As US employers are preparing for the changes introduced by the Final Rule on Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees (“the Overtime Rule”) as of Dec. 1, 2016, employers of contingent labor, who are in many cases joint employers of their contingent workforce, will want to be satisfied that their suppliers are properly compliant.
The Fair Labor Standards Act (FLSA) requires employers with revenue of $500,000 to pay their employees at least the federal minimum wage (currently $7.25 per hour), and 1.5 times his or her regular hourly wage for all time worked over 40 hours in a week, unless an employee is exempt.
The FLSA provides exemptions from the general overtime rule for any person employed in an executive, administrative, or professional capacity if all the relevant tests relating to the employee’s duties and responsibilities are met. In addition, there are exemptions for outside sales and computer employees. Subject to some exceptions, an employee must meet the following three tests to fall within one of these “white-collar” exemptions:
- the employee must be paid a predetermined and fixed salary that can’t be reduced because of variations in the quality or quantity of work performed (“salary basis test”);
- the amount of salary paid must meet a minimum specified amount (“salary level test”); and
- the employee’s job duties must primarily involve the duties of an executive, administrative, or professional employee as set out in regulations (“duties test”).
The Overtime Rule makes the following changes to overtime:
- Standard salary level increases. It increases the standard salary level from $455 per week, or $23,660 annually, to $913 per week, or $47,476 annually. This figure is calculated using the 40th percentile of full-time salaried workers in the lowest-wage census region. This region is currently the South, including the states of Maryland, Virginia and the District of Columbia.
- HCE salary level increases. It also increases the total annual compensation for highly compensated employees (HCE) to the annual equivalent of the 90th percentile of full-time salaried workers nationally, or $134,004.
- Automatic salary level increases. It establishes a mechanism for automatically updating the salary and compensation levels every three years, to maintain the levels at the 40th and 90th The first such increase will take place in 2020.
- Salary basis test. It amends the test to allow employers to use nondiscretionary bonuses and incentive payments (including commission) to satisfy up to 10% of the standard salary level (i.e., $4747.60).
Most contingent workers are paid hourly, which automatically rules them out of being exempt, as failing to meet the salary basis test. However, it is possible to pay some workers on an hourly or a “fee basis” and for them to be exempt.
A salary is not a prerequisite for those who meet the duties- and salary-level tests of the administrative and outside-sales exemptions. If the employee is paid an agreed sum for a single job, regardless of the time required for its completion, the employee will be considered to be paid on a “fee basis.” It is also not a requirement to pay a salary for computer systems analysts, computer programmers, software engineers, and other similarly skilled workers in the computer field who would otherwise fulfill the tests applicable to the computer exemption, or those workers whose level of skill and knowledge meet the duties criteria for the professional exemption.
However, in all cases, except the outside sales exemption, the employee must be paid the equivalent of $913 per week or $47,476 annually.
In some cases, a client may use contingent workers in roles alongside their own traditional employees whom they classify as exempt. This may give rise to a legitimate expectation that the contingent worker is also exempt and an assumption that they should not be charged time and half for hours worked over 40 in a workweek by those contingent workers.
It is feasible that contingent workers in IT, sales, design, education, legal, and medicine may meet the relevant duties tests in order for one of these exemptions to apply. However, it is important for clients and their suppliers to seek detailed legal advice pertinent to the particular duties the workers in question will be required to perform, on a case by case basis if necessary.
Unless they also receive compensation of $47,476 or above, annually and are paid on a salary or “fee basis” if applicable, they will not be exempt.
As the spotlight shines on the issue of overtime, it is an opportunity for client employers to ask their suppliers how they comply with overtime in relation to the contingent workforce. Often the biggest issue is controlling the hours worked by agency workers. Some employers impose a ban or attempt to limit overtime but employees must be paid for work “suffered or permitted” by the employer even if the employer does not specifically authorize the work. If the employer knows, should know, or has reason to believe that the employee is continuing to work, the time is considered compensable hours worked.
Overtime hours and pay should be addressed in negotiations between the client and staffing suppliers. In particular, such discussions should address any restrictions or approvals required before workers exceed 40 hours in any workweek; and payment for hours that may not be viewed as “work,” but which are compensable time, such as waiting time and travel.
Whether waiting time is hours worked depends upon the particular facts and circumstances. According to the Department of Labor’s guidance if an employee is made or “engaged to wait” by the employer, the time spent waiting will be compensable. If the employee is voluntarily “waiting to be engaged,” such time is not compensable. In most cases, there will be no dispute but it is always worth specifying the work that is considered compensable in the contract to avoid any disagreement in the future.
It is estimated that up to 4 million more workers will benefit from the new overtime rules, and many employers will need to take action to comply with the changes. The contingent workforce may be the least of an employer’s concerns.