DOL Proposes New FLSA Test for Employee Exemptions and Issues New Guidance for Independent Contractor Classifications

What you need to know:

The Department of Labor recently proposed an important change to the Fair Labor Standards Act that would significantly reduce the number of employees who are properly deemed “exempt” from the FLSA’s overtime and minimum wage requirements. In addition, the DOL issued guidance emphasizing that it applies a strict test to determine which workers may properly be classified as independent contractors, rather than as employees covered by the FLSA.

What you need to do:

Employers should stay apprised of the status of the proposed rule regarding employee exemptions under the FLSA and should consider an audit of their current employee populations, as the rule could bring a significant number of employees within the ambit of minimum wage and overtime requirements. Employers are also advised to review their independent contractor classifications to ensure compliance with the FLSA and other applicable laws.

The details on the proposed exemption rule:

The DOL’s proposed new rule would change the current FLSA white collar exemption test, which excludes executive, professional, administrative and certain other employees from the FLSA’s minimum wage and overtime requirements. If approved, the proposed rule would result in the following changes:

•  It would increase the minimum salary level for the white collar exemption from the current threshold of $455 per week, or $23,660 annually, to the 40th percentile of weekly earnings for full-time salaried workers, which is projected to be $970 per week, or $50,440 annually, in 2016.
• It would increase the minimum salary level for the “highly compensated” exemption from $100,000 per year to $122,148 per year.
• It would index the exemption’s minimum salary and compensation levels to either wage growth or inflation, and adjust these levels annually.

The proposed rule does not change the “duties test” for white collar exemptions. The DOL is, however, currently seeking comment regarding whether the duties tests are resulting in proper employee classifications, suggesting that such changes are being considered.

The details on the independent contractor guidance:

The DOL also issued guidance clarifying the strict test it applies to determine whether workers are employees within the purview of the FLSA or independent contractors outside of its protections. The guidance highlights that under the FLSA, the key inquiry in determining whether a worker is a covered “employee” is whether a worker is genuinely in business for himself or herself, or is instead economically dependent on the employer.

The guidance further elucidated the six “economic realities” factors that guide the DOL’s assessment, which are:

(A)  the extent to which the work performed is an integral part of the employer’s business;

(B)  the worker’s opportunity for profit or loss depending on his or her managerial skill;

(C)  the extent of the relative investments of the employer and the worker;

(D)  whether the work performed requires special skills and initiative;

(E)   the permanency of the relationship; and

(F)   the degree of control exercised or retained by the employer.

While these tests are not new, the DOL’s issuance of this 15-page memorandum suggests that going forward, it intends to scrutinize closely companies’ classifications of workers as independent contractors.