
The Duties Exemptions: There are exemptions from overtime for the following:
Executives, whose primary duties are management and supervision of at least two other full-time employees and must have authority relating to hiring and firing https://www.dol.gov/whd/overtime/fs17b_executive.pdf
Administrators, whose primary duties must be the management or general business operation and include the exercise of discretion and independent judgment https://www.dol.gov/whd/overtime/fs17c_administrative.pdf
Professional, whose primary duties involve advanced intellectual knowledge in a field of science or learning and which involves specialized instruction https://www.dol.gov/whd/overtime/fs17d_professional.pdf
Computer Employees, whose primary duties in those areas of computer systems sound foreign to mere mortals https://www.dol.gov/whd/overtime/fs17e_computer.pdf
Outside Sales, whose primary duties are obtaining orders away from the employer’s place of business https://www.dol.gov/whd/overtime/fs17f_outsidesales.htm
The Changes: In addition to the duties component, for employees to be exempt from overtime pay, they had to earn at least $23,660/year or $455/week. This amount has not increased since 2004. If the new rules go into effect the catch-up applies: employees must earn at least $47,476/year or $913/week to be exempt from overtime provisions. Wow! More than a 200% increase! The salary is based on the standard salary level equal to the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). And, the salary will be evaluated every three years. So it may increase again in 2020.
The Impact: So what do employers do now?! If the Department of Labor prevails and the rules are allowed, employers must evaluate each job description and determine how to proceed. If an employee already was hourly, there is no change. If employees were validly exempt from overtime provisions under one of the exceptions discussed above, but earned less than a salary of $47,476/year, employers must make decisions quickly. Either the employer must increase the employees’ salary to $47,476 or change the employees to hourly.
The change of salaried employees to hourly involves several complications. Salaried workers are not used to tracking their time. While this law is supposed to prevent the employees from working excessive hours without additional compensation, employees may be offended by the perceived reduction in status. In addition, it is the employers’ obligation to accurately track the employees’ hours. Employees must be compensated for time they are “permitted or suffered to work.” So they cannot just put down 8 hours/day even if they work more or less. If the Department of Labor or Arizona Wage and Hour Division of the Industrial Commission conducts an investigation (because any employee becomes disgruntled and complains or they conduct an industry-wide investigation), it does not matter if the individual employees are not upset (or even cover their ears and say “la, la, la” every time you insist on accurately paying for their time). If there is evidence that the employee worked and was not compensated, the employer will have to pay the employee for the time worked, plus may be penalized in an amount equal to the unpaid wages. The employer will be responsible for two years’ corrections to wages or three years if the violations are found to be “willful.” If an employee sues for a wage and hour violation, in addition to the wages and penalties, the employer may be charged for the employee’s attorneys’ fees.
What to do: For now, plan but wait. If the rules are allowed, employers will need to utilize some accurate time reporting system. For employees who always work in the office, the system need not be complex, but for employees who work remotely, some program where employees sign in by phone or computer would be beneficial. Time reporting gets complicated for off-hours work telephone calls, email and text messages. Wages for time between tasks is based on whether the employees are “waiting to be engaged” (not compensated) or “engaged to be waiting” (compensated). For employees who were salaried and become hourly, these rules will need clarification.
Employers also will need to adopt a policy stating that they intend to compensate employees for all of their work time and requiring employees to record all of their work time. There cannot be a presumption. Employers can require supervisor approval for employees to work overtime, but, even if employees violate that policy, they must be paid for the overtime. The violating employees can and should be disciplined for violating the employer’s rule, but they must be paid for the hours worked. As for compensatory time, it must occur within the same work week or the employee must be paid for the overtime.
For employers who are having difficulty with the transition, I recommend you make a plan to deal with the new rules just in case. We don’t yet know how the federal court will rule or what the Department of Labor will do under the new administration, but it is best to be ready.