Late Tuesday afternoon, the United States District Court for the Eastern District of Texas granted a motion brought on behalf of 21 states and supported by business groups led by the United States Chamber of Commerce to preliminarily enjoin the new overtime exemption regulations set to go into effect on December 1, 2016. Those new regulations were announced in May by the United States Department of Labor (“DOL”) and, if they had gone into effect, would have increased the minimum salary threshold for most executive, administrative and professional employees from $455 per week (or $23,660 per year) to $913 per week (or $47,476 per year). The new rules would have jeopardized the exempt status of 4.6 million employees.
The Elements for Preliminary Relief Were Satisfied by the States
At the outset, the court had to determine if the states will “likely succeed on the merits” as the case is further litigated, and if a permanent injunction is on the horizon. The states’ case was premised on both constitutional and statutory grounds. The court concluded that while the states’ constitutional claims were unlikely to succeed, their statutory arguments appeared strong and likely to succeed.
The court noted that the Fair Labor Standards Act (“FLSA”) provides that “‘any employee employed in a bona fide executive, administrative, or professional capacity… as such terms are defined and delimited from time to time by regulations of the Secretary, shall be exempt from minimum wage and overtime requirements.” According to the court, the issue boiled down to what Congress meant by “executive, administrative and professional.” The court concluded that Congress’ focus when the FLSA was enacted was on what these employees actually do, i.e., what are their duties, which, the court concluded, “does not include a minimum salary level.” That is, while the law generally grants administrative agencies great deference as they interpret statutes, “nothing… indicates that Congress intended the Department to define and delimit a salary level.”
Consequently, the court held that the DOL exceeded its authority by imposing a salary level requirement in the tests for these white collar exemptions. Further, the court stated: “Congress did not intend salary to categorically exclude an employee with [exempt] duties from the exemption,” but such an outcome, the court stressed, would happen under the new regulations. Indeed, this outcome was expressly admitted to by the DOL in the preamble to the new regulations, i.e., that the significant salary level increase would, in and of itself, make otherwise exempt employees non-exempt.
The court also held that absent an injunction, the states would be irreparably harmed. That harm would not only include the cost of paying higher salaries, but it would also entail the cost spent on compliance and the redirection of resources from other critical services of the state governments.
Finally, the court found that the public interest would be best served by it issuing an injunction. On this point, the court noted that more time would be needed for it to make a final ruling on the case, and that by issuing an injunction, the only harm to the DOL would be a delay in the implementation of the new regulation. Thus, the court concluded that preserving the status quo while the case continues on the merits is appropriate.
The Injunction’s Scope Is National
In light of the above, the court determined that an injunction was appropriate. The remaining issue regarded its scope. The DOL argued that it should only apply to those states that participated in the case, and established the potential of irreparable harm. The states argued that the injunction should apply nationwide. After noting that injunctions are dictated by the nature of the violation at issue and not its geographical scope, the court agreed with the states and applied its injunction nationwide.
Consequently, the court granted the motion of the preliminary injunction and enjoined the DOL from implementing and enforcing the new salary level regulations on December 1, 2016.
At this time, the new regulations are essentially on hold, subject to further litigation. The current regulations are not enjoined in the meantime. Those may later become an issue as the litigation proceeds, but for now, employers must continue to comply with the regulations currently in effect. Employers operating in states with their own laws and regulations must continue to comply with their states’ laws; nothing in Tuesday’s injunction affects state laws.
To be sure, many employers have already made or announced changes to conform to the regulations set to go into effect in just over one week. Those employers may consider cancelling those changes or retaining some of them. How to proceed will depend on the circumstances and each employer’s assessment of the likelihood that the injunction will become permanent. Another unknown factor is the stance the Trump Administration will take on this matter. The incoming administration could continue to fight for the new DOL regulations, or could simply let the injunction stand so that it can chart its own path in 2017. Time will tell.
Over the course of the last year, the U.S. Department of Labor promulgated two controversial regulations triggering court challenges. One rule – known as the “Persuader Rule” – was set to require employer consultants and lawyers to file disclosure reports of any union avoidance activities they engage in, even if that activity was purely advisory in nature and did not involve direct contact with employees. The other rule regards the changes to the overtime exemption regulations, which are set to increase the salary threshold for exempt status from $455 per week to $913 per week, and then to automatically adjust that threshold every three years.
THE PERSUADER RULE
This past spring a Texas court issued a preliminary injunction on the eve of “persuader” rules’ effective date. If not enjoined, the new persuader rules would have substantially broadened the definition of “persuader” activity and required greater disclosure by law firms regarding their relationships with their clients. Under the current rules, lawyers may give advice to employers regarding union avoidance issues and, so long as they don’t meet with employees directly, their work is not disclosable. The new rules would have made the mere giving of advice reportable. This week, the court made the preliminary injunction enjoining the implementation of the new rules permanent. The only option for the DOL at this point is for it to appeal that ruling to the Court of Appeals. Given the outcome of last week’s election, even if it does appeal the case, the conventional wisdom is that the Trump Administration will abandon the rule and the appeal.
THE STATUS OF THE OVERTIME REGULATIONS
The new FLSA exemption regulations are set to go into effect on December 1, 2016. A few months ago, two lawsuits were filed in another Texas federal court, one by 21 state attorneys general, and the other by a coalition of business groups spearheaded by the U.S. Chamber of Commerce (of which Dykema is a member and serves on its Labor and Employment Committee). The claims in the cases are not identical, but they do overlap and basically contain two themes.
One theme is that the dramatic increase to the salary level jeopardizes the exempt status of 4.6 million workers, employees on November 30 considered to be exempt, but on December 1 would no longer be exempt despite their duties remaining the same. The magnitude of this change is unprecedented and is claimed to run afoul of the statute making these employees exempt based on their duties and not their salaries.
The second theme regards the triennial indexing of the salary level threshold. Both lawsuits assert that the DOL cannot create automatic adjustments to the regulations because the FLSA states that the DOL is only empowered to issue regulations on this matter “from time to time.” The automatic indexing, the plaintiffs claim, serves to change the rules without the “notice and comments” required before administrative agencies may change a rule.
On Wednesday, November 16, 2016, the court heard arguments on the states’ motion for an injunction to stop the December 1 implementation of the new regulations. During the arguments, the court stressed that it would not base its decision on the prospects of the incoming Trump Administration’s disfavoring the new regulations. Rather, the court said it would limit its review to the merits of the new regulations as they currently stand. In that regard, though, the court’s exchanges with counsel from both sides revealed some skepticism on the court’s part, mostly pertaining to the unprecedented loss of exempt status by so many employees and whether the DOL has the right to preclude exempt status as to employees who clearly meet the duties tests for their exemptions. That said, the DOL strongly argued that its right to set a salary level test has been unchallenged in the courts or by Congress for 70 years, and that defining the exemption as it has done was therefore well within its authority.
The court concluded the hearing by stating that it will issue its decision by November 22, 2016. The conventional wisdom is still that there is a high likelihood that the regulations will not be enjoined. Further, if enjoined, the injunction may only apply to state (and local) governments. More importantly, given the perceived skepticism of the court (which may be encouraging to employers), employers should not “take their foot of the pedal” towards complying with the new regulations, but instead, should continue to act with the assumption that the regulations will go into effect on December 1.
Should the court deny the injunction, though, on November 28th the court will hear arguments on the pending motion for summary judgment brought by the business groups. The prospects of success by the business groups on that motion may be better assessed after reading the court’s decision on the injunction.
Dykema and other WHDI firms will continue to monitor these cases and related developments.
The FLSA requires that covered employees be compensated not only for time spent on the principal activities he or she is engaged to perform but also tasks that are an integral and indispensable part of those principal activities. In Integrity Staffing Solutions, Inc. v. Busk, 135 S. Ct. 513 (2014), the U.S. Supreme Court explained that an activity is “integral and indispensable to the principal activities that an employee is employed to perform if it is an intrinsic element of those activities and one with which the employee cannot dispense if he is to perform his principal activities.”
Recently, the Second Circuit had an opportunity to apply Busk’s “integral and indispensable” standard in the context of a donning and doffing claim. In Perez v. City of New York, __ F.3d __, 2016 WL 4087216 (2d Cir. Aug. 2, 2016), Assistant Urban Park Rangers (AUPRs) employed by the City’s Department of Parks & Recreation claimed an entitlement to compensation for time spent donning and doffing uniforms and equipment. The district court granted summary judgment for the City, but the Second Circuit reversed, finding that a reasonable jury could conclude the AUPR’s donning and doffing activity was integral and indispensable to their principal law enforcement and public assistance activities.
As an initial matter, the Court of Appeals emphasized that the donning and doffing of uniforms was by all indications undertaken for the City’s benefit, as evidenced by the fact that the Parks Department (i) “prescribes the components of the uniform in painstaking detail, and AUPRs may be disciplined for non-compliance”; and (ii) “requires AUPRs to don and doff their uniforms at the workplace.” Moreover, the Second Circuit explained, “it is the professional Parks Department clothing, with its recognizable color scheme and insignias, that not only attract citizens in need of assistance but also establishes an AUPR’s authority to investigate violations, issue summonses, make arrests, and otherwise intervene in emergency situations.”
The Court next observed that the protective gear carried by the AUPRs appeared to be vital to the primary goal of their work in that “an AUPR’s utility belt holds items used to perform law enforcement duties” and so may be properly classified as tools of the trade: “A summons book is, of course, necessary for the issuance of summonses. A baton, mace, and handcuffs, in turn, may be critical in effecting an arrest. And a radio and flashlight may prove crucial in tracking suspects and coordinating with other municipal employees.” Therefore, the Court opined, “a reasonable factfinder could conclude that the donning and doffing of an AUPR’s utility belt are integral and indispensable tasks.” Likewise, the Circuit Court concluded that “the donning and doffing of an AUPR’s bulletproof vest may also qualify as integral and indispensable” since “it guards against ‘workplace dangers that transcend ordinary risks,'” in particular “[t]he risk of sustaining gunfire while enforcing municipal laws.”
Perez offers yet another illustration of the highly fact-intensive, job-specific nature of the “integral and indispensable” inquiry.
Wiggin and Dana LLP
Beyond setting a minimum wage rate for the Commonwealth, the Massachusetts Minimum Fair Wage Law (MFWL) also forbids payment of an “oppressive and unreasonable wage,” defined by statute as “a wage which is both less than the fair and reasonable value of the services rendered and less than sufficient to meet the minimum cost of living necessary for health.”
The plaintiff in Costello v. Whole Foods Market Group, Inc., 2016 WL 4186927 (D. Mass. Aug. 8, 2016) offered the novel argument that a wage rate higher than the established minimum wage may nonetheless be “oppressive and unreasonable,” only to be shot down by a federal district judge. Although technically a matter of first impression, the district court found “that from the very beginning, the MFWL has been interpreted to enforce the minimum wage standards that are statutorily or administratively set, but not to permit ad hoc, case by case inquiries into what might be ‘oppressive and unreasonable’ in varying circumstances. The fact that a wage is not below any established minimum is conclusive that the wage is also not ‘oppressive and unreasonable.'” The court therefore concluded that because the plaintiff’s wage rate always exceeded the statutory minimum, it “could never have violated the MFWL.”
The issue actually arose in the context of a claim for retaliatory discharge–the plaintiff alleged that he was fired for complaining about an “oppressive and unreasonable” wage rate. Rejecting the claim essentially for want of protected activity, the court reasoned that the plaintiff could not have reasonably believed the statute “authorizes the free-floating assessment he proposes. In other words, given the way the law has been administered, it would not have been reasonable for him to believe that his employer violated the minimum wage law by not giving him a raise from an already above-minimum wage to an even higher wage.”
While the result in Costello is hardly surprising, a contrary ruling would undoubtedly have had disastrous consequences, potentially leaving it to the judiciary to determine on a case-by-case basis whether a given wage was “oppressive and unreasonable” under the particular circumstances. Hopefully, this is the last we’ve seen of the novel argument rejected in Costello.
Wiggin and Dana LLP
In Fortune v. National Cash Register Co., 373 Mass. 96, 364 N.E.2d 1251 (1977), the Supreme Judicial Court of Massachusetts held that an employer breaches the implied covenant of good faith and fair dealing by terminating an at-will sales employee in order to deprive him or her of the opportunity to earn commissions, such as in a situation where the employee is discharged on the brink of completing a commissionable sale. Nearly forty years later, the Supreme Court of Connecticut has followed suit, recognizing in Geysen v. Securitas Security Services USA, Inc., __ Conn. __, __ A.3d __, 2016 WL 4141090 (Aug. 9, 2016) “the availability of a breach of the covenant of good faith and fair dealing contract claim when the termination of an employee was done with the intent to avoid the payment of commissions.”
In arriving at this conclusion, the Court rejected the notion that in the at-will employment context a claim for breach of the covenant of good faith and fair dealing is coextensive with a claim for wrongful discharge, reasoning that “the former focuses on the fulfillment of the parties’ reasonable expectations rather than on a violation of public policy.” The Court noted that “although an employer may terminate the employee at will” and “an employer does not act in bad faith solely by refusing to pay commissions on sales invoiced after an employee’s termination if that obligation is an express contract term,” “the employer may not act in bad faith to prevent paying the employee commissions he reasonably expected to receive for services rendered under the contract.”
On a more positive note, the Court rejected the plaintiff’s claim under Connecticut’s wage payment statutes, reiterating that the wage laws leave the timing of accrual of earned compensation to the determination of the wage agreement between the employer and employee, and holding that a “contract provision providing that commissions will be paid only if the work had been invoiced prior to termination of the employee does not violate public policy and is enforceable.” The Court also affirmed dismissal of the plaintiff’s public policy-based wrongful discharge claim, ruling “that the parameters of the public policy of this state with regard to the payment of wages is reflected in the wage statutes and that an employee cannot use the nonpayment of wages that have not accrued as the basis for a wrongful discharge claim.”
All in all then, the Geysen decision is a mixed bag. However, by recognizing the equivalent of a Fortune claim the Court has undoubtedly opened the door to further litigation.
Wiggin and Dana LLP
On August 1, 2016, Massachusetts Governor Charlie Baker signed a new pay equity act (the “Act”) into law. The Act, which goes into effect on July 1, 2018, is designed to close the wage gap between men and women. Although Massachusetts already had a pay parity law that prohibits wage discrimination, the Act provides greater clarity on what constitutes unlawful pay discrimination and imposes new rules and restrictions on employers.
First, the Act clarifies what it means to discriminate against workers who perform “comparable work” to others. While the current statute prohibits pay discrimination where workers perform “comparable work,” it does not define that term. Under the Act, comparable work is defined to be work that requires “substantially similar skill, effort and responsibility and is performed under similar working conditions.” The Act, however, does not define “substantially similar,” so that term will still be subject to interpretation by either the Attorney General’s Office or courts.
Second, whereas seniority was the only stated basis for paying variable wages under the old law, the Act recognizes six justifications for pay disparities where workers perform comparable work. Variations in pay are permissible under the Act if based upon: (1) a seniority system, provided that job-protected leave does not reduce seniority; (2) a merit system; (3) a system measuring quality or quantity of production, sales or revenue; (4) geographic location of where the job is performed; (5) education, training, or experience to the extent these factors reasonably relate to the job at issue; and (6) travel, if travel is a regular and necessary condition of the job.
Third, Massachusetts becomes the first state in the country to constrict what employers may ask prospective employees about their wage history. Under the new law, employers may not seek the wage or salary history of a prospective employee from the prospective employee or a current or former employer or require that applicants meet certain salary criteria to be eligible for a job. This provision, however, includes an important caveat: prospective employees may authorize a prospective employer to verify salary history, and prospective employers may confirm salary history after an offer with compensation has been negotiated and made to a prospective employee.
Fourth, the Act makes it unlawful for employers to prohibit employees from discussing or disclosing information about their own wages, or the wages of other employees.
Fifth, the Act establishes an affirmative defense for employers who have audited their pay practices within the prior three years. Specifically, employers who voluntarily evaluate their pay practices and “demonstrate that reasonable progress has been made towards eliminating wage differentials based on gender for comparable work,” have an affirmative defense to pay discrimination claims, so long as the evaluations were reasonable in detail and scope. At the same time, the law prohibits courts from drawing an adverse inference against employers who have not done a voluntary audit.
Sixth, the Act enhances the enforcement scheme of the previous law. The statute of limitations has been extended from one year to three years. The new law also allows employees to go directly to court with their pay discrimination claims without first bringing a complaint to the Massachusetts Commission Against Discrimination or the Attorney General’s Office.
Pay equity has been a topic of significant interest of late both locally and nationally. Massachusetts Attorney General Maura Healey in particular has made pay equity a priority of her office and has been using her enforcement powers to audit employer pay practices to detect and address discrimination. Accordingly, employers should expect that the Attorney General’s scrutiny of discriminatory pay disparities will only increase when the Act goes into effect. Now more than ever, employers should take time to review and evaluate their compensation practices to identify and remedy discriminatory pay disparities, and to take advantage of the new affirmative defense discussed above. They should also review hiring practices to ensure that they are not making impermissible inquiries into the pay histories of prospective employees. They also should review employee handbooks and other policies to ensure that they do not inhibit employees from discussing their compensation, as such a prohibition not only violates the Act, but also federal labor law.
Foley Hoag LLP
In 2013, the DOL promulgated a rule that served to eliminate the overtime exemption for companionship service workers, including live-in domestic service providers, employed by home care agencies and other third-parties. The new rule was to become effective on January 1, 2015. In the meantime, a lobbying group representing the interests of home healthcare companies filed suit in the U.S. District Court for the District of Columbia challenging the rule. The district court vacated the rule, finding it in conflict with the FLSA. However, last August, the U.S. Court of Appeals for the D.C. Circuit reversed the district court’s vacatur, reasoning that the rule was grounded in a reasonable interpretation of the FLSA and neither arbitrary nor capricious. Just last month, the U.S. Supreme Court denied the lobbying group’s petition for certiorari.
Against this backdrop, the U.S. District Court for the District of Connecticut was called upon to determine the effective date of the new rule. As artfully framed by the district court, the case, Kinkead v. Humana, Inc., “raise[d] a basic but well-settled question about the intersection of law and time.” In particular: “Are employers like the defendants in this case liable to pay overtime only from the date that the D.C. Circuit’s mandate issued in October 2015 to overturn the district court’s decision that vacated the rule? Or are employers liable to pay overtime as of the agency’s initial effective date in January 2015?” Applying “the well-established rule that judicial decisions are presumptively retroactive in their effect and operation,” the court determined that the rule became effective in January 2015, as originally contemplated by the DOL. The court reasoned that the defendants’ purported reliance on the district court’s decision was, in light of this presumption, unjustified. As such, the plaintiffs’ overtime entitlement kicked in as of January 2015.
Lawrence Peikes, Wiggin and Dana LLP
The Ninth Circuit issued its decision in Corbin v. Time Warner-Advance Newhouse, rejecting an employee’s claim that he was unlawfully denied compensation for hours worked due to his employer’s poilcy of rounding time entries to the nearest quarter hour. The Ninth Circuit further rejected the employee’s claim that the trial court erroneously denied class certification on the rounding claim. The first paragraph of the Ninth Circuit opinion nicely captures just how ridiculous this claim, where less than $20 was actually at issue, was:
“This case turns on $15.02 and one minute. $15.02 represents the total amount of compensation that Plaintiff Andre Corbin (“Corbin”) alleges he has lost due to his employer’s, Defendant Time Warner Entertainment-Advance/Newhouse Partnership (“TWEAN”), compensation policy that rounds all employee time stamps to the nearest quarter-hour. One minute represents the total amount of time for which Corbin alleges he was not compensated as he once mistakenly opened an auxiliary computer program before clocking into TWEAN’s timekeeping software platform. $15.02 in lost wages and one minute of uncompensated time, Corbin argued before the district court, entitled him to relief under the Fair Labor Standards Act of 1938 (“FLSA”), 29 U.S.C. § 201, et seq., and various California state employment laws.”
Of course, it is safe to assume that several hundreds of thousands of dollars were spent litigating the merit of this $15.00 claim, the propriety of class certification, and the resulting appeal. Fortunately, the Ninth Circuit, like the trial court, rejected the employee’s claims and in the process, upheld the validity of the employer’s rounding policy under both the FLSA and California law.
The rounding policy at issue rounded all employee time stamps to the nearest quarter hour. There was no evidence that the policy operated to benefit only the employer by, for example, rounding all entries in the employer’s favor. Instead, the evidence showed that the policy was neutral, meaning that if an employee clocked in up to 7 minutes early, the employee’s time would be rounded up (benefiting the employer), but if the employee clocked in up to 7 minutes late, his or her time would be rounded down (benefiting the employee). Similarly, if the employee clocked out up to 7 minutes early, the time would be rounded up (benefiting the employee), and if the employee clocked out up to 7 minutes late, the time would be rounded down (benefiting the employer). A review of the named plaintiff’s time records revealed that the rounding policy resulted in plaintiff gaining compensation or breaking even 58% of the time. However, for the snapshot of time at issue, the net result was that plaintiff lost $15.02 based on the rounding policy. Plaintiff alleged that this violated both the FLSA and California law, and sought to certify a class action on the claim. The district court granted summary judgment in favor of the employer and rejected the plaintiff’s effort to certify a class.
Agreeing with the district court, the Ninth Circuit held that the rounding policy was lawful and that plaintiff did not have a valid claim for unpaid wages. The Court relied on a FLSA regulation, 29 CFR 785.48, that specifically permits rounding practices as long as they are applied in a neutral manner that does not, over time, result in a failure to compensate employees for all time that they have actually worked. The plaintiff argued that because he lost $15.02 as a result of the application of the rounding policy (for the snapshot of time analyzed), it violated the law because it resulted in him being underpaid. The Ninth Circuit rejected this argument, reasoning that the validity of a rounding policy depends on how it operates in the global sense, not how it impacts one individual employee. Here, the evidence showed that the policy was neutral in operation. Furthermore, even looking at how the policy affected just the individual plaintiff in this case, even though the plaintiff lost $15.02 for the snapshot of time analyzed, the rounding policy was still lawful because it was undisputed that in most pay periods the policy operated to either overcompensate the plaintiff or he broke even. Thus, it did not result in him being systematically underpaid. Indeed, in 8 out of 10 of his last pay periods, he was overcompensated based on the rounding policy. Thus, if he had continued working a few more pay periods and those were added into the analysis, it likely would have resulted in there being no net loss whatsoever. The Court thus rejected the idea that just because the particular snapshot of time selected produced a net loss, this automatically invalidates the rounding policy. The Court reasoned that if this were the case, this would lead to artful pleading by plaintiffs to craft rounding claims based on carefully selected snapshots of time that they know would yield a net loss.
Having determined that the rounding policy complied with federal law, the Court turned to plaintiff’s claim that the policy violated California law. The Court rejected this argument as well, holding that California law is in accord with federal law on the issue of rounding.
The Court similarly rejected the plaintiff’s claim that he was denied one minute of pay for work he performed off the clock on one occasion when he mistakenly logged onto his computer before clocking in. The court held that this was de minimis time that was not compensable under the FLSA or California law. The Court further noted that the employee’s off the clock “work” was contrary to the employer’s policies specifically requiring employees to clock in before performing any work.
On the issue of class certification, the Court held that the trial court’s grant of summary judgment in favor of the employer on the named plaintiff’s rounding claim mooted the issue of whether or not a class should have been certified because there was no valid rounding claim upon which to base a class claim.
While a good result and a favorable decision for employers, this case should not be interpreted as providing blanket approval for rounding policies and practices. Such policies still carry risk and invite litigation, particularly where combined with written or unwritten rules of practice that aim to ensure that the policy will operate to the benefit of the employer.
The U.S. Department of Labor (USDOL) announced adoption of 2016 final regulations changing the white-collar exemption requirements. The new regulations are set to take effect on December 1, 2016, giving employers approximately 200 days to get ready.
The new minimum salary threshold for the overtime exemptions will be $47,476 ($913/week) annually. This is up from $23,660 ($455/week). The new salary threshold for the highly compensated employee exemption is $134,004, up from $100,000. Non-discretionary bonuses and commissions can be counted toward as much as 10 percent of the salary threshold, as long as they are made on a quarterly or more frequent basis. Going forward, the salary thresholds will be automatically updated every three (3) years starting January 1, 2020, and indexed to the 40th percentile of full-time salaried workers in the lowest income region of the country (currently the South). The DOL did not make changes to the exempt duties tests.
These regulations may be the most controversial among the last-minute employment regulations and guidance streaming out of the current Administration because of the significant impact on large numbers of employers and employees across the country, particularly local businesses, nonprofits, public agencies (including higher education), hospitality, tourism, and retailers. The U.S. Congress could try to block the final rule using the Congressional Review Act that gives Congress the option to disapprove certain types of “economically significant” regulations before they go into effect. Several congressional representatives have introduced such legislation but it remains to be seen how much momentum exists to pass legislation on this rule and whether enactment can be done on a timetable to avoid a certain veto by President Obama before he leaves office.
Employers who have not already done so need to immediately initiate risk management and compliance planning by reviewing exempt positions and identifying options to minimize negative impacts on employee relations, direct payroll costs, indirect administrative costs, and general operations. Employers are strongly advised to do these analyses under the guidance of an experienced wage and hour attorney due to the complexity of potential issues and the availability of the attorney-client privilege to protect candid discussions involving legal advice and risk management.
With its final rule, the USDOL has created an expectation that employers will have to give more than 4 million managers and administrators a “government-mandated” pay increase. However, the USDOL has failed to adequately inform the public that individual compensation in the form of overtime pay does not have to result in overall increase from current compensation when employers reclassify positions as non-exempt. Employers are allowed to modify pay rates, benefits, and work hours to maintain existing compensation levels.
The USDOL has also largely ignored the adverse impacts that will likely occur with the implementation of this final rule. For example, currently exempt employees who are converted to non-exempt status will lose flexibility regarding working conditions and many may feel that they have been “demoted.” Employers will have to deal with these employee morale issues as well as significant hidden costs to plan, budget, implement, train workers, revise policies and procedures, reprogram payroll, and otherwise administer changes required by the new rules.
Today Governor Jerry Brown signed Senate Bill 3, which will gradually increase the state’s minimum wage from its current level of $10 per hour to $15 per hour by 2022. Both houses of California’s legislature passed the bill on March 31 to great fanfare, but the Governor waited until today to give formal approval, presumably to avoid signing the bill into law on April Fool’s Day.
The new law will increase the state’s minimum wage from $10 per hour according to the following schedule:
For employers with 26 or more employees:
January 1, 2017: $10.50 per hour
January 1, 2018: $11.00 per hour
January 1, 2019: $12.00 per hour
January 1, 2020: $13.00 per hour
January 1, 2021: $14.00 per hour
January 1, 2022: $15.00 per hour
For employers with 25 or fewer employees, each increase will be delayed by one year as follows:
January 1, 2018: $10.50 per hour
January 1, 2019: $11.00 per hour
January 1, 2020: $12.00 per hour
January 1, 2021: $13.00 per hour
January 1, 2022: $14.00 per hour
January 1, 2023: $15.00 per hour
Beginning in 2024, the minimum wage will increase annually up to 3.5 percent based on the United States Consumer Price Index for Urban Wage Earners and Clerical Workers, rounded to the nearest ten cents. The new law does not preempt local minimum wage ordinances that have been adopted by several cities in California in recent years, so local governments remain free to enact minimum wages higher than the state minimum.
Beginning July 1, 2018, the new law will also phase in paid sick leave for in-home supportive care workers, who were excluded from the state’s paid sick leave law that took effect in 2015.
The new law will also gradually increase California’s minimum salary for so-called “white collar” (executive, administrative, and professional) exempt employees, which is set at twice the state minimum wage for a 40-hour work week. Under the current $10 state minimum wage, California’s minimum salary is $800 per week or $41,600 per year. Unless the legislature acts to de-couple the minimum exempt salary from the minimum hourly wage, the minimum salary for white collar exempt employees in California will rise according to the following schedule:
January 1, 2017: $840 per week / $43,680 per year
January 1, 2018: $880 per week / $45,760 per year
January 1, 2019: $960 per week / $49,920 per year
January 1, 2020: $1,040 per week / $54,080 per year
January 1, 2021: $1,120 per week / $58,240 per year
January 1, 2022: $1,200 per week / $62,400 per year
The minimum salary for white collar exempt employees under the FLSA is currently just $455 per week ($23,660 per year). However, the Obama administration’s plan to change the FLSA regulations to raise that minimum to at least $970 per week ($50,440 per year), and then annually adjust the minimum to keep pace with inflation, is likely to take effect in the summer or fall of 2016. Any white collar employee in California must be paid a salary high enough to satisfy both the state and federal minimums to be exempt from overtime for hours worked in excess of eight per day or 40 per week.
Employers should immediately begin planning to adjust to the new law, which critics describe as a “job-killer.” The economic impact of a $15 minimum wage remains to be seen, and given the implementation schedule the new law’s effects will be gradual. But at a minimum we know this much is true: (1) Minimum wage workers who remain employed will see a wage increase; and (2) Those who are laid off or cannot find employment under the new law will have an effective minimum wage of zero.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA