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DOL’s 2015 New Year’s Resolutions: Increased Enforcement, Worker Classification, and the FLSA’s White Collar Overtime Exemptions

December 11, 2014

As the New Year approaches, the Department of Labor (DOL) has identified three key issues facing employers:  (1) pervasive violations of federal and state minimum wage and overtime laws; (2) extensive subcontracting and outsourcing, with the result that employers are misclassifying workers as independent contractors rather than employees; and (3) DOL’s new proposed rule to revise the Fair Labor Standard Act’s (FLSA) overtime exemption for “white collar” employees.  DOL identified these priorities in a panel held this month entitled “Enforcement Matters: How Workplace Law Enforcement Can Boost Americans’ Wages and Strengthen the Economy,” where Secretary of Labor Tom Perez was the keynote speaker, and which coincided with a new DOL report “The Social and Economic Effects of Wage Violations: Estimates for California and New York,” estimating the impacts of state and federal minimum wage and overtime pay violations.

In its recently released report, DOL noted that approximately three to six percent of employees covered by the FLSA in New York and California experience minimum wage violations.  To combat this problem, the federal government, state governments, and industry partners have strengthened enforcement efforts.  At the federal level, the Obama administration has expanded the number of investigators, which dropped by about twenty percent during the Bush administration.  DOL’s Wage and Hour Division collected approximately $250 million in back wages from employers this past fiscal year.  At the state level, in California, the Division of Labor Standards Enforcement has emphasized doing investigatory work into a particular business before conducting an on-site investigation to be able to identify red flags and conducting investigations during non-regular business hours.  In New York, the Attorney General’s Office has focused on criminal enforcement where employers have repeatedly violated wage laws or refused to pay any wages to employees.  These enforcement efforts have targeted in particular the restaurant industry.  In San Francisco, for example, the state government recently recovered $4.25 million for a group of 280 restaurant workers who were paid less than minimum wage and whose tips were taken by their employers.

Another problem identified by the panel was employers’ increased reliance on outsourcing through subcontracting, licensing, or third party management, so that the employer has no responsibility for its workers.  As a result of the ever-growing pressure on businesses to remain competitive, businesses have turned to subcontracting as a way to cut costs and focus on the business’s core competencies.  The result is that these workers, who would have in previous years been classified as employees, are in some cases being misclassified as independent contractors.

Lastly, DOL plans to address the “white collar” overtime exemption regulations in the New Year.  Currently, most workers covered under the FLSA must receive overtime pay of at least 1.5 times their regular pay rate for hours worked in excess of forty hours per week. [1]  However, regulations regarding exemptions from the Act’s overtime requirement, particularly for executive, administrative, and professional employees (often referred to as “white collar” exemptions), have not kept up with rising wages and inflation.  For this reason, President Obama has directed DOL to modernize those exemptions.  Although the Department’s goal for publishing a proposed rule was November 2014, DOL has now said that it plans to propose a rule in early 2015. [2]

Given DOL’s focus on increased enforcement of wage and overtime laws and misclassification of employees as independent contractors, employers should ensure that they are properly classifying employees.  Under the FLSA, only certain employees are exempt from the minimum wage and overtime pay provisions, such as executives, administrative employees, professional employees, certain computer specialists, outside salespersons, and highly compensated workers.  Employers should closely check the terms and conditions of an exemption in light of the employee’s actual job duties before assuming that the exemption applies to the employee.  The ultimate burden of supporting the actual application of an exemption rests on the employer.

In regard to potential worker misclassification, employers should carefully examine the structure of their relationship with the worker.  In performing an employee-independent contractor determination, the government looks at the degree of control and independence of the worker.  The more control the employer has over when, where, and how the worker performs, the higher the probability that the worker will be deemed an employee.  The start of a new year is a good time to self-audit worker classifications and exemptions with outside counsel so that the audit results are protected under the attorney-client privilege.  These audits can generally be provided on a fixed fee basis and can reduce potential back wage and tax liability.

*Nina S. Rustgi, a Wiley Rein LLP law clerk, contributed to the drafting of this alert.

[1] Updating and Modernizing Overtime Regulations, 79 Fed. Reg. 15211, 15211 (Mar. 18, 2014).