This spring has been a particularly busy one for federal regulators who set the rules that govern employment relationships. They have banned most (but not all) non-competition agreements, released significantly updated guidance for employers on workplace harassment issues, and expanded protections for pregnant workers. But federal agencies have also made important changes to overtime pay rules and the test used to determine whether a worker is properly classified as an employee or independent contractor.
The modified overtime pay and employee/independent contractor rules will require distributors to review and potentially adjust the structure of their workforces and employment policies to ensure compliance and minimize potential claims and liability.
Here is what distributors need to know about these two major alterations to the national employment law landscape.
More Workers Now Entitled To Overtime Pay
On April 23, 2024, the Department of Labor (DOL) published a Final Rule that dramatically expands the pool of salaried workers entitled to overtime pay under the Fair Labor Standards Act (FLSA). The new rule significantly raises the salary threshold above which bona fide executive, administrative, or professional (EAP) employees and "highly compensated employees" are not entitled to overtime pay. By raising the compensation bar, the DOL estimates that employers will now need to pay approximately 4.3 million more American workers time-and-half for all hours worked above 40 per week.
EAP Exemption
Currently, the salary threshold for qualifying for the "white collar" or EAP exemption for overtime pay is $35,568; that is, employees in “executive, administrative, or professional” roles as defined by the DOL who make more than that amount are not entitled to overtime pay. Under the Final Rule, that figure will be raised in two stages and then go up every three years after that, starting July 1, 2027, to reflect current earnings data. Specifically:
- The salary threshold for EAP exemptions increases to $43,888 per year (or $844 per week) on July 1, 2024.
- Six months later, on January 1, 2025, the threshold increases to $58,656 per year (or $1,128 per week).
While the Final Rule adjusts the salary level applicable to the EAP exemption, it does not change the test for determining whether an employee's job duties qualify them for the exemption.
Similarly, the rule does not alter an employer's ability to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to ten percent of the new salary levels, so long as they make those payments annually or more frequently.
Highly Compensated Employee Exemption
The new rule also raises the salary thresholds for the FLSA's “highly compensated employee” exemption. Similar to the EAP exemption, the highly compensated employee exemption applies to those workers who earn more than the designated amounts, whose primary duty includes performing office or non-manual work, and who customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
Currently, a highly compensated employee is one who earns $107,432 annually. Under the Final Rule, an employee will qualify for the exemption only if they earn these amounts:
- $132,964 starting on July 1, 2024
- $151,164 starting on January 1, 2025
What Distributors Should Do About the New Overtime Rule
To prepare for these changes, distributors should work with counsel to thoroughly review the compensation amounts and structures for all their salaried employees, as well as their job duties and responsibilities. By doing so, they can understand how much their exempt workforce will be impacted and make any needed adjustments to ensure compliance and consistency.
New Independent Contractor v. Employee Test
Like employers in almost every industry, distributors often hire or classify workers as independent contractors rather than employees in order to keep costs down and reduce time spent dealing with personnel and payroll matters such as overtime pay, unemployment insurance, sick leave, and other obligations that only apply to employees. But just calling a worker an independent contractor doesn’t necessarily make them one in the eyes of the law. Ultimately, whether a worker is an employee or independent contractor is determined by the classification rules promulgated by the U.S. Department of Labor (DOL), as well as individual state laws addressing the subject.
And as of March 11, 2024, a new Final Rule issued by the DOL means that more distribution workers are likely to be considered employees instead of contractors, no matter what label a distributor applies to them.
Initially published in January 2024, the rule revises the DOL’s test for distinguishing between an employee and an independent contractor under the Fair Labor Standards Act (FLSA). Specifically, the new Final Rule rescinds a rule promulgated by the previous administration which identified five “economic reality factors” to be used in determining whether a worker was an employee or independent contractor. Under the prior rule, two of the five factors— “the nature and degree of control over the work and the worker's opportunity for profit or loss” were designated as “core factors” that were to carry more weight in the analysis.
The rule issued by the prior administration was generally viewed as more employer-friendly in that it made it easier to classify a worker as an independent contractor. Under the new Final Rule, the pendulum has swung in the other direction.
Classification Based on the “Economic Realities of The Working Relationship”
The “core factors” mentioned above are no longer part of the classification analysis. Instead, the new rule uses a “totality-of-the-circumstances” approach and an “economic reality test” that looks at the economic reality of the worker’s activities and the nature of their working relationship with the employer.
The Final Rule sets forth six factors to be used in determining whether the “economic realities of the working relationship” indicate that a worker is economically dependent on the employer – in which case they would be likely considered an employee – or whether the worker is in business for themselves such that they qualify as an independent contractor. These factors, described in the Final Rule’s economic reality test, are:
- opportunity for profit or loss depending on managerial skill;
- investments by the worker and the potential employer;
- degree of permanence of the work relationship;
- nature and degree of control;
- extent to which the work performed is an integral part of the potential employer’s business; and
- skill and initiative.
No one factor or subset of factors determines if a worker is an employee or independent contractor. The weight given to each factor may depend on the facts and circumstances of the particular employment relationship.
Given the fact-specific nature of the new rule’s test and the significant financial and legal risks of misclassification, distributors should work with experienced employment counsel to conduct a complete audit of their workforce to ensure that the realities of each worker’s responsibilities and employment relationship align with their current designation and make any necessary adjustments accordingly.
If you have questions or concerns about these new overtime pay or worker classification rules, please contact me at 312-840-7004 or [email protected].
The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter. The author expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this article.
