Important Regulatory Changes Affecting Your Employees and their Benefits
April 25, 2024
It’s been a busy few months for the Department of Labor (DOL), hustling to release final rules for the new salary threshold for exempt employees and updating their independent contractor rules. The EEOC also released their final rules for complying with the Pregnant Workers Fairness Act. This Alert will provide you with an overview of all these important changes, action items for you to consider and how these modifications may affect how you provide employee benefits to your employees.
DOL Announces Final Overtime Rule – Exempt Employees Salary Threshold Increases
On April 23, 2024, the DOL announced a final rule to amend current requirements employees in exempt occupations must satisfy to qualify for an overtime exemption under the Fair Labor Standards Act (FLSA). The final rule will take effect on July 1, 2024.
Increased Salary Level
The FLSA white-collar exemptions apply to individuals in executive, administrative, professional, and some outside sales and computer-related occupations. To qualify for this exemption, white-collar employees must satisfy the standard salary level test, as well as a test that examines the specific duties of a job. Some highly compensated employees may also qualify for the FLSA white-collar overtime exemption based on salary alone. This salary level is a wage threshold that white-collar employees must receive to qualify for the exemption.
Starting July 1, 2024, the DOL’s final rule increases the standard salary level from:
- $684 to $844 per week ($35,568 to $43,888 per year); and
- $107,432 to $132,964 per year for highly compensated employees.
On Jan. 1, 2025, the standard salary level will then increase from:
- $844 to $1,128 per week ($43,888 to $58,656 per year); and
- $132,964 to $151,164 per year for highly compensated employees.
Automatic Updates
The DOL’s final rule also includes mechanisms allowing the agency to automatically update the white-collar salary level thresholds without having to rely on the rulemaking process. Effective July 1, 2027, and every three years thereafter, the DOL will increase the standard salary level. The agency will apply up-to-date wage data to determine new salary levels.
Effect on Benefits
From a Total Rewards perspective, the salary threshold elevation may significantly impact some employers’ budgeting decisions if they are forced to either increase salaries or prepare to pay more in overtime costs. All of which may impact an employer’s ability to provide similar or enhanced employee benefits. Additionally, employers using job classifications in their eligibility requirements should examine how this may impact to whom benefits are offered.
Action Items. The first salary level increase in July is expected to impact nearly 1 million workers, while the second increase in January is expected to affect approximately 3 million workers. Employers should become familiar with the final rule and evaluate what changes they may need to adopt to comply with the rule’s requirements. We recommend using this catalyst as a reason to audit your current job classifications, making sure that all exempt employees are truly exempt from overtime payment – both in terms of salary and job duties. While legal challenges to the rule are anticipated, which may delay the final rule’s implementation, employers with a large number of employees expected to be impacted by the salary differential will be wise to begin preparations sooner as opposed to later.
DOL Updates their Independent Contractor Analysis
The DOL has also been active in updating rules guiding another type of employment classification: the difference between employees and independent contractors. Worker classification directly impacts eligibility for benefits, legal protections (such as minimum wage and overtime rights) and taxation. With regard to labor protections, employee misclassification has been a growing concern for the DOL. While several tests exist to determine whether a worker is an employee or an independent contractor, the DOL uses the “economic reality test,” which examines whether a worker is economically dependent on the employer or engaged in business for themselves. Under this test, if a worker is economically dependent on the employer, they are an employee and should be protected by employment laws, including the Fair Labor Standards Act (FLSA) and FMLA.
Effective March 11, 2024, the DOL released a final rule revising the agency’s three-year-old guidance on how to analyze who is an employee or independent contractor under the FLSA. Basically, a true independent contractor is not entitled to minimum wage, overtime pay or employee benefits. The DOL hopes this final rule will provide direct parameters and a more consistent approach for businesses that engage with individuals who are in business for themselves.
The final rule
Under the final rule, six economic reality factors are all weighed to assess whether a worker is economically dependent on a potential employer for work. The goal of this multi-factor test is to decide if the worker is economically dependent on the employer for work or is instead in business for themselves. For example, if the economic realities show that the worker is economically dependent on the employer for work, then the worker is an employee. However, if the economic realities show that the worker is in business for themself, then the worker is an independent contractor. The economic realities of the entire working relationship are looked at to decide whether a worker is an employee or an independent contractor. The six factors:
- The degree to which the employer controls how the work is done;
- The worker’s opportunity for profit or loss, depending on managerial skill;
- The amount of skill and initiative required for the work;
- The degree of permanence of the working relationship;
- The worker’s investment in equipment or materials required for the task; and
- The extent to which the service rendered is an integral part of the employer’s business.
No single factor automatically determines a worker’s status as either an employee or an independent contractor. Instead of a rigid checklist, think of the factors as pointing toward a direction, when considering the totality of the circumstances. In other words, if it walks like a duck and quacks like a duck, you may just have to accept that you’re employing a duck.
Effect on Benefits
Generally, independent contractors should not be allowed to participate in an organization’s employee benefit programs due to their nonemployee status. Employers who reclassify workers as employees (after applying the independent contractor tests) should review the eligibility rules of their benefit plans to determine each worker’s eligibility for benefits. Additionally, if an employer is an Applicable Large Employer under the ACA, it must offer affordable, minimum-value health coverage to its full-time employees (and dependent children) or risk tax penalties. Smaller employers who reclassify workers as employees should monitor whether the increase in their employee headcount triggers any additional compliance obligations under federal, state and local laws.
Action Items. A worker’s coverage by a particular law or entitlement to a particular benefit often depends on whether they are an employee or independent contractor. Employers who misclassify employees may be liable for expensive fines and litigation if a worker should have been classified as an employee and did not receive a benefit or protection to which they were entitled by law. But that’s not all. Federal tax application (such as FICA) and various state law application (unemployment insurance, workers compensation insurance, and income taxes) will also depend heavily on a worker’s correct classification. If you routinely use independent contractors to support your business, we recommend that you understand the classification standards of the DOL, IRS and your particular state and apply them accordingly to ensure your classifications can be defended in the event of an audit.
Pregnant Workers Fairness Act – Final Rule Released
On April 15, 2024, the EEOC released a final rule implementing the enforceable terms of the Pregnant Workers Fairness Act (PWFA). The final regulation will be published in the Federal Register on April 19, 2024, and becomes effective on June 18, 2024.
Background
The PWFA requires most employers with 15 or more employees to provide “reasonable accommodations,” or changes at work, for a worker’s known limitations related to pregnancy, childbirth, or related medical conditions, unless the accommodation will cause the employer an undue hardship. The PWFA came into effect on June 27, 2023, when the EEOC began accepting charges of discrimination. Nearly a year later, the final rules clarify definitions and limitations under the PWFA, and will hopefully help employers understand their duties under the law.
Highlights from the Final Rule
- Examples of Reasonable Accommodations: The regulation provides clear examples of accommodations, including additional breaks for hydration and rest, temporary reassignment, telework options, and time off for medical appointments or recovery from childbirth or miscarriage.
- Guidance on Limitations and Medical Conditions: It offers comprehensive guidance on medical conditions eligible for accommodation, such as miscarriage, migraines, lactation, and episodic pregnancy-related conditions like morning sickness.
- Encouragement of Early Communication: Employers are encouraged to foster open dialogue with employees to address accommodation requests promptly and effectively.
- Documentation Requirements: Employers are advised to request supporting documentation for accommodations only when reasonable under the circumstances, streamlining the process for both parties.
- Undue Hardship Clarifications: The regulation outlines factors determining when an accommodation would impose undue hardship on an employer, ensuring fairness in decision-making.
- Defense and Exemption Information: Employers are provided guidance on how to assert defenses or exemptions, including those based on religious beliefs, at the earliest stage of charge processing.
Effect on Benefits
Remember, the PWFA applies to accommodations – which may, in some circumstances, include a leave of absence. FMLA should always be considered first, if available, before considering the leave under the PWFA. This means that employers should be cognizant of their benefit eligibility rules. Under FMLA, medical benefits are protected and maintained through the duration of the leave. However, a leave of absence as an accommodation under the PWFA (like the ADA) should be viewed through the lens of eligibility for each benefit offered. To avoid potential discrimination, leaves under the PWFA should be handled like other non-FMLA leaves of absence when applying rules of eligibility.
Action Items. Employers should develop a policy and procedures for handling requests for accommodation under the PWFA much like they handle accommodation requests under the ADA. Employee handbooks should be written to explain this accommodation right to ensure proper communication to employees. We also recommend that employers be both nimble and patient. Even though a final rule has been issued and clarifications have been made, there will still be many unanswered questions as we learn how the EEOC will ultimately enforce this relatively new law.
If you have any questions about how these compliance items affect your HR policies or benefits offerings, or would like to learn more about the HR-related resources we provide, please contact your Cottingham & Butler team member today.