The revised U.S. Department of Labor (DOL) Fair Labor Standards Act (FLSA) rules change whether certain employees are classified as exempt or non-exempt and make an estimated 4.2 million more workers eligible for overtime pay. The rules will take effect on December 1, 2016. With salary thresholds changing, preparations to classify, and in some cases, reclassify employees correctly, the new rule should be top of mind for HR leadership.
Now is also a good time for employers who hire contractors to evaluate whether those workers still qualify as independent contractors, or if the relationship actually requires that the employer classify them as employees.
Consider the following as you prepare your organization to audit the classifications of your exempt employees, non-exempt employees and contracted workers.
Qualifying for Contractor Status
The FLSA changes do not cover contractors, per se, but an Administrative Interpretation (AI) from the DOL that was issued in July 2015 (around the same time as the DOL issued the proposed FLSA overtime rules) addressed that segment of the workforce. The AI reminds employers that contractors should only make up a small portion of the overall workforce size. As in the past, the six-part test to determine whether a worker is classified as a contractor correctly is based on the amount of control exerted over his or her work and the permanency of the relationship between the organization and the worker.
Put simply, how financially dependent upon your organization is the worker? If the answer is "mostly" or "entirely," then the worker should likely be considered an employee, not a contractor. This determination is notwithstanding any contract that may have been signed or the potential off-site/remote location used by the worker as his or her normal place of business.
If you've determined that a worker previously classified as a contractor should now be reclassified as an employee, your next consideration will be whether that person should be categorized as exempt or non-exempt. Use the exempt duties tests, as well as the salary basis test, to begin your review of contractors who will be transitioned to employees.
Qualifying as Exempt
The FLSA overtime rule change may have the largest employee classification impact in your organization's history, particularly if you currently have a large number of exempt employees whose annual income is between the low $20,000s and high $40,000s. Under the new rules, the minimum threshold for exempt salaries will increase from $23,660 to $47,476.
With that in mind, the first and most important decision your organization should make is whether you will be able to continue considering your lower-salaried white-collar workforce exempt. Although the review process will more than likely be lengthy and require a lot of precise planning, deciding how to classify each employee can really boil down to the following:
Would it be more financially feasible to ensure certain workers continue to meet the duties test (performance of duties falling within exempt categories, such as executive, administrative or professional) and absorb the salary bump to a minimum threshold of $47,476, or would it make more sense to re-classify certain workers as non-exempt at a per-hour rate calculated from the current salary level, and thus open those workers up to the possibility of overtime pay once they've worked more than 40 hours in a week?
Maintaining an employee's exempt status would make sense if his or her current salary is already close to the new minimum, or if the number of hours he or she currently works over 40 hours per week would result in overtime pay pushing the worker's annual income above the new minimum level. If anticipated overtime hours are minimal, or if the salary differential is extreme and could absorb overtime pay without coming near the new minimum, reclassifying as non-exempt may be a better decision.
While HR and financial leadership will have to review the effect of these possible changes from an economic standpoint, they should also perform a more subjective assessment of employee morale and engagement that a change in classification could cause. That way your organization will not only remain compliant, but also demonstrate your respect and concern for the most important resource for every organization — your employees.
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