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Changes Delayed, But Not Forgotten: Overtime Exemptions and Employee Classification Rules

Peter J. Richter

December 31, 2015

As we’ve reported in the past, the U.S. Department of Labor (DOL) has been working for some time on an overhaul of the rules governing overtime exemptions and employee classification rules.  While those changes are still forthcoming, the DOL recently signaled that the final implementation would likely be delayed until late 2016.  However, that does not mean that businesses should stop preparing for the changes.  It is estimated that when implemented the changes could result in more than 4.5 million workers becoming eligible for overtime.  Accordingly, employers should be using the extra time to carefully review how they are classifying any and all individuals that perform services for them.

Under the Fair Labor Standards Act (FLSA), a covered employer must pay overtime to its “nonexempt” employees at a rate not less than one and one-half times the employee’s “regular rate of pay” for all hours worked in excess of 40 hours during a work week.  Conversely, an employer is not obligated under the FLSA to pay overtime to an “exempt” employee or an independent contractor.   Yet only certain classes of employees may be considered exempt and only if specific qualifications are met.  Similarly, only those individuals meeting the applicable tests for an independent contractor relationship will fall outside the employer-employee relationship.

For many years, the qualifications or requirements for the treatment of an employee as “exempt” from overtime included the payment of a salary in an amount not less than $455 per week ($23,600 per year).  Under the new regulations proposed by the DOL, the salary threshold could move to a projected level of $970 per week ($50,440 per year).  In addition, the salary threshold will automatically increase thereafter to match inflation.

While some businesses might look to manage increased overtime costs through the use of independent contractors, such a strategy comes with increased risk.  Within the past year, the Office of the Secretary of the DOL issued new recommendations regarding independent contractor arrangements because “current tax, labor and employment law gives employers and employees incentives to create contingent relationships not for the sake of flexibility or efficiency but in order to evade their legal obligations.”  Accordingly, the Office of the Secretary has recommended that the independent contractor determination should no longer focus on the degree of control the employing unit may exercise over the individual, but rather on the “economic realities of the relationship.”  Under such a test, even an individual who controls the means and manner of the work performed might still be deemed an employee if “they are economically dependent on the entity for whom they perform services.”

Other changes are likely coming as well and therefore every employer should carefully examine how it classifies its employees to ensure that all individuals who are currently being treated as “exempt” will continue to meet all the necessary qualifications.  Employers should also reexamine any independent contractor relationships in light of the possibility that the arrangement could be subject to review under a new test.


If you have any questions about how the information in this article may affect you or your business, please contact Peter Richter at prichter@stroudlaw.com or (608) 257‑2281 or your Stroud attorney.

DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.