The Department of Labor Once Again Changes the Rules for Eligibility for Overtime Compensation
Here we go again. As of January 1, 2020, there will be a revised eligibility requirement for the exemption for executive, administrative, professional, computer and outside sales employees under the Fair Labor Standards Act. See U.S. Department of Labor: Wage and Hour Division Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act. Specifically, employers must pay employees at least $684 per week in order to satisfy the threshold requirement for not having to pay certain executives, administrators, professionals, computer personnel and outside salespersons overtime compensation should they work more than 40 hours per week. To be clear, paying $684 per week is merely a threshold requirement for these exemptions; there are additional factors that must be met in order for an employer not to have to pay certain employees overtime (i.e., compensation at a premium rate). The soon-to-be superseded salary requirement was $455 per week.
Another development of note with respect to exempt employees under the Fair Labor Standards Act is the Supreme Court case in 2018, Encino Motorcars, LLC v. Navarro, that held that the standard for finding certain employees exempt should not be the uphill climb that the Department of Labor recommended and that was the usual counsel to employers when they sought advice about making use of the exemption. Before Encino Motorcars, LLC v. Navarro, lawyers frequently advised clients to proceed with extreme caution when characterizing employees as exempt, especially in light of the fact that the multi-factor tests that informed the analysis as to appropriate qualification for the exemption translated into serious challenges in getting such cases thrown out before trial. With Encino Motorcars, LLC v. Navarro, the Supreme Court has endorsed the view that the exemptions for executive, administrative, professional, computer and outside sales employees are a core element of the Fair Labor Standards Act and should not be viewed with any heightened suspicion. The bottom line for employers is that the characterization of employees as exempt is not the risky proposition that it was once considered to be.[1]
Nonetheless, employers who are inclined to characterize some of their employees as exempt pursuant to one of the exemptions listed above should seek legal advice before implementation. The fact remains that the misclassification of an employee can bring an abundance of pain (i.e., liability). Frequently, once employers classify an employee as exempt, they cease tracking the number of hours that the employee works. The lack of records as to the number of hours worked by a misclassified employee becomes an opportunity for the plaintiff-employee to embellish the number of hours actually worked above 40. As a punishment for not having such time records, the court will be forced to accept those embellished hours at face value. Further, under the Fair Labor Standards Act, it is routine for courts to hold employers liable for double damages as a punishment for violating the Act (what is called liquidated damages), not to mention having to pay the fee owed to the plaintiff’s attorney (and, of course, the employer’s own attorney). Lastly, as if the foregoing was not bad enough, under the Fair Labor Standards Act, individual managers, supervisors and principals of a business can be found individually liable for overtime compensation owed to a misclassified employee under certain circumstances, which means that the corporate form through which the business is run will not save individuals within the management realm from having their homes, cars, summer homes, etc. etc. on the proverbial chopping block. Employers can minimize damages owed to misclassified employees if they obtain a legal opinion from an attorney that states in sum and substance that the exemption is applicable and they, in turn, applied it in good faith (otherwise known as the “good faith defense”). Thus, hiring a lawyer to get an opinion regarding compliance with the Fair Labor Standards Act makes good sense.
If you have any questions about the new Department of Labor rules regarding overtime compensation or more general questions about compensating employees, feel free to contact one of the lawyers at Cardi & Edgar LLP.
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[1]How significant Encino Motorcars, LLC v. Navarro will prove to be for federal courts in the Second Circuit asked to decide whether an employee is truly exempt from overtime compensation is difficult to discern at this point since the cases are few. An interesting example of the effect of Encino Motorcars, LLC v. Navarro is Vasto v. Credico where the plaintiffs argued that they should not be subject to the overtime exemption for outdoors salespeople because the Fair Standards Labor Act intended the exemption for those circumstances where the employees were generously compensated. In Vasto, it was undisputed that the plaintiffs were poorly compensated. The Court observed:
Although [Plaintiffs] invoke[] the purported “spirit and purpose” of the FLSA to suggest that [poor compensation] negates the reason for an outside salesman exemption, “[i]t is quite mistaken to assume … that whatever might appear to further the statute’s primary objective must be the law” … “In the absence of words in the statute or regulation that require consideration of [the plaintiff’s level of compensation] when deciding if an employee is “making sales,” we decline to add a [“subject to compensation”] exception to the “making sales” requirement of the outside salesmen exemption under the FLSA.
767 Fed.Appx. 54, 57 (2d Cir. April 12, 2019) (quoting Encino Motorcars, LLC)