Screen clip from Notice of Proposed Rulemaking
U.S. DOL Issues Notice of Proposed Rulemaking

On November 5, 2019, the U.S. Department of Labor published a proposed rule that would make it easier for some employers to apply the “Fluctuating Workweek” method of calculating overtime pay for certain non-exempt employees.

Background

For those not familiar with the concept, the fluctuating workweek method is one way of calculating overtime pay for non-exempt employees who are paid a fixed salary but whose hours fluctuate from week to week. The fluctuating workweek method can be extremely advantageous for employers because it allows an employer to pay a non-exempt employee a fixed salary covering all of the employee’s straight-time work, regardless of the number of hours worked. If an employee works overtime, they still receive premium pay for each hour worked, but the rate is one-half of the employee’s regular rate instead of 1.5 times the regular rate. For a full explanation of this method and the conditions under which it can be used, check out our earlier explanation here.

Under the current rules, several conditions must be met before an employer can use the fluctuating workweek method. These include:

  1. The employee’s work hours fluctuate from week to week.
  2. The employee receives a guaranteed salary each workweek, regardless of hours worked.
  3. The employee’s salary is sufficient to compensate the employee at not less than the applicable minimum wage for all hours worked.
  4. There is a clear mutual understanding between the employer and employee that the employee’s fixed salary covers the employee’s straight-time wages for all hours worked.
  5. The employee receives overtime compensation, in addition to the fixed salary, for all overtime hours worked at a rate of not less than 1/2 of the employee’s regular rate of pay, calculated by dividing the employee’s non-overtime compensation for each workweek by the actual hours worked in each workweek.

Proposed Changes

The DOL’s new proposed rule focus on the second requirement – the fixed salary. Back in 2008, the DOL under the George W. Bush administration issued proposed regulations that would have allowed employers who use the fluctuating workweek method to supplement employees’ salaries with additional non-overtime payments such as incentive pay and bonuses. However, those regulations were not finalized until 2011, after President Obama took office. The final rule published by the Obama administration did not include the proposed changes to fluctuating workweek regulations allowing for incentive compensation and bonus pay. In its commentary on the final rules, the DOL took the position that any additional compensation paid to an employee, be it a shift premium, production bonus, or anything other than overtime pay – would be incompatible with the “fixed salary” requirement for the fluctuating workweek method, and would create a risk of abuse by employers seeking to reduce their overtime liability.

Now, under the Trump administration, the DOL is proposing to reverse course again, with a rule that would expressly permit employers to use the fluctuating workweek method for employees who also receive additional bonuses and incentive compensation, so long as the additional pay is properly factored into the employee’s regular rate of pay for purposes of calculating overtime.

Here’s how this would work, according to examples in the proposed rule:

Suppose an employee’s work hours vary from week to week, but never exceed 50 hours. The employee is paid a flat salary of $600 per week, with the understanding that it constitutes the employee’s entire compensation aside from overtime premiums and any bonuses, premium payments, or additional pay not excludable from the regular rate under FLSA Sections 7(e)(1) through (8), regardless of the employee’s hours worked.

During the course of four weeks, the employee’s hours and pay are as follows:

Salary Hours Regular Rate (Salary ÷ Hours) OT Hours OT Pay (OT Hours x 1/2 Regular Rate) Total Pay
$600 37.5 $16.00 0 $0.00 $600.00
$600 44 $13.64 4 $27.28 $627.28
$600 50 $12.00 10 $60.00 $660.00
$600 48 $12.50 8 $50.00 $650.00

For the same employee, if four of the employee’s hours in each workweek were night shift hours compensated at a premium rate of an extra $5 per hour (totaling $20 per week), the employee’s pay would be calculated as follows:

Total Straight-Time Earnings

(Salary plus shift premium)

Hours Regular Rate (Salary ÷ Hours) OT Hours OT Pay (OT Hours x 1/2 Regular Rate) Total Pay
$620 37.5 $16.53 0 0 $620.00
$620 44 $14.09 4 $28.20 $648.20
$620 50 $12.40 10 $62.00 $682.00
$620 48 $12.92 8 $51.68 $671.68

The same principal would apply if, instead of a shift bonus, the employee received a productivity bonus of $100 each week:

Total Straight-Time Earnings

(Salary plus bonus)

Hours Regular Rate (Salary ÷ Hours) OT Hours OT Pay (OT Hours x 1/2 Regular Rate) Total Pay
$700 37.5 $18.67 0 0 $620.00
$700 44 $15.91 4 $31.84 $731.84
$700 50 $14.00 10 $70 $770.00
$700 48 $14.58 8 $58.32 $758.32

What Happens Now

The DOL is accepting public comments on the proposed rule through December 5, 2019. Interested parties can submit comments online through the Federal eRulemaking Portal at https://www.regulations.gov, or by mail to: Division of Regulations, Legislation, and Interpretation, Wage and Hour Division (WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, DC 20210.

Responding to the concerns raised in 2011 by the prior administration, the DOL states in its commentary regarding the proposal that it “is not aware of any evidence of problematic pay shifting,” and cites data from the Bureau of Labor Statistics showing that bonuses and additional pay other than fixed salary amount to a “relatively small portion of employees’ overall compensation – no more than 5% for any occupation.” These assurances are unlikely to mollify critics, and the new rule can be expected to draw substantial criticism from worker advocates. Despite such criticism, it seems likely that the DOL will seek to issue a final rule in the next year, possibly before the November 2020 election.

While the rule, if adopted, would provide clarity regarding the use of the fluctuating workweek method with bonuses and incentive compensation at the federal level, it is not clear whether states and localities with their own overtime pay requirements will follow the federal lead. In Illinois for example, the regulations implementing the Illinois Minimum Wage Law recognize the fluctuating workweek method, but are silent on whether the method may be used with bonuses or incentive compensation. While state courts might defer to the federal rule in interpreting the state law, that is by no means guaranteed. Accordingly, even if the proposed rule is adopted in its current form, employers should consult with experienced employment counsel before implementing any changes.

On Tuesday, the U.S. Department of Labor issued its final rule concerning overtime exemptions. The rule increases the salary threshold for employees exempt under the executive, administrative, and professional exemptions (the “white collar exemptions”) from $455 per week (or $23,660 annually) to $684 per week (or $35,568 annually). Additional changes include:

  • Increasing the total annual compensation threshold for highly compensated employees (“HCEs”) from $100,000 per year to $107,432 per year;
  • Permitting employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10% of the increase salary threshold; and
  • Committing to updating the salary threshold more regularly.

The new rule is set to take effect on January 1, 2020 and increase the number of overtime-eligible employees by 1.3 million. No changes to the duties test have been made.

This isn’t the first time in recent years that we’ve had a final rule issued increasing the salary threshold for the white-collar exemptions. In 2016, the DOL, under President Obama’s administration, issued a final rule increasing the salary threshold to $913 per week (or $47,476 annually). The 2016 rule also increased the minimum salary for HCEs (to $134,004), allowed employers to use nondiscretionary bonuses and incentive pay to satisfy up to 10% of the salary threshold, and provided for automatic annual updates to keep the minimum salary level adjusted to the 40th percentile of full-time salaried workers in the lowest-wage Census region. Business groups and several states filed a lawsuit seeking to block the 2016 rules, arguing that the DOL exceeded its authority in adopting the rules. A federal district court in Texas agreed and blocked the rules from taking effect.

The new minimum salary threshold falls between the current salary threshold and the rule proposed under the Obama administration. While the 2016 rule was criticized by many business and employer groups, the new final rule is drawing fire from advocates for workers, who wish to force the administration to adopt something closer to the blocked 2016 rules. Legal challenges to the new rules are highly likely to follow.

We will keep you updated on any new developments as the effective date of the new rule approaches.

On June 11, 2019, Alabama Governor Kay Ivey signed a new law that prohibits wage discrimination based upon sex and protects workers who decline to share their salary history with a prospective employer. The new law takes effect August 1, 2019. Unlike laws in some other states, the Alabama law does not bar employers from asking for salary history information, but prohibits employers from refusing to interview or hire applicants who decline to provide such information.

Alabama joins a growing list of jurisdictions to ban or limit the use of salary history inquiries in the hiring process, including:

  • California (statewide and in San Francisco)
  • Colorado
  • Connecticut
  • Delaware
  • Hawaii
  • Illinois (awaiting Gov. Pritzker’s signature)
  • Maine
  • Massachusetts
  • Missouri
  • New York (Albany, Suffolk, and Westchester Counties, and NYC)
  • Ohio
  • Oregon
  • Philadelphia (subject to legal challenge)
  • Vermont
  • Washington

Among the bills awaiting signature by Illinois Governor J.B. Pritzker is an amendment to the Illinois Equal Pay Act of 2003 that would ban employers from asking job applicants for information about their wage, salary or benefits history. Governor Pritzker is expected to sign the bill, HB834. With this new law, Illinois joins at least 12 other states and multiple counties and municipalities in restricting employers’ ability to obtain or use applicants’ compensation history in the process of hiring and setting compensation.

New Restrictions on Requesting and Using Salary History
HB834 specifically prohibits employers from screening job applicants based on their current or prior wages or salary histories, including benefits or other compensation, by requiring that the wage or salary history of an applicant satisfy minimum or maximum criteria. The bill also bans employers from requesting or requiring applicants to disclose wage or salary history as a condition of employment, or from requesting such information from any current or former employer. The bill provides exceptions where wage or salary history is a matter of public record under FOIA or other laws, or the applicant is a current employee.

The bill expressly provides that employers do not violate the new restrictions by merely sharing information with applicants about the compensation and benefits associated with a position or discussing applicants’ expectations regarding compensation and benefits. The bill also provides that an employer does not violate the new law if an applicant voluntarily discloses compensation and benefits history information in the course of such discussions. However, if that happens, the employer is barred from relying upon that information as a factor in determining whether to make an offer of employment or compensation, or in determining future wages, salary, benefits, or other compensation.

Expanded Claims Under the Equal Pay Act

In addition to restricting use of salary history information, HB834 also makes it easier for employees to bring and win claims under the Equal Pay Act. Currently, the Act prohibits employers from paying an employee at a lower rate of pay as compared to another employee of the opposite sex who performs work requiring “equal skill, effort, and responsibility, and which are performed under similar working conditions.” The Act provides the same protection for African-American employees as compared to non-African-American employees. The law allows employers to justify pay differentials when they are due to a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or “a differential based on any factor other than” race, sex, or other unlawful discrimination.

HB834 amends the Act’s protections in two ways. First, instead of having to demonstrate that another employee performs work requiring “equal” skill, effort, and responsibility, plaintiffs will now only have to show that the levels of skill, effort, and responsibility are “substantially similar.” Second, the law limits employers’ ability to justify pay disparities based upon “any factor other than” unlawful discrimination by requiring employers to show that the factor relied upon “is not based on or derived from a differential in compensation based on sex or another protected characteristic,” that it is “job-related with respect to the position and consistent with business necessity,” and that the factor “accounts for the differential.”

Ban on Agreements Restricting Employees From Disclosing Compensation

Under the existing law, employers are barred from taking action against any employee for “inquiring about, disclosing, comparing or otherwise discussing the employee’s wages or the wages of any other employee …” HB834 expands upon these protections by specifically prohibiting employers from requiring an employee to “sign an contract or waiver that would prohibit the employee from disclosing or discussing information about the employee’s wages, salary, benefits, or other compensation.” However, the amendment now expressly allows employers to prohibit HR employees, supervisors, and other employees whose job responsibilities afford them access to other employees’ compensation information from disclosing that information “without prior written consent from the employee whose information is sought or requested.”

Increased Liability for Violations

HB834 also significantly expands employers’ potential liability for Equal Pay Act violations. Under current law, employees who prevail on a claim under the Act can recover the amount of any pay differential, plus interest and attorneys’ fees and costs. Employers are also subject to civil penalties of up to $5,000 per affected employee. HB834 amends the Act to allow employees to recover compensatory damages if the plaintiff demonstrates that the employer acted “with malice or reckless indifference,” and punitive damages. Employers who violate the new restrictions on salary history inquiries can also be held liable for “special damages” of up to $10,000 and any additional compensatory damages needed to make the plaintiff whole. The amendment also allows courts to award injunctive relief. The statute of limitations under the amended law will remain 5 years from the date of each underpayment.

What Employers Should Do

The new provisions of HB834 will take effect 60 days after the Governor signs the bill. The Equal Pay Act applies to all Illinois employers, regardless of size, including governmental bodies. Employers should prepare to comply with the new law as soon as possible. Steps to consider include the following:

  • Employers must change their recruiting and hiring practices to eliminate inquiries regarding compensation and benefit history, and should not rely on candidates’ compensation or benefit history when selecting candidates or determining compensation or benefits.
  • When recruiting, employers should shift compensation discussions with candidates away from the candidates’ salary history to focus on candidates’ expectations and the salary range that the employer has identified for the position.
  • Employers should train all personnel involved in the recruiting and hiring process on these new requirements.
  • Employers should review their existing compensation structures to identify pay differentials between employees who perform similar work and assess whether those differentials can be justified under the amended law. Differentials based solely upon prior compensation history may now be difficult for employers to defend. Consider engaging legal counsel to conduct this review, as the legal issues can be complex and an assessment done without the assistance of counsel will not be privileged.
  • While employers should consider addressing any pay disparities that may be problematic under the new law, they should be cautious in how they do so. The Act prohibits employers from reducing the pay of any employee to comply with the Act. While increasing compensation is less problematic, that too can create employee relations and legal issues if not handled with care. Proceed with caution, and consult with legal counsel.
  • Employers should review their confidentiality policies and agreements to ensure that they do not run afoul of the Act’s new restrictions on provisions limiting disclosure of compensation information.

City of Chicago FlagThe City of Chicago has flirted with enacting a “Fair Workweek” ordinance, aimed at ensuring predictable work schedules for workers, for several years. While the ordinance failed to gain traction in its prior iterations, this time it has a powerful proponent in Mayor Lori Lightfoot, who has made passing the ordinance one of her priorities for her first 100 days in office.

If it passes, the ordinance will impose significant new regulatory obligations on day and temporary labor service agencies, hotels, restaurants, building services, healthcare facilities and programs, manufacturers, airports, warehouses, retail employers, and childcare providers. The Chicago City Council may vote on the measure as early as June 12, 2019.

The full text of the ordinance is available here: O2019-3928 (1)

Visit this link for a detailed summary of the ordinances’s requirements.

Mayor Lightfoot’s first 100-day agenda also includes a proposal to increase the minimum wage in Chicago to $15 per hour by 2021. Illinois recently adopted legislation to increase the state minimum wage to $15 per hour, but that increase will not take full effect until 2025.

 

Earlier today (March 7, 2019), the U.S. Department of Labor announced new proposed regulations (.pdf) that would increase the minimum salary for employees to qualify for the Executive, Administrative, and Professional exemptions under the Fair Labor Standards Act to $679 per week, equivalent to $35,308 per year. This is an increase from the current minimum of $455 per week ($23,660 per year), set in 2004. However, it is significantly less than the $913 per week ($47,476 per year) minimum established in final regulations issued in 2016 and later blocked by a federal court.

Unlike the ill-fated 2016 regulations, the new proposed rules do not provide for automatic increases of the minimum salary. Instead, the Department proposes to review the minimum salary threshold every 4 years.

One new wrinkle included in the proposed rules is a provision that would allow employers to use non-discretionary bonuses and commissions paid annually or more frequently to satisfy up to 10% of the minimum salary obligation.

The Department will accept public comments on the new rules for a period of 60 days after the Notice of Proposed Rulemaking is formally published in the Federal Register. The timing of a final rules remains uncertain, but it is likely that the Department will aim to have final rules in place before the 2020 election.

For now, no need to panic even if you have exempt employees whose salaries fall below the proposed new minimum. It will be months before we know exactly what the final rules will look like, let alone whether they will survive the inevitable legal challenges.

Stay tuned for updates and further analysis.

On February 15, 2019, the U.S. Department of Labor issued Field Assistance Bulletin No. 2019-2, providing additional guidance for Wage and Hour Division staff regarding how to apply tip credit rules for employees who perform both tip-generating work (like taking orders and serving) and other duties. We provided an overview of the DOL’s position on the issue in an earlier post (“What Duties Can a Server Perform Under the Tip Credit Rules?“).

This latest bulletin doesn’t break new ground, but does provide a useful summary of the DOL’s current take on how the tip credit under FLSA Section 3(m) applies to employees who perform differing tasks for an employer. It’s worth a read for any employers in the hospitality industry. Keep in mind – the DOL’s revised position may not carry the day in litigation, and state laws may vary.

On February 19, 2019, Illinois Governor J.B. Pritzker signed Senate Bill 1, which increases the minimum wage in Illinois to $15 per hour by 2025. Under the new law, the minimum wage will increase from $8.25 to $9.25 on January 1, 2020, to $10.00 on July 1, 2020. Thereafter, the minimum wage will increase by $1.00 per hour each January 1, until it reaches $15.00 per hour on January 1, 2025. To mitigate the sting for small employers, the law allows employers with 50 or fewer employees to claim a tax credit for 25% of the cost of the increase in 2020. The credit gradually phases out over the next several years.

While most of the headlines about the new law focus on the minimum wage increase, the law also dramatically increases employers’ potential liability for minimum wage and overtime violations. Previously, employees who sued to recover wages and overtime pay under the Minimum Wage Law were entitled to recover the amount of any underpayment plus a statutory penalty of 2% of the amount of the underpayment per month that amount goes unpaid. The new law more than doubles the statutory penalty to 5% per month. Even more significantly, the law creates a new provision allowing employees to recover not just the amount of wages owed, but treble that amount.

To put this in dollar terms, before this new law, an employee who was underpaid by $100 per month over three years could recover $4,932 ($3,600 in wages plus $1,332 in penalties). Under the new law, the same employee could recover $14,130 ($10,800, or three times the amount of wages owed, plus $3,330 in penalties). These changes are likely to encourage employees and plaintiffs’ lawyers to pursue claims for even modest underpayments. Employers may also find it far more difficult and expensive to settle minimum wage and overtime claims under the new law.

The law also adds other new penalties payable to the Illinois Department of Labor. The Minimum Wage Law already provided that if an underpayment is found to be willful, repeated, or reckless, the employer is liable to the Department of Labor for a penalty of 20% of the amount of the underpayment. The new law adds an additional penalty of $1,500, payable to the Department of Labor’s “Wage Theft Enforcement Fund.”

The law also adds new teeth to the Minimum Wage Law’s record keeping provisions. Until now, the Minimum Wage Law did not provide for any monetary penalties for failure to keep required records. Under the new law, an employer that fails to maintain records required by the Minimum Wage Law is subject to a penalty of $100 for each impacted employee, also payable to the Department of Labor’s Wage Theft Enforcement Fund. Among other things, the Minimum Wage Law requires employers to keep a record of “the hours worked in each day and in each work week by each employee.” The law does not create any exception to this timekeeping requirement for exempt employees, and the Department of Labor’s regulations under the Wage Payment and Collection Act expressly state that employers are required to keep daily time records for all employees “regardless of an employee’s status as either an exempt administrative employee, executive or professional.”

The penalty provisions of the law are effective immediately.

In light of the new law, Illinois employers should consider the following steps:

  • Review all wage rates and begin planning for how to address the increased minimum wage taking effect on January 1, 2020.
  • Plan for how the increased minimum wage may affect bargaining with unions and existing wage schedules under union contracts.
  • With the assistance of legal counsel, conduct a comprehensive wage and hour compliance review.
  • If your organization does not currently keep a daily record of hours worked by exempt employees in Illinois, start doing so.
  • If you have fifty or fewer employees, be sure to talk with your tax advisers about the new tax credit.
  • Don’t hesitate to seek professional advice about wage and hour questions. The cost of a fifteen minute phone call with an experienced wage and hour lawyer is a drop in the bucket compared to the severe new penalties for even innocent mistakes under the new law.

Oh the weather outside is frightful …

No, seriously, it’s actually dangerous here in Chicago. Since much of the city seems to be on lock-down today as we all try not to freeze to death, this seems like a good time to review the rules relating to employee pay during weather-related shut-downs.

For non-exempt employees, the rule is pretty simple: Unless you have promised to do otherwise, you only have to pay non-exempt employees for the hours that they actually work. If you are shut down due to weather, you are not typically obligated to pay non-exempt employees. If you choose to pay for time that the employees do not actually work, you do not have to count the hours of non-work for overtime purposes, or include the pay in the “regular rate” calculation for computing overtime.

Exempt employees are another story. Most employees who are exempt under the executive, administrative, and professional exemptions have to be paid on a salary basis, meaning that they receive the same pay each workweek, regardless of their work hours. You can deduct from pay if an employee does not show up to work for a full day for personal reasons, but that exception does not apply if the employer elects to shut down for weather, lack of work, or other reasons. As long as the employee is ready, willing, and able to work, they are entitled to their full pay for the week.

You can require exempt or non-exempt employees to draw down any available vacation, PTO or personal time to cover the hours missed due to your shut down. However, once exempt employees are out of paid time, you still have to pay them their full salary for the week.

If you are open for business but your exempt employees decide on their own that they prefer not to brave the cold, you might be able to take deductions for any full days missed. Just beware – most exempt employees these days have at least some ability to work from home. Even if they are just taking a few calls or replying to e-mail, that counts as work, and if they work part of the day, they are entitled to pay for the full day.

As always, mileage may vary depending on your jurisdiction, and be sure to check and follow your policies, handbooks, agreements, etc.

Stay warm!