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FLSA

The Federal Third Circuit Court of Appeals recently sent an earthshattering reminder to companies about both the importance of complying with critical wage and hour laws and the legal need to pay employees for all time worked. A Pennsylvania employer, East Penn Manufacturing Co., now owes over 11,000 hourly workers $22 million in back pay for time spent dressing and showering after the Court determined that these workers were entitled to compensation for the time they spent putting on and taking off their protective gear (also commonly known as ‘donning and doffing’) to perform their job duties.

Rather than recording and paying for the actual time spent by the employees donning and doffing their protective gear and showering after their shifts, the employer instead granted the workers a five-minute paid grace period before the start of their shift and a 10-minute paid grace period at the end of their shift. However, at trial it was found that employees actually spent more than 15 minutes at the beginning of their shift and 11 minutes after their shift completing these necessary tasks.

The Company argued that any violation of the federal Fair Labor Standards Act (“FLSA”) was “de minimis,” as the donning and doffing activities were claimed to be not actual work activities, an argument ultimately rejected by the court. Because of the nature of the job, and having to work around hazardous materials, the changing and showering activities indeed constituted work; otherwise, according to the court, employees would not have been able to perform the required duties they were hired to do with lead and other hazardous substances. The employer also argued alternatively that paying its employees for the actual amount of time spent changing and showering could lead to employees acting in a dilatory fashion in completing the tasks to increase their possible payout. The Third Circuit responded that in cases of such abuse, employees could always be disciplined if the employee takes too long to complete the required tasks. 

For employers, this case is a critical reminder of the importance of ensuring that you pay your employees properly and always include an accurate accounting of all actual work time. Interestingly, the Third Circuit did not prohibit the payment for a “reasonable” amount of time for employee activities not considered “work,” as the employer tried to do here, but the court failed to delineate how an employer is supposed to draw that legal line so acting in such a fashion could be legally perilous. Therefore, it is important as always that an employee’s paid time either equal or exceed the time actually worked, and pre-and-post-employee activities that are necessary for the employee to perform all required tasks should importantly be accounted for in that calculation. Otherwise, you could be the next employer in this kind of predicament.          

As anyone who follows my blogs know, the United States Department of Labor (“USDOL”) implemented new overtime rules that went into effect on July 1, 2024, that increased the salary threshold that had to be met in order for an employee to be deemed exempt and ineligible for overtime payments. The goal of this change in the law was to expand overtime eligibility for employees who previously would not have qualified to receive such payments. On November 15, 2024, a federal judge in Texas found that this new overtime rule was legally invalid and issued an injunction that now prohibits implementation of this rule nationwide.
 
The Texas judge ruled that the DOL exceeded its statutory authority with the 2024 rule that raised the salary threshold from $35,568 to $43,888, effective July 1, 2024, and later to $58,656, effective January 1, 2025. The rule also included automatic triennial updates to the threshold. In light of this decision, Employers no longer need to adjust salaries or reclassify employees to comply with this at present invalid rule. The current overtime threshold at least for now therefore remains at $35,568.

This ruling is likely to be appealed, so we will see if anything changes regarding the decision, though with a new administration taking control in Washington in January 2025, there is a significant chance that this changed overtime rule will be abandoned by the incoming USDOL and the old salary threshold will continue to remain the applicable legal standard.

As I wrote a few months ago, the United States Department of Labor (“USDOL”) was taking the necessary legal steps to modify federal overtime requirements by increasing the salary threshold needed to render employees exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”). On April 23, 2024, the USDOL released its long-awaited final rule raising the salary thresholds for overtime exemptions, meaning that employers will now need to pay overtime to a larger group of employees, unless employee salaries are adjusted to meet these new thresholds. 

The new rule raises the salary threshold under which salaried employees are eligible for overtime in two stages. The threshold will increase to the equivalent of an annual salary of $43,888, or $844 a week, starting July 1,2024 and then to $58,656, or $1,128 a week, on January 1, 2025. (The current threshold is $35,568 a year, or $684 per week.) The salary threshold will then be updated every three years, starting July 1, 2027. Also increased was the exemption salary amount for those employees’ ineligible for overtime because they are high earner employees. The minimum threshold for the highly compensated employee exemption will increase significantly too, as follows: July 1, 2024: The annualized compensation threshold will increase from $107,432 to $132,964. January 1, 2025: The annualized salary threshold will increase again to $151,164.

It is also important for employers to remember that paying employees a certain salary does not alone make such employees exempt. Employees must also qualify for one of the exempt classifications under the FLSA (i.e. executive, administrative, professional, etc.), along with meeting the new salary thresholds to be deemed ineligible for overtime. Those exemption categories are unaffected by the recent change to the salary requirements.

Already there have been significant rumblings that these new salary rules will face legal challenges that could impact whether they ever are enforced, and we will keep you updated on any such efforts. In the meantime, employers will need to start preparing for life under the new rules if they ever do go into effect. Employers should at a minimum canvas their workforce and determine whether increasing employee salaries to the new overtime exemption rate is a justifiable step for your company and is commensurate with the duties performed by those employees. Or alternatively employers will need to come up with other strategies for minimizing overtime costs for your business by better controlling what overtime gets worked to reduce possible increased exposure to overtime payments. The time for taking such steps is now and your business should not wait until July to decide the best way to legally cope with these new overtime requirements.  

The United States Department of Labor (“DOL”) has continued the implementation process for its adoption of a new federal standard for determining questions of independent contractor status under federal law. On January 10, 2024, the DOL published a final rule that revises the DOL’s past guidance on how to analyze independent contractor issues under the Fair Labor Standards Act (“FLSA”).

The final rule largely tracks the DOL’s October 2022 proposed rule. It specifically retains the multifactor, “totality-of-the-circumstances” framework for analyzing independent contractor status included in that proposal. Under this framework, the DOL will consider six non-exhaustive factors when examining the relationship between a worker and a potential employer, including:

  • Worker’s opportunity for profit or loss.
  • Investments made by the worker and the employer.
  • Degree of permanence of the work relationship.
  • Nature and degree of control over performance of the work.
  • Extent to which the work performed is an integral part of the employer’s business; and
  • Use of the worker’s skill and initiative.

The final rule was published in the Federal Register on Wednesday, January 10, 2024, and is expected to take effect March 11, 2024. When it goes into effect, independent contractor issues under the FLSA will need to be examined under this new framework that will require an analysis of how each of the foregoing characteristics impact the overall relationship to decide if there is either employment or instead independent contractor status. The DOL believes that this new standard is more consistent with how courts have interpreted this issue in the past, while also providing a more consistent approach for companies that engage with individuals who are in business for themselves.  

When it comes to creating independent contractor relationships, it is important that companies are aware of not only this new rule, but also any other standards applied under state wage and hour laws. If state standards are more favorable to workers than this new federal rule, the state standard takes priority and must be followed. Some states like New Jersey have a more difficult standard that must be met, known as the ABC Rule, in deciding worker classification issues. Under the ABC Standard applied here in New Jersey, an independent contractor relationship is established only if each of the foregoing requirements are met:

  1. The individual has been and will continue to be free from control or direction over the performance of work performed, both under contract of service and in fact; and
  2. The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and
  3. The individual is customarily engaged in an independently established trade, occupation, profession, or business.

The failure to meet any one of these prongs means that, rather than having an independent contractor, you have an employee who is entitled to all the usual available benefits that are applicable to such persons under state wage and hour laws.

While the new federal standard under the recently announced final rule seemingly provides greater flexibility in analyzing independent contractor issues under federal law, companies will face significant legal peril if they stop their analysis of this issue prematurely just at this federal rule while ignoring companion state wage and hour standards. Accordingly, it is important to remember in this area of the law to analyze independent contractor questions under both federal and state rules to avoid possible employee misclassification issues.   

On August 30, 2023, the Department of Labor (“USDOL”) announced the issuance of a Notice of Proposed Rulemaking (NPRM), Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees. The NPRM proposes to update and revise the regulations issued under section 13(a)(1) of the Fair Labor Standards Act. These rules and regulations implement the exemption from minimum wage and overtime pay requirements for executive, administrative, and professional employees. Such proposed revisions would bring major changes to the number of employees who would now qualify for overtime payments.  

In particular, the proposed revisions would do the following: increase the standard salary level and the highly compensated employee total annual compensation threshold for qualifying for overtime, as well as providing an automatic updating mechanism that would allow for the timely and efficient updating of all the thresholds to reflect current earnings data. Once these new regulations are published in the Federal Register, the USDOL will ask for public commentary as part of the federal rulemaking process. 

One of the most significant changes under these proposed rules involves changing what salary threshold must be met to establish the salary test requirement of the overtime rule. Currently, to meet this requirement, an employee must be paid at least a specified weekly salary level, which is $684 per week (the equivalent of $35,568 annually for a full-year employee) in the current regulations (the “salary level test”).

Under the proposed rules, this salary test requirement would change as follows: (1) increase to the 35th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South), which would be $1,059 per week ($55,068 annually) based on current data; (2) apply the standard salary level to Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands, while increasing the special salary levels for American Samoa and the motion picture industry; and (3) automatically update these earnings thresholds every 3 years with current wage data to maintain their effectiveness.

In addition to changing this important salary threshold, the regulations would likewise increase the highly compensated employee (HCE) total annual compensation requirement to the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally, which would be $143,988 per year based on current data.

Taken together, these two changes would increase the total number of employees who would be able to collect overtime significantly beyond that current number today.

We will continue to keep track of these new regulations as they proceed through the rulemaking process and will provide updates on these potentially important changes to federal overtime rules.  

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