How Could the Fair Labor Standards Act Revisions Affect You?

Posted in: Commercial Insurance

 

For months, organizations in the U.S. had been preparing to implement changes that, as of Dec. 1, 2016, would have increased the minimum salary requirement for certain exemptions under the Fair Labor Standards Act.

Unexpectedly, a little more than a week before the law would have gone into effect, a federal judge blocked the rule. While the Labor Department can appeal the decision, the future of the rule depends on the incoming administration. The new administration may remove the hold and allow the legislation to move forward as written, adjust the rule, or block it altogether.

RM Prevent Claims

While the future of the legislation may be uncertain for now, if the law does go into effect, it promises to have wide-reaching effects on organizations across the country.

The current state of employee pay 

The Fair Labor Standards Act (FLSA) is a United States Federal Law enacted in 1938, which establishes minimum wage, overtime pay eligibility, record-keeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments.

Employees whose jobs are governed by FLSA are categorized as either exempt or non-exempt. The FLSA requires covered employers to pay non-exempt employees at least the minimum wage for each hour worked as well as overtime pay for all hours worked in excess of 40 in a work week.

Exempt employees

Exempt employees are not entitled to overtime pay. With few exceptions, to be classified as exempt, the employee must a) be paid at least $23,600 per year or $445 a week, b) be paid on a salaried basis, and c) perform exempt job duties. Exempt job duties are relatively high-level duties with respect to the entity’s overall operations. The FLSA breaks this out into three main categories: executive, professional, and administrative:

Executive

  1. Supervises two or more employees
  2. Primary duty of the position is management
  3. Has input into other employees’ job status (hiring, firing, assignments)

Professional

Typically, this category includes intellectual jobs that require specialized education or training and involve the use of discretion and judgement. This does not include skilled trades, mechanical arts, or other work that does not require a college or postgraduate degree.

Administrative

In this category, employees’ main duties involve the support of the business, such as human resources staff, public relations, or payroll and accounting.

There is also an exemption for “highly compensated” employees, who, according to the revised law, are paid a total annual compensation of at least $134,004. These employees are exempt from the FLSA overtime requirements if they regularly and customarily perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.

Non-exempt employees

Non-exempt employees fall outside of the categories discussed above and should meet the following criteria:

  • Must be paid at least the federal minimum wage
  • Must be paid overtime pay if they work over 40 hours a week
  • Must be paid at least one and a half times base pay for overtime

The effect of new regulations 

According to the Department of Labor, the revisions that would have gone into effect Dec. 1 would simplify the identification of non-exempt and make the exemption easier for employees and employers to understand. That change would force employers to either raise salaries to meet the new salary threshold or reclassify workers and start paying them overtime.

In short, the proposed changes would update the minimum salary level required for an exempt employee. Currently, the salary level stands at $23,600 per year, or $455 per week. If the law had gone into effect Dec. 1, the salary level would have increased to approximately $47,476, or $913 per week to keep it in line with inflation. Under the act, the exact amount would change annually and be tied to relevant economic indicators.
For employers that currently have employees who are classified as exempt under the current FLSA regulations but who make less than the new proposed salary threshold, some changes would be required. Essentially, employers will have two choices if the new regulations are put in place:

  1. Keep the employee’s exempt status by increasing the employee’s pay to or above the new minimum threshold.
  2. Change the employee’s exemption status to non-exempt and begin paying overtime for all hours worked in excess of 40 hours in a given work week.

Nondiscretionary compensation

Nondiscretionary compensation can help satisfy the standard salary level as employers may use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly. To satisfy the rule, employers may make one final catch-up payment no later than the next pay period after the end of the quarter if the bonus, incentive payment, or commission ended up being less than anticipated and the employee’s weekly salary plus nondiscretionary bonus, incentive payment, or commission does not equal or exceed 13 times the minimum weekly salary of $913.

Consequences of noncompliance

The department of labor estimates that in the first year, as many as 4.2 million workers would need to be either reclassified as non-exempt and paid overtime whenever they work more than 40 hours in a workweek or receive an increase in their salary to meet the new requirement.

What would happen if an employer fails to heed the new revisions? Is there any way to be reimbursed for any defense or settlement costs in the event litigation results from either an intentional or unintentional violation?

Violations of wage and hour laws are one of the largest risks employers face. Defending and paying wage and hour claims is not inexpensive, especially when you factor in high legal fees. As claims skyrocket under the FLSA and similar state hour and wage laws, employers have discovered — sometimes the hard way — that their insurance policies may not cover their claims, leaving them to bear the entire cost of the liability.

Commercial General Liability policies do not provide coverage for wage and hour claims. A coverage endorsement can be attached to an Employment Practices Liability policy that will respond to a wage and hour claim — albeit, with a sublimit for defense costs only (e.g., up to $100,000). That would not cover indemnity costs (i.e., any compensation your company has to provide to another person as a result of the claim).  Rarely can you find a carrier willing to provide coverage for both defense and indemnity costs. Typical limits offered for defense in the market place range from $50,000 to $150,000.

For more information for navigating this legislation or selecting the right insurance policy for your organization, contact me at jeffw@psafinancial.com.