Amy Traub Unpacks New Overtime Rule, Provides Tips for Compliance

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In a June 2016 interview, Amy J. Traub analyzes the impact of the Labor Department’s final rule revising FLSA overtime regulations and offers suggestions to employers across a variety of industries on how to prepare for compliance and to mitigate the risk of wage-hour litigation.

PDF version of report Amy J. Traub

Amy J. Traub (interviewed by Jesse R. Butler)

Amy J. Traub ( atraub@bakerlaw.com) is a partner in BakerHostetler’s New York office. As a management-side employment law attorney, Ms. Traub focuses her practice on providing ongoing advice and counsel to companies on all aspects of the employer-employee relationship, including federal and state wage-hour concerns. Ms. Traub serves as designated outside employment counsel for a number of clients in a variety of industries, including health care, hospitality and retail. In addition, she routinely represents clients in employment disputes of all kinds, including wage-hour class and collective actions. Ms. Traub is admitted to practice in New York and Georgia, New York federal district courts, and the Second, Fifth and Eleventh Circuit Courts of Appeals.

Bloomberg BNA:

[Editor's note: The Labor Department published May 23 (81 Fed. Reg. 32,391) a final rule revising regulations implementing the Fair Labor Standard Act's white-collar exemptions. The final rule, effective Dec. 1, 2016, raises the overtime exemption salary thresholds and renders millions of employees newly eligible for overtime—many for the first time.]

What industries or professions do you anticipate will be most impacted by the final rule’s changes to the white-collar exemption criteria?

Traub:

While the final rule changes apply to employers in all industries, industries such as hospitality and retail may feel the most impact from the new exemption criteria. Certain entry-level advocacy, consulting, film/movie, publishing and talent professions also are likely to experience a significant impact.

The hospitality and retail industries are more likely to have managers, assistant managers, supervisors and office workers who perform exempt duties but who currently earn less, and in some cases much less, than the new salary threshold ($47,476). The rule changes will force employers in these industries to take a look at their current models and to consider restructuring them to meet the new threshold—in which case groups of employees (e.g., all assistant managers or all supervisors) could receive significant raises—or reclassifying those groups as nonexempt.

While all employers will face the same type of decision, the hospitality and retail industries are often very market-driven, with high turnover as employees move from one retail employer to another, for example. Thus, the anticipated additional compliance challenge on these industries is that employers will need to carefully craft a strategy for their workforce that allows them to maintain a competitive edge as against other hospitality or retail companies. If one luxury retailer opts to increase all of its supervisors to the new salary threshold to maintain the position as an exempt one, another that opts to make the same position nonexempt may find itself losing employees to the competitor company.

Gone too are the days of paying low salaries and no overtime for the long hours typically worked by entry-level staff members and assistants vying for a more prestigious job within the advocacy, consulting, film/movie, publishing and talent industries. Indeed, this model, depicted in movies such as “The Devil Wears Prada” will need to be revisited altogether, with employers in these fields towing the line between paying positions that they historically have viewed as apprenticeships at least $47,476 or limiting the number of hours these employees work, which could in turn limit the overall experience, and value-add, of the employee.

Bloomberg BNA:

How would you suggest employers prepare for compliance and mitigate litigation risks?

Traub:

Employers should first identify the group of potentially affected employees within their organizations. A good place to start is with a simple compensation/payroll review to identify those employees currently classified as exempt who make less than $47,476 and, separately, those who make between $100,000 and $134,004.

Once workers are identified, employers should work with outside wage-hour counsel to determine the best course of action, which will differ for each employer depending on a number of factors, such as the position(s) at issue, the amount of anticipated overtime for affected workers and whether that can feasibly be controlled, the organization’s culture and employee morale concerns, and what actions competitors within the industry are taking as a result of the new regulations.

Decisions on how to address each affected employee (e.g., raise salaries, reclassify as nonexempt, etc.) will need to include consideration of all of the additional requirements of the law, both state and federal, regarding exempt and nonexempt employees. Keeping track of hours worked is a primary consideration, but employers also need to be aware of how bonuses and other incentive pay, travel time and benefits may weigh into the decision. Further, employers must develop a communication plan for rolling out the changes, revise or create written policies addressing timekeeping and other aspects of the law and conduct training.

Employers should understand that there is no one-size-fits-all approach to the new rules. The key is not to wait. Indeed, one of the more significant challenges of the new rules is that employers don’t have a sense of how many hours their currently exempt employees typically work because exempt employees aren’t required to record their time. December 1 will arrive quickly, and savvy employers will utilize the six-month implementation period wisely to evaluate the most effective way to address the changes for their employees.

Bloomberg BNA:

What effect do you expect the rule changes will have on the interplay between technology and employers’ policies?

Traub:

With the new rule’s emphasis on overtime pay and, in this day and age, where the vast majority of employees have some kind of PDA or mobile device, employers may no longer be able to rely solely on punch clocks to enforce their timekeeping policies. Indeed, even before the new rules, employers were facing challenges in capturing time worked by nonexempt employees after hours, either pre- or post-shift or during meal/rest breaks.

In addition to bolstering written timekeeping and overtime policies and ensuring consistent discipline of those who work off-the-clock but fail to report all hours worked, employers also may consider more recent technological advancements that have brought biometric timekeeping systems to the workplace. Such technologies use fingerprints, retinal scans and handprints to track employee working hours. Employers also might devise a system for employees to log their hours remotely, without standing in front of a time clock at the workplace.

Bloomberg BNA:

What steps could employers take to reduce their exposure to wage claims related to work performed electronically or outside the scope of regular business hours?

Traub:

To mitigate liability in this regard, an employer should, as an initial matter, have a written timekeeping policy that requires nonexempt employees to accurately record all hours worked, including time spent working remotely and outside of business hours. Of course, a policy is only as good as the paper it’s written on, meaning that if a nonexempt employee fails to record time spent making/answering work-related calls or drafting/answering work-related correspondence and e-mails, texts or instant messages outside of regular business hours, the employee must be counseled or disciplined for violating the company’s timekeeping policy.

Employers can further protect themselves from liability by not providing PDAs to nonexempt employees in the first place and/or preventing the company’s e-mail software from being accessed or downloaded by those nonexempt employees who have their own personal PDAs. These measures may not ultimately prevent nonexempt employees from conducting business outside of working hours, but they should help curtail or deter it, particularly where employees who violate the policies will be disciplined. Employers should understand, however, that employees still must be paid for time worked off the clock, even when it isn’t authorized.

Bloomberg BNA:

Are there any potential liability exposures resulting from the increased salary requirement for the highly-compensated employees (HCEs) exception?

Traub:

The new regulations significantly increased the compensation threshold for the HCE exemption (from $100,000 to $134,004). Frankly, this change isn’t likely to have much of a significant impact because most HCEs can satisfy the duties test of one of the other white-collar exemptions anyway, meaning that they would then only need to meet the new general salary threshold of $47,476.

In the event an HCE earns less than $134,004 and the employee can’t satisfy one of the white-collar exemption’s duties tests, the employer must consider whether there is a way to restructure the HCE’s job functions in an effort to satisfy one of those duties tests, reclassify the HCE as nonexempt or raise the HCE’s salary above the new threshold.

Bloomberg BNA:

You have previously recommended that employers conduct a “full-scale audit of their exempt classifications” in anticipation of DOL enforcement of the new regulations. Do you also expect a shift in plaintiff-side litigation tactics or an increase in misclassification claims?

Traub:

In the past 15 years, there has been a 450 percent increase in FLSA cases filed in federal courts throughout the country. Employee misclassification and unpaid overtime claims are one of the fastest growing areas of litigation. While the new regulations don’t make any changes to the various duties tests under the FLSA, employers shouldn’t be fooled by this, as the regulations have shined a spotlight on worker classification as a whole.

The new regulations give employers the opportunity to shore up exemptions not just by assessing their current compensation structure but also by analyzing the duties each affected worker performs. In fact, employers who simply raise currently exempt workers’ salaries to the new salary threshold, without ensuring that the worker actually should be classified as exempt in the first place based on duties performed, may find themselves the target of a misclassification lawsuit. Employers should remember that all of the exemptions from overtime available under the law require that the employee at issue meet three criteria—the salary basis test, the salary threshold and the duties test. Addressing one without the other two could mean improperly classified workers—an easy target for litigation.

Bloomberg BNA:

What can employers do during the audit process to protect themselves?

Traub:

While conducting a full-scale audit of exempt classifications, employers should carefully analyze each affected position with the assistance of outside wage-hour counsel to ensure that the audit is protected by the attorney-client privilege and work product doctrine. Indeed, an employee only can be exempt by meeting all three criteria for exemption. The new regulations provide a unique opportunity for employers to identify and address issues that may already exist—perhaps unbeknownst to the employer—in their exempt classifications.

Bloomberg BNA:

Can you explain the role of nondiscretionary bonuses and incentive payments in employers’ compensation reassessment strategies?

Traub:

The new regulations amend the salary threshold by allowing nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the new salary threshold ($47,476 annually, $913/week), so long as these payments are made on a quarterly or more frequent basis. Employers must therefore take into account all forms of compensation that employees receive when conducting their exemption analysis. For example, an employer may not have to reclassify or provide a raise to an otherwise exempt manager earning $45,000 annually if the manager earns a nondiscretionary bonus of $3,500 per quarter.

Bloomberg BNA:

Could such payment structures lead to problems arising from ambiguities and errors in the “nondiscretionary” determination?

Traub:

Yes, if an employer improperly determines that a discretionary bonus is nondiscretionary and the employee doesn’t otherwise earn the requisite salary threshold, the employee can’t properly be classified as an exempt white-collar employee. The key then is to understand the difference between a discretionary and nondiscretionary bonus.

Nondiscretionary bonuses are automatically earned by an employee upon reaching certain predetermined benchmarks or performance objectives, such as sales or productivity goals—i.e., if the employee does X, the employee earns Y. The employee’s entitlement to the bonus and the timing and the amount of the bonus are typically established and provided to the employee in advance, usually in writing.

In contrast, a discretionary bonus is, just as it sounds, entirely within the employer’s discretion as to under what circumstances, whether, when and in what amounts a bonus will be awarded.

Bloomberg BNA:

Does inclusion of such payments make more or less sense in specific industries?

Traub:

Incentives and nondiscretionary bonuses are prevalent in a number of industries. For example, in the hotel industry, sales employees may receive upsell incentives for making a certain number of sales calls. In retail, a manager may receive an automatic bonus if the store achieves a specified monthly sales goal.

Nondiscretionary bonuses and incentives make the most sense in industries where the condition precedent is easily identifiable and objective. Additionally, these forms of payment are ideally suited for service industries where a common goal can boost employee morale and align employee goals with those of the employer.

Bloomberg BNA:

What weight do the benefits given to current exempt employees carry in the reexamination calculus?

Traub:

Most employers offer more employee benefits to exempt employees than nonexempt employees, and, in certain industries, employer-paid group life and disability benefits might only be offered to exempt employees.

If an employer is reclassifying employees from exempt to nonexempt, it should be mindful of the consequences of cutting off an employee’s entitlement to employee benefits previously received. While this may present a significant cost savings to the employer, it also could have a negative impact on employee morale and may even lead to discrimination claims under the Affordable Care Act or the Employee Retirement Income Security Act of 1974.

Employers also should assess whether overtime pay now provided to reclassified employees will be included in the employer’s contribution towards the affected employees’ 401Ks.

Bloomberg BNA:

What benefit restructuring strategies should employers adopt?

Traub:

Every organization will need to find a solution that fits best in light of their budgetary and organizational culture concerns. For example, with respect to paid time off (PTO), if a significant number of employees will be reclassified from exempt to nonexempt (and the employer doesn’t provide PTO to nonexempt employees), it may be best to revise the company’s PTO policy and provide this benefit on the basis of tenure or job level rather than exempt versus nonexempt status.

Bloomberg BNA:

You have mentioned that the efficacy (or even legality) of certain compliance strategies may depend on an employer’s geographic location. Can you give some examples of where state or local law may offer interesting options or challenges to an employer’s compliance or litigation strategies?

Traub:

Indeed, many states and municipalities have their own wage and hour laws that provide greater worker protections than the FLSA. In these situations, employers must comply with the law that provides the greatest benefit to the employee.

Accordingly, certain compliance strategies that work best in some states may be unlawful in others. For example, in California, if employees spend more than 50 percent of the time performing nonexempt tasks, they can’t satisfy the duties test for exemption and must receive overtime. Thus, California retail employers, for example, will need to consider whether certain managers satisfy California’s duties test in addition to the FLSA’s duties test when analyzing their exemption status. In this scenario, a multi-state employer may end up faced with the awkward choice of reclassifying those managers only in California in light of the strict duties test there while raising the salaries of these managers in other states subject to less burdensome duties requirements, or reclassifying all such managers.

Another option for employers considering how to implement the new changes is the fluctuating workweek methodology of paying overtime, which allows an employer to pay overtime at a rate of one-half instead of time and one-half. However, this option isn’t lawful in all states, which could make decisions regarding positions more challenging for a multistate employer. For example, a hospitality employer can’t take advantage of the fluctuating workweek method in the state of New York.

Some state laws also require that employers provide advance notice to employees about compensation changes. Oftentimes, such notice must be in writing. Employers should be careful to check applicable state laws and ensure compliance in implementing the new rule changes.

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