Regulatory Risk

A Salary Threshold Working Over Time

On Dec. 1, the U.S. government is raising the minimum salary threshold on paying overtime to white collar workers.
By: | October 19, 2016

In December, new U.S. Department of Labor rules will 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.

Employers who have not yet audited their wage and hours practices are running out of time to make sure they are in compliance with this new base salary limit, experts warn.

The Department of Labor estimates as many as 4.2 million U.S. workers could be affected by the change.

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By some estimates, as many as 70 percent of companies are in violation of the rules.

“For anybody who hasn’t looked at this yet, this is the ‘all-nighter before the test’ window,” said Noel P. Tripp, a principal at Jackson Lewis P.C., who represents employers in wage and hour cases.

Those that don’t comply may find themselves joining an ever growing club of litigants, including well-known companies such as DuPont Co. and Tyson Foods, scrambling to prove they paid their workers fairly.

Even before this change, the number of lawsuits filed under the Fair Labor and Standards Act (FLSA) more than tripled in the past decade and is expected to hit an all-time high this year.

With the election of Donald Trump to the presidency and his promise to roll back regulations, it’s unclear whether this new rule will be revoked in 2017.

Nonetheless, 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.

“For anybody who hasn’t looked at this yet, this is the ‘all-nighter before the test’ window,” — Noel P. Tripp, principal, Jackson Lewis P.C.

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.

That’s because the company bears the legal burden of proof; it’s hard to manage payroll records on time worked for every single worker if the proper systems are not in place, and it takes a lot of money and time away from the core responsibilities of a business to fight a case in court.

With so many companies at risk of being non-compliant, this looming deadline is as good a time as any to review for problems, said Chris Williams, an employment practices liability product manager at Travelers.

“If you haven’t fixed it by Dec. 1 [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.

States and business organizations have tried to delay the rule change by filing complaints recently with the federal courts. Experts say those are unlikely to prevail, so companies should proceed with greatest caution and keep the Dec. 1 deadline as the target.

Wal-Mart Stores was most likely aiming for broad-based compliance ahead of the deadline when just last month it 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.

“It’s a long time overdue,” Ruckelshaus said. “Workers could be making around $23,000 and be called exempt white collar workers, which is kind of crazy.”

Chris Williams, employment practices liability product manager,Travelers.

Chris Williams, employment practices liability product manager,Travelers.

The new rule more than doubles the minimum to $913 per week, or $47,476 annually.  And to make sure there’s not such a long gap before the threshold goes up again, it will now 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 Walmart 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.

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

In many cases, there’s tremendous pressure from the higher level to the middle level to be more efficient and less costly, said attorney Thomas More Marrone who represents employees in FLSA cases.

“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,” Tripp said.

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.

“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.

DuPont argued that the employees recouped that time by taking paid breaks throughout the day.

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

Some newly emerging FLSA cases involve the time employees spend checking email and on computers at home, Williams said.

Often, 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, Williams said.

He adds that it is not unusual to see wage and hour claims filed after an employee is fired. That’s why it is so important to keep in compliance and maintain accurate records.

FLSA cases are often “lawyer driven,” he said. It’s not uncommon for a fired employee to inquire with a lawyer about a wrongful termination case.  “The lawyer says, ‘I don’t care about [your termination] but answer these 10 questions about the hours you worked and how you were paid.”

Something to keep in mind: Employers who are liked by their workers are far less likely to get sued, said Tripp.

Protect Your Business

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

Lisa Doherty, co-founder and CEO, Business Risk Partners

Lisa Doherty, co-founder and CEO, Business Risk Partners

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 — that is, an employee who is not exempt from, and therefore eligible to receive, overtime pay under the FLSA.

Travelers can provide a $100,000 defense expenses sublimit for wage and hour claims for most clients, Williams said. No coverage typically applies under these endorsements to settlements or judgments (i.e., they cover only defense costs), and a sublimit usually applies.

As for when to be ready for the higher threshold, Williams said “the prudent employer should plan on the law going into effect on Dec. 1 until there’s a definitive word to the contrary.”

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A group of 21 states filed a complaint in the Eastern District of Texas challenging the new U.S. Department of Labor regulations that redefine the white collar exemptions to the overtime requirements of the FLSA. The States argue the DOL overstepped its authority by, among other things, establishing a new minimum salary threshold for those exemptions.

More than 50 business groups including the U.S. Chamber of Commerce, the National Association of Manufacturers and the National Retail Federation also filed a lawsuit in the same court, on the same day, contending the new regulations were implemented in violation of the federal Administrative Procedure Act.

Travelers recommendations to protect against wage and hour claims:

  • Consult with an attorney and a human resources representative to understand all obligations required by the law.
  • Review all employee job responsibilities and wages to determine whether they are entitled to overtime, and document those decisions.
  • Ensure you have a process in place to document all hours worked for non-exempt employees.
  • Communicate and train managers on the new regulations and requirements.
Juliann Walsh is a former staff writer at Risk & Insurance. Comments or questions about this article can be addressed to [email protected]

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