In a recent post, we discussed the U.S. Department of Labor’s (DOL) proposed rule increasing the salary threshold to qualify for a white collar exemption under federal law. In response, many employers are evaluating whether to reclassify employees as non-exempt instead of raising salaries to maintain the exemption. Along with this analysis, employers often struggle with two related issues: (1) how to calculate the regular rate of pay of non-exempt employees in order to calculate the proper overtime rate and (2) who is considered an “employer” and thus responsible for employee wages?
The DOL recently announced two proposed rules that will help employers tackle these issues, which we discuss in turn below. Acknowledging that the DOL has not updated its rules in over a half century, the proposed amendments seek to reflect modern developments in the employer-employee relationship.
“Regular Rate” - Excludable Compensation
The first proposed rule would clarify which payments and benefits factor into an employee’s regular rate. Calculating the regular rate can get complicated when considering whether bonuses, paid leave, expense reimbursements and other benefits must be included in an employee’s base rate of pay. The regular rate serves as the basis of the overtime rate (i.e., 1.5 x regular rate = overtime rate), so getting this right is imperative for employers. In addition, requiring employers to include certain categories of compensation and benefits in the regular rate not only complicates the calculation, but also inflates the overtime rate.
The proposed amendments enumerate categories of compensation that are excludable from the regular rate:
Warning: Don’t Forget to Check State Law!
In determining which items must be included in the regular rate, employers must not forget to check applicable state law. State law may delineate different types of compensation that must be included in an employee’s regular rate for purposes of calculating overtime and therefore, in certain circumstances the overtime compensation owed to an employee will differ under federal and state law. For example, Massachusetts’ state wage and hour regulations exclude all bonuses in determining an employee’s regular rate, not just discretionary bonuses as required by the DOL. New York also delineates categories of compensation and benefits that are not part of the regular rate, which largely mirrors the DOL’s proposed rule, but also includes gifts and payments in the nature of gifts. Employers should make sure to pay the employee the higher of the federal or state overtime rate.
The second proposed amendment lays out a new joint employer test for determining who is considered an employer when the work of an employee for one employer simultaneously benefits another entity. In conjunction with clarifying how to determine workers’ pay rates, the DOL also seeks to clarify when businesses qualify as joint employers and therefore are responsible for employees’ compensation and subject to direct liability for non-payment of wages. The DOL’s proposed rule lays out four key factors that it will analyze to determine whether a business is a joint employer:
The DOL also notes that “additional” factors can be evaluated if it appears that a business is either “exercising significant control” over employees’ work or “otherwise acting directly or indirectly in the interest of the employer in relation to the employee.” The DOL also states that the business model of a company, such as a franchisor-franchisee relationship, does not make joint employer status more or less likely.
The proposed joint employer test by the DOL – which would govern entities’ obligations under the Fair Labor Standards Act – differs from the test used by other federal agencies. The National Labor Relations Board (NLRB) also recently published a notice of proposed rulemaking to establish the standard for determining joint employer status similar to the DOL’s proposal and stressing the importance of the actual control the company exercises over the conditions of employment, not just the potential for control. Both standards dramatically limit the definition of joint employer and reverse previous definitions which held that two entities are joint employers based on the mere existence of the potential to exercise control or indirect control.
Employers should welcome these new proposed rules. The clarification on the calculation of employees’ regular rate will certainly mitigate concerns about compliance with overtime wage requirements. Additionally, the new joint employer standard is much more restrictive than the tests currently used by some circuit courts and may result in fewer findings of joint employer liability.
Remember, both proposed rules are in the sixty-day comment period and may undergo material changes prior to the publication of the final rules. Keep in touch on the status of the proposed rules and seek legal advice before making changes to ensure continued compliance.