Regulatory Watch

A Salary Threshold Working Over Time

The U.S. government may raise the minimum salary threshold on paying overtime to white collar workers.
By: | December 14, 2016 • 4 min read

New U.S. Department of Labor rules may require employers to pay overtime to salaried workers earning less than $47,476 a year, effectively doubling the current overtime annual salary threshold of $23,660.

A group of 21 states and more than 50 business groups that filed suit against the DOL won a preliminary injunction in late November that halted the rule from taking effect on Dec. 1. The election of Donald Trump to the presidency and his promise to roll back regulations add more uncertainty as to whether this new rule will be revoked or revised in 2017.

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The Department of Labor estimates as many as 4.2 million U.S. workers would be affected by the change. By some estimates, as many as 70 percent of companies are in violation of the rules.

It’s important to conduct an audit of your workforce and bring all employees to compliance if they are not already, said Catherine K. Ruckelshaus, general counsel at the National Employment Law Project.

With many existing state rules already much higher than the federal threshold, companies often find they are already in compliance, which is much more cost-effective than defending a wage and hour claim.

Chris Williams, employment practices liability product manager, Travelers

Chris Williams, employment practices liability product manager, Travelers

But with so many companies still at risk of being noncompliant, they must review for problems, said Chris Williams, an employment practices liability product manager at Travelers.

“If you haven’t fixed it … [and you are sued], you paint yourself in an even worse light in a courtroom,” said Lisa Doherty, co-founder and CEO of Business Risk Partners, a specialty insurance underwriter and program administrator.

Wal-Mart Stores was most likely aiming for broad-based compliance ahead of the deadline when it recently raised all salaries for its entry-level managers to just above the threshold at $48,500 from $45,000 annually, according to Reuters.

A Change Long Overdue

The FLSA was enacted in 1938 and established the 40-hour work week salary threshold, which entitled workers to time-and-a-half their regular hourly wage for any overtime.

White collar workers making more than the threshold and meeting certain “duties tests” were exempt from receiving overtime pay if they worked more than 40 hours in a week. The current threshold of $455 a week or $23,660 annually, has been in place since 2004.

“A mid-level manager with a labor budget and no compliance training regarding overtime rules is a loaded weapon you have pointed at the business because you have given that manager an incentive with no context.” — Noel P. Tripp, principal, Jackson Lewis P.C.

The currently postponed new rule more than doubles the minimum to $913 per week, or $47,476 annually, and will automatically increase every three years based on wage growth Employers with exempt salaried workers within this range generally face three options.

One: Raise the annual pay to above $47,476 to maintain the exempt status. This option works best for employees paid a salary close to the new level, such as those Wal-Mart managers.

Two: Reclassify salaried employees as hourly and pay time and a half when they exceed 40 hours in a week. This approach works best when there are only occasional spikes that require overtime for which employers can plan for and budget.

Three: Strictly limit employees’ time to 40 hours and hire additional workers. That’s not always a welcome path if it triggers a new record-keeping system to track hours. It can be difficult to get workers to change their behavior to start recording when they arrive at work and leave.

Establishing a 40-hour week was meant to encourage employers to hire more people rather than pay overtime, but often adding staff is not in the labor budget.

“A mid-level manager with a labor budget and no compliance training regarding overtime rules is a loaded weapon you have pointed at the business because you have given that manager an incentive with no context,” said Noel P. Tripp, a principal at Jackson Lewis P.C., who represents employers in wage and hour cases.

What’s at Stake? Legal Cases Are Growing

There were 8,000 FSLA wage and hour claims filed last year, making it the single fastest growing type of employment litigation, Doherty said.

One reason for that claims volume is that there are a variety of ways a company can violate the rules.

There’s straight-out failure to pay overtime when a worker is entitled to it. There’s “donning and doffing” claims when an employer doesn’t include the time to put on protective gear as part of the work day. DuPont and Tyson were both targets of class action lawsuits citing donning and doffing.

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“It has been the law for many decades; if you don’t keep track of it there’s a presumption against you,” said attorney Thomas More Marrone, who is representing employees against DuPont.

Some newly emerging FLSA cases involve the time employees spend on computers or checking email at home, Williams said. Often, he said, it’s not until a claim is filed that employers — who bear the burden of proof in most cases — realize they haven’t maintained the appropriate records to defend the business.

It’s important that companies talk to a broker about coverage for some of that exposure, Williams said.

A coverage endorsement attached to employment practices liability insurance (EPLI) policy forms may cover the cost of defending claims alleging that an employer failed to pay overtime to a nonexempt employee. &

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Liability

Fresh Worries for Boards of Directors

New cyber security regulations increase exposure for directors and officers at financial institutions.
By: | June 1, 2017 • 6 min read

Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).

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Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.

The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.

The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.

Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.

The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.

“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”

D&O Challenge

Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.

“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.

William Kelly, senior vice president, underwriting, Argo Pro

William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.

“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.

Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.

“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.

Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.

“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.

Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.

“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”

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One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.

“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.

A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.

“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.

“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro

Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.

“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.

The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.

“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.

New Models

Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.

The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.

Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.

“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”

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Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.

“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”

Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]