Got Exempt Contractors? Some May Become Eligible for Overtime

By DEBBIE FLEDDERJOHANN, President of Top Echelon Contracting

Driven by a presidential decree, the Department of Labor (DOL) is working hard to revise the laws regarding who can be exempt from overtime.  If you have contractors who are currently classified as exempt, you will want to stay up on the changes.

In March, President Obama issued a memorandum asking the DOL to update the regulations surrounding who can legally be considered exempt from overtime.  It was recently announced that the new, proposed regulations are expected to be published in November.

Under the Fair Labor Standards Act (FLSA), most American workers must be paid at a rate of 1.5 times their regular pay rate for any hours worked over 40 in a workweek.  Some employees can be denied overtime if they qualify for the executive, administrative, and professional exemptions, otherwise known as the “white collar exemptions.”

President Obama is seeking to make fewer people ineligible for overtime under these exemptions.  To that end, his memorandum to Secretary of Labor Tom Perez directed the DOL to do the following:

1. “Modernize and streamline” the overtime regulations to make them more consistent with the original intent of the FLSA.
2. Address the changes in the modern workforce.
3. Make them easier for both employers and workers to understand.

We will not know the content of these changes until the proposed regulations are released, but they will undoubtedly include changes to the “minimum salary” and “duties” tests that must be met for a position to be considered exempt.  A Fact Sheet released by the White House states that the minimum salary requirement has failed to keep up with inflation.  In fact, it has only been changed twice in 40 years, currently standing at $455 per week, which is below the poverty level for a worker with a family of four.  Someone could even fall under the minimum wage if they had to work 65 or more hours per week and were only paid the minimum salary required by the white collar exemptions.  In addition, that salary threshold makes it so that only 12% of Americans qualify for overtime, compared with 65% in 1975.  Experts believe the salary threshold could be increased to as high as $1,000 per week.

They also expect an update to the “duties tests.”  Each exemption spells out what duties must be performed to allow the employee to be exempt.  For example, workers under the Executive Exemption must be managing the enterprise or a department or subdivision and regularly directing the work of at least two other full-time employees.  The duties tests will likely become more specific, possibly dictating an exact percent of time a worker must spend doing certain duties to qualify.

Even if you outsource the employment of your contractors to a back-office service, this is an important issue.  You will want to be sure to do the following:

1. Keep up-to-date on the regulations.  Again, the changes will not happen overnight.  The DOL spent two years deciding on changes for the last revision in 2004.  Still, you will want to keep this issue on your radar so that when the regulations are updated, you are ready.
2. Educate clients.  If you have exempt contractors placed at any of your client companies, they need to be made aware that you may need to increase some contractors’ salaries to keep them as exempt, or you may have to make them nonexempt.  Either way, your clients’ costs could increase, and they will likely appreciate a heads-up, especially considering the new regulations could apply to some of their direct hire staff, as well.
3. Follow current federal AND state laws.  While waiting for the new regulations, it’s important that you and your clients continue to comply with the DOL’s current regulations.  Don’t forget rules in certain states, such as California and New York.  For example, in California, the salary of an exempt worker can be no less than twice the minimum wage for a full-time employee.  The minimum is currently $640, but will increase to $800 in 2016.

Hopefully, we will have a better picture of the new regulations this fall when the proposed regulations are supposed to be released.  We will be sure to keep you posted as this issue continues to develop.

(Editor’s note: This article is intended for informational purposes only and should NOT in any way be construed as legal advice.)