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HARMON CURRAN NONPROFIT LAW BLOG

Navigating Classification Issues in 2020

U.S. Department of Labor Final Rule on Overtime Eligibility

As a result of a final U.S. Department of Labor (DOL) rule, effective January 1, 2020, for employees to be considered executive, administrative, or professional employees exempt from the overtime rules of the Fair Labor Standards Act (FLSA), they must receive a minimum salary of at least $35,568 per year. While this increased salary level is well below that proposed during the prior administration, it is slightly higher than  the initial DOL proposal announced in March 2019 (see our prior post here), and it does increase the number of American workers eligible for overtime pay.

The total annual compensation requirement for “highly compensated employees” has also increased to $107,432 per year, although that number is significantly lower than the $147,414 figure included in the initial proposal. Under the final rule, nondiscretionary bonuses and incentive payments may be used to satisfy up to 10 percent of the standard salary level. DOL has expressed an intent to more regularly update these minimum salary figures in the future, but without making any commitment or establishing any time period for doing so.

Employers should remember that the minimum salary level is only one aspect of the requirements that must be met for employees to be classified as exempt from the FLSA overtime requirements. Exempt employees must also satisfy the existing duties tests to be considered exempt executive, administrative, or professional employees. Employers must also consider whether any state laws, such as those in California, require that exempt employees be paid at a higher salary level or meet additional duties requirements. Any additional state requirements will apply to employees who work in those jurisdictions.

Employers who have not recently reviewed whether employees considered exempt actually satisfy all of the currently applicable tests should do so.

Answers to frequently asked questions regarding the final rule on overtime eligibility can be found here.

California Law Impacting Independent Contractor Classification

Also effective at the start of this year is California Assembly Bill 5 (AB 5), a law that makes it more difficult for California companies to classify workers as independent contractors, meaning that organizations with California-based independent contractors may need to reclassify them as employees. While the law is currently being challenged in the courts, it remains in effect for covered industries, other than motor carriers. In addition, a number of bills are being considered by the legislature this session to amend the law.

AB 5 codifies and clarifies the California Supreme Court’s landmark ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex) which adopted a three-part “ABC” test in order to determine the correct classification of a worker. Under the “ABC” test, the burden is placed on the employer to prove that an individual is an independent contractor and not an employee. Specifically, a worker can be correctly classified as an independent contractor, to whom California wage and hour requirements do not apply, only if the employer can establish all of the following:

  1. “that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
  2. That the worker performs work that is outside the usual course of the hiring entity’s business; and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.”[1]

AB 5 codifies the “ABC” test used in Dynamex and extends its application for purposes of the California Labor Code, Unemployment Insurance Code, and California wage and hour requirements. An individual that is paid to provide labor or services in California is therefore considered an employee, unless the hiring entity demonstrates that all of the above three prongs apply.

Organizations that employ individuals in California should ensure that they are correctly classifying their workers, pursuant to the “ABC” test, including verifying that the worker actually has an established business. Furthermore, this serves as a general reminder that workers are subject to the laws of the states where they work, even if the organization is based elsewhere. Other states, such as Massachusetts, have a similar law in place or are considering adopting them. Employers must therefore be aware of state specific laws regarding the proper classification of workers.

[1] https://caselaw.findlaw.com/ca-supreme-court/1894839.html

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This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.