As is true each year, Labor Day brings focus to the state of the American workplace. Issues regarding minimum wage, unions, and workplace diversity take center stage. This year, we can add the classification of workers as “exempt” or “non-exempt” to the list.
Understanding Exempt vs. Non-exempt
The Department of Labor, through the Fair Labor Standards Act (FLSA), distinguishes between workers whose compensation is tied to time worked, and workers whose compensation is tied to the creation of deliverables. Non-exempt workers are paid by the hour, and time worked beyond 40 hours/week is compensated at an overtime rate equal to 1.5x the regular hourly rate. Exempt employees are paid a fixed amount each pay period, regardless of the time worked. The classification of non-exempt is tied to both the level of compensation and the nature of the work. Of course, as with most government regulations, there are exceptions. Regardless of pay rate, administrators, executives, professionals, outside sales people and computer personnel are generally classified as exempt.
For years, there has often been a level of prestige associated with being classified as “exempt”. Exempt employees were thought to enjoy benefits not offered to non-exempt workers, including pension contributions, paid time off, greater work schedule flexibility, training, and increased opportunities for promotion. However, it is critical to note that these benefits are not intrinsic to being exempt. All are subject to negotiation with the employer, who may choose to offer any of these benefits – or none of them – to exempt and non-exempt alike.
Recent economic trends have curtailed or eliminated the availability of these benefits. At the same time, technology and cultural shifts have significantly increased the weekly hours worked by those classified as exempt. Employer-issued tablets, personal digital assistants and smart phones with connectivity across the globe, allow emails, text messages, calls and voice mails to reach anyone at any time. For many, conducting work after hours and on weekends has become the norm.
Changes to the Fair Labor Standards Act
In July, we reported through the DCR blog that the Department of Labor had proposed amendments to the FLSA, increasing the threshold for exempt status to more than twice the current federal level. This could be $970/week or $50,440 per year. The proposed changes are intended to make low level managers of hourly workers earn overtime pay. Often, low-level managers work alongside non-exempt employees, putting in the same long hours without compensation. They have marginally greater responsibilities than their non-exempt workers who are being paid overtime for their efforts. Clearly testifying to the overriding interest in this matter, the proposed changes received more than 247,000 comments before the final deadline set for submissions. The period for public comment over the proposed changes to the law is coming to a close and the Wage and Hour department has clarified that there will be no further extension to the comment period.
Once the regulations are finalized, companies will need to examine the classification of their workforces, communicate the regulatory change to the affected employees, put mechanisms in place to properly track hours worked, and monitor their work hours and ensure that they are properly compensated. The FLSA may also increase the limits on exempt salary levels each year in sync with the changes to the Consumer Price Index for All Urban Consumers.
Implications for Contingent Workers
The tenets of the FLSA apply in full to contingent workers also, with additional areas of concern. The staffing firm which employs the contingent worker is responsible to ensure adherence to the FLSA’s tenets. However, liability tied to “joint employer” status could render both the staffing firm and client liable to litigation, together or separately. Since classification as non-exempt is tied to pay rate as well as nature of the job, an employer (this is generally the staffing vendor who provides the worker) may be able to successfully argue that a contingent worker, doing essentially the same job as an exempt employee, should be classified as non-exempt.
When a staffing firm and its client become liable for overtime as joint employers of workers assigned to clients’ work sites; all hours worked by the contingent worker at the staffing firm and its client are combined for purposes of determining if the employee’s work exceeded 40 hours in a workweek.
The new rule could also result in increased opportunities for contingent work, as employers come to rely upon them more, instead of paying overtime to more permanent employees or increasing manpower. In addition, the neutralization of formerly common benefits for exempt employees, combined with the work flexibility provided through contingent work, offers additional reasons for workers to turn from traditional “full employment” relationships.
Are you in favor of the proposed FLSA changes? Do you anticipate an increase in reliance on contingent workers to offset increased expenses associated with paying overtime to entry-level managers and other previously exempt technical and professional personnel? Let us know your thoughts.
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