Don’t Wager Your Company on Incorrect Wages in 2016

As we transition into 2016, it is essential that employers are aware of and plan for changes to employee wage requirements and the increased emphasis on wage and hour compliance. For at least the past decade, the number of wage and hour claims filed in federal courts has increased exponentially and 2016 looks like it will be much of the same with fuel for a significant rise. In Fiscal Year (FY) 2000, employees filed only 1,935 claims for violations of the Fair Labor StandardIncreasing Money Graphs Act. At the end of FY 2014, that number had increased by more than 420% to 8,160 wage and hour lawsuits filed in federal court. In FY 2015, the trend continued with 8,781 wage and hour cases based on data released by a national law firm from the Federal Judicial Center. This represents a 7.6% rise in these types of suits from 2014. With employees filing wage and hour claims on a much more frequent basis, compliance is of even greater importance and 2016 looks to present some additional challenges on that front.

An Increasing Minimum Wage

Last year, many employers saw an increase in the required minimum wage at the state level, as well as a rise at the federal level for federal contractors. For many states and federal contractors, 2016 will bring another round of higher minimum wages. As of January 1, 2016, federal contractors will have to begin paying their employees $10.15 (up from $10.10) per hour. This change in the wage is based on Executive Order 13658, which calls for an increase in the set minimum wage for federal contractors annually beginning in 2016. Although this increase seems minimal, reflecting the inflation rate, employee wages must be calculated using this rate and employers will be held accountable for ensuring that this new rate has been implemented.

The minimum wage in many states and the District of Columbia will also rise in 2016. For instance, New York’s minimum wage increases to $9.00 as of December 31, 2015 and Massachusetts’ rate changes to $10.00 as of January 1, 2016. D.C. and Maryland will both see increases in their minimum wage, to $11.50 and $8.75 respectively, as of July 1, 2016. Not only do these increases affect the minimum wage an employee must be paid, but they affect the overtime wage to which employees are entitled (one and one-half times the employee’s set hourly wage). Although these changes seem very straightforward, issues can arise when the new minimum wage is not timely implemented and/or certain employees are deemed not to be entitled to overtime because of their classification as exempt employees. It is sometimes difficult to determine the status of an employee as exempt or as an independent contractor, removing them from certain requirements of the FLSA, and this challenge is likely to increase with implementation of new regulations related to exempt versus non-exempt status set to take effect in 2016.

The New White Collar Exemption Rule

Department of LaborThe opportunities to file lawsuits under the FLSA will also likely be impacted by the implementation of the new regulations related to the white collar exemptions. As proposed, the new regulations would increase the threshold salary level to be classified as an exempt employee to more than twice the current level (from $23,660.00 to $50,440.00) and potentially provide for annual raises in the threshold salary thereafter. This change will substantially expand the amount of employees entitled to overtime time pay and likely require an overhaul of employer payroll practices. Furthermore, the Department of Labor (“DOL”) also indicated that it may revise the duties test associated with the exemption classification analysis without really identifying exactly what the new test would entail.

The DOL has stated that this rule, in whatever form it ends up taking, will be promulgated sometime in 2016, but exactly when is still unclear. The DOL received over 270,000 comments on the rule, demonstrating the major debate surrounding this proposal and its public notoriety. The number of comments impacts the process because the DOL must consider the substantive comments received in determining how the final rule should be promulgated, and its ultimate analysis must reflect such a review.

The Semiannual Regulatory Agenda released on November 19, 2015, indicated that the final rule will be released in July 2016. However, at a recent ABA Labor and Employment Law Conference in Philadelphia around the same time as the regulatory agenda was published, the DOL Solicitor, Patricia Smith, stated that the rule may not be promulgated until “late” 2016, without any further details of what that means. Nevertheless, 2016 will most certainly be the year in which these regulations come out and employers must be prepared to implement the necessary changes and curb the potential for claims of non-compliance. This is especially true because, with the extent of the publicity surrounding this rule, employees will likely be aware of the implications of the regulations and what they could and would be entitled to if the rule passes as proposed.

Renewed Emphasis on Properly Classifying Independent Contractors

Finally, misclassification of workers as independent contractors could be another significant source for wage and hour claims in 2016. Although the classification of employees as independent contractors has consistently been a focus of the DOL, a July 15, 2015 Interpretation issued by the Wage and Hour Division (WHD) Administrator David Weil demonstrates a renewed emphasis on ensuring proper classification. The interpretive guidance does not really say anything different about the familiar factors used to assess independent contractor classification under the economic realities test, but it implies that employers must be aware of this test and use it properly based on the DOL’s explanation of how the factors should be applied. Basically, ignorance is no excuse.

The DOL also clearly communicates its belief that proper use of the test would result in a majority of workers being classified as employees. It explains that the factors of the economic realities test are based on the FLSA’s definition of “employ,” which includes to “suffer or permit to work.” Essentially, the economic realities of the employer’s relationship to a worker, whether a worker is economically dependent on an employer, determines whether the worker has been suffered or permitted to work. The DOL explains that the “suffer or permit to work” standard was intended to be “expansive” and, under such broad definitions provided in the FLSA, “most workers are employees.”

This is the expectation that the DOL has set and will attempt to enforce against employers. In addition to and separate from this guidance, the WHD has requested a $50 million discretionary increase “to improve compliance with our Nation’s labor and employment laws” in its FY 2016 Budget Justification. The WHD expresses an intent to use a majority of the funds received for additional enforcement staff and active enforcement efforts. Furthermore, many states have also increased their enforcement efforts in this area. Currently, 27 states have an agreement with the DOL to share resources and enhance enforcement efforts related to misclassification of independent contractors. This could mean additional audits and investigations of employers, opening the door to potential civil litigation as well. Therefore the proper classification of employees should be a priority of employers in 2016.

Strategies for Compliance

With increased employee knowledge regarding their rights under the Fair Labor Standards Act and a focus on greater compliance through enforcement efforts, the number of wage and hour claims filed against employers is likely to continue to rise into 2016. Thus, employers looking to avoid potential missteps that could generate such claims and protect their companies should prepare for the changes to come by:

(1) Making a plan for how to effectively implement potential changes now, such as an increased minimum wage or a new exempt employee salary level threshold;

(2) Auditing employee classifications to determine whether they are correctly classified as exempt or an independent contractor;

(3) Reviewing overtime policies and payroll practices to ensure workers are being paid accurately based on their classification and the current wage rate; and

(4) Maintaining current and compliant pay records for all employees as required by the FLSA and to refute any future wage claims.

These steps may not prevent all wage and hour claims, but they will certainly help prevent non-compliant practices and provide strong defenses against claims of wrongdoing.

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