Businesses Beware - Employees are learning about the FLSA, are you?

The proverbial cat is out of the bag and employees all across the country are learning about their rights under the Fair Labor Standards Act (FLSA). What is the catalyst for this recent increase in awareness and potential increase in FLSA claims? The Department of Labor (DOL) submitted proposed rule changes on July 6, 2015 and on March 14, 2016 the DOL sent their final changes to the Office of Management and Budget (OMB). This proposed rule received over 250,000 comments during the comment period, which for those who do not follow these types of events, is a very high volume of comments. What does all of this mean for the business owner or leader?

The proposed rule changes impact how employers determine which workers are eligible for overtime pay. The new rule will elevate the salary threshold for exempt employees from $23,660 to $50,440. Other possible changes, which will not be revealed until the final rule is published, are the duty tests for exemption classification. When this rule is published and an effective date for compliance is established, it will be unlawful for an employer to classify a worker as exempt if they do not earn a salary of greater than $50,440 in addition to the duty test. Therefore, each and every employee presently in your workforce classified as exempt who will not be earning more than the new salary threshold will need to be reclassified to a non-exempt status making them eligible for overtime compensation at one and one half rate of hourly pay. This change certainly has employers concerned and worried, but are you worrying about all of the possible challenges facing you in the near future or are you only concerned with paying overtime?

Reflect for a moment on your organization today, and think about your FLSA classifications. When was the last time you performed a job analysis, examined the job descriptions, and determined if they accurately reflect the tasks and duties performed by workers in those respective positions. It is very possible that as your business was established, or expanded, little to no effort was exerted on ensuring FLSA compliance and you may have various positions in your workforce misclassified based on current FLSA rules. So forget for a moment the pending changes, you should examine if you are compliant now. The rule changes, the social media explosion on this topic that is going to take place, and the very public communication and promulgation of these rule changes are going to place your employees level of awareness at an all-time high. Workers are going to question if they should have been paid overtime prior to the changes, and will demonstrate these inquiries of curiosity through direct communication with the employer, or by means of filing a law suit with the DOL. Are you prepared to answer their questions or defend the law suits? Are you prepared for a DOL audit of your compensation practices?

Misclassification is much more complicated than simply realizing that a worker should be paid overtime because they are actually non-exempt and covered by the FLSA overtime provisions.   The risk is wider in scope than just possible back wages for failing to pay overtime. When an employer classifies a worker as exempt, it is often rare that the employer maintains adequate timekeeping records of hours worked. When the misclassification is identified, not only was there a violation of the FLSA for overtime pay, there is a violation of FLSA recordkeeping requirements. If you ask if this situation could get any worse, well yes it can, because not only are you now facing possible violations in two categories, the rate of pay and the hours worked might result in a violation of federal or state minimum wage laws. For example, the state of Delaware minimum wage is $8.25 per hour. To meet the exemption salary requirement, the employer was paying the worker $455 per week. The employee was permitted or suffered to work an average of 56 hours per week. When you calculate the hourly rate ($455 / 56 = $8.13) the employer has unintentionally violated the state minimum wage for this worker.

The pending rule changes have not only heightened employee awareness, but in recent years during the Obama administration enforcement efforts to identify and stop FLSA misclassification has increased. The DOL even launched their own mobile application to empower workers to track their own hours worked and compare them to what their employer is paying them for, with guidance and instruction on how to then file a claim. The government is doing everything they can to stop illegal pay practices and ensure workers are provided fair pay for a fair day’s work, what are you doing as a business to ensure compliance and protect your business from litigation?

Cooperative efforts between the DOL and the Internal Revenue Service to explore who is classified appropriately as a worker versus an independent contractor is also prevalent. For years, employers have avoided providing appropriate benefits, overtime pay, taxes, and appropriate insurance coverage such as workers’ compensation for workers labeled as independent contractors. In the past, an agreement and some loose management of the worker passed the test for independent contractor status which is exempt from the FLSA. However, the government has caught up with these practices and established greater enforcement of the FLSA through an economic realities test, which is a six factor analysis in which no one factor has greater weight than the others in determining if, in fact, an individual is an employee or actually an independent contractor.

While it may already seem daunting to think about the risks associated with FLSA misclassification for overtime, recordkeeping, and minimum wage, you should realize there is also significant legal risk and exposure when misclassifying an employee as an independent contractor. Business owners and leaders, it is time to ask yourself when was the last time you performed a comprehensive analysis of the relationship and work performed by your independent contractors to ensure you are compliance with the FLSA?

There is more to consider beyond the regulatory compliance and the financial impact of the proposed rule changes. Your actual business operations, the delivery of products and services, may be at risk when you either correct misclassified workers or are forced to make adjustments due to the proposed rule changes. Consider that you may not have the financial resources to pay all of the reclassified employee’s overtime pay, which would reduce the number of hours worked by these workers. That could potentially mean your business has a lower capacity for producing products or delivering services to your customers. This is one of the major consequences of these changes that many employers are either neglecting to realize, or simply do not know what they do not know and will be a victim of the process and poor strategic planning.

As a business owner or leader, do you adjust compensation rates? Do you increase prices for customers to cover overtime expenses? Do you hire more resources and incur more benefits and payroll tax liability? Or will you have to reduce hours of operation, diminish production of products or delivery of services which will negatively impact your business?

There is an answer and a solution to these challenges. It requires human capital management strategic planning focused on business success through compliant practices. This effort, which if not already in progress, should start immediately, requires a comprehensive examination of your workforce to include a job analysis, new job descriptions, analysis of compensation practices and recordkeeping, and various other activities and employee communications to achieve compliance and established business goals. An ounce of prevention is worth a pound of cure. If you have a human resource department and they haven’t taken steps to protect your business, we can help them. If you do not have a human resource department SymbianceHR can help you to achieve your business goals through the implementation of compliant human capital management strategies. The only mistake you can make now is doing nothing at all.