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FLSA Exemption Threshold

DOL Proposes Increased FLSA Exemption Threshold

On August 30, 2023, the Wage and Hour Division of the U.S. Department of Labor announced its intention to propose significant increases in the compensation required for several common minimum wage and overtime exemptions. If adopted following public review and comment, the FLSA exemption threshold for the administrative, executive, and professional exemptions would increase by more than 50% over the current salary requirement. The proposal also seeks an automatic adjustment every three years. In addition, the pay required to qualify for the FLSA’s “highly compensated employee” exemption would also increase substantially.

FLSA Minimum Wage and Overtime Requirements

The Fair Labor Standards Act applies to most employers across the United States. It generally requires that employees receive a minimum wage of at least $7.25 per hour and then receive overtime at time-and-a-half the employee’s regular rate for hours worked beyond 40 in a week. However, there are various exceptions and exemptions from those requirements.

Note that many states and some localities have additional minimum wage and overtime requirements. Employers are often subject to and must comply with both the FLSA and the applicable state/local standards.

“White-Collar” Exemptions

The FLSA permits a series of so-called “white-collar” exemptions that employers commonly rely on in structuring compensation for certain, typically non-manual, workers. The most generally applicable of these are known as the administrative, executive, and professional exemptions.

Under the FLSA, each of these exemptions has a salary basis requirement. To qualify for the exemption, an employee must be paid a salary that usually doesn’t vary based on how much the employee works in a given week.

Currently, the minimum salary for these exemptions is $684 per week ($35,568 annualized).

Proposed FLSA Exemption Threshold

The U.S. DOL has the authority to issue regulations interpreting the FLSA, including its exemptions. The salary requirement has historically been implemented through such administrative rulemaking.

The DOL has now proposed to base the salary requirement on the 35th percentile of weekly earnings of full-time salaried workers in this lowest-wage U.S. Census Region. The South is traditionally and currently the lowest-wage region.

Based on this method, the new FLSA exemption threshold would be $1,059 per week ($55,068 annualized). However, the DOL’s proposal indicates in a footnote that the actual threshold upon adoption of a final rule could be higher. Since some time will pass before the rule is finalized, the 35th percentile earnings in the South may increase. The DOL notes that given its current projection for future quarterly earnings data, the new weekly salary threshold could be up to approximately $100 higher than $1,059 upon adoption.

The proposal would also impose automatic updates to the salary requirement. The DOL would change the amount every three years to maintain the 35th percentile standard.

Highly Compensated Employee Threshold

The administrative, executive, and professional exemptions are not based solely on compensation. Employees’ duties must also meet particular standards. However, the FLSA recognizes an alternative potential exemption for some employees who do not fully meet the duty requirements of the other white-collar exemptions.

Currently, the “highly compensated employee” exemption could apply to an employee who makes a salary of at least $684 per week and overall qualifying annual compensation of at least $107,432.

As proposed, the new DOL rule would tie the overall annual compensation requirement to the 85th percentile of full-time salaried workers nationally. Based on current earnings statistics, that would initially be $143,988. Like the standard exemption salary threshold, this bar would also be subject to automatic updates every three years.

Rulemaking Process

Once the DOL’s proposal is formally published in the federal register, the public will be afforded at least 60 days to submit comments. After the comment period ends, the DOL can move forward with a final rule change. The new rule could be exactly what is currently proposed or include some revisions.

Given the necessary rulemaking timeline, it is unlikely the FLSA exemption threshold would change before 2024.

Potential Litigation

The last time the DOL tried to include automatic indexing of the FLSA exemption threshold, it was challenged in the courts and ultimately never took effect. Similar lawsuits will presumably be filed in response to the DOL’s current attempt to increase the salary requirement. The outcome of those cases cannot be as reliably predicted.

Impact of Proposals

The practical impact of the potential increases will vary depending on an employer’s circumstances. Some states already have higher exemption thresholds than what the DOL seeks here. Some companies already pay most exempt employees beyond this level. Nonetheless, many would need to either re-classify employees as non-exempt or increase their salaries, potentially significantly.

Even where the initial jump to $1,059 (or more) per week is not particularly problematic, the prospect of automatic indexing could be more so. This approach would almost certainly result in meaningful increases every three years. Notwithstanding other economic factors, some employers would raise salaries to meet the new higher thresholds, putting upward pressure on average weekly wages nationwide (and perhaps especially in the South, where fewer states currently impose thresholds beyond the FLSA level). As a result, it almost necessarily will become more expensive over time to maintain these exemptions.

 

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Tip Pooling

Navigating New York Tip Pooling and Tip Sharing Rules

Balancing company revenues and employee compensation is critical to the success of any hospitality business. As profit margins continue to tighten, restaurant and bar owners may need to revisit their tipping practices. Tip pooling and tip sharing are common practices that can benefit employees (and hence their employers). The legal requirements around these tipping topics can depend on both state and federal law. In New York, the state requirements are more restrictive than federal regulations would otherwise allow.

Tip Pooling and Tip Sharing

New York applies the following concepts to requirements related to these tipping issues.

Tip Pooling is the practice by which the tip earnings of directly tipped employees are intermingled in a common pool and then redistributed among directly and indirectly tipped employees.

Tip Sharing refers to a type of tip pool structure in which directly tipped employees keep a certain percentage of their tips, then tip out other indirectly tipped employees with the remaining percentage.

Directly Tipped Employees receive tips from patrons directly without any intermediary between the customer and the employee. Examples of directly tipped employees include servers and bartenders.

Indirectly Tipped Employees support service and are eligible to receive tips from a tip pool, such as bussers, barbacks, and hosts.

Eligible Employees

Back-of-house employees, such as cooks, dishwashers, porters, and other employees, whose primary job function does not involve direct interaction with customers, must be paid at least minimum wage for all hours worked. These employees are ineligible to receive tips or gratuities, and thus, cannot be part of a tip pool.

Front-of-house employees, such as servers, bartenders, barbacks, and bussers, who interact with customers or support the interaction indirectly are also paid at least the minimum wage for all hours worked. But they typically also receive tips and gratuities, and, accordingly, can be part of a tip pool. Hospitality industry employers may apply a tip credit towards their minimum wage obligations to these tipped employees.

Whether an employee is eligible to participate in a tip pooling arrangement depends on their duties and tasks assigned, not their title. To be eligible, the employee must regularly engage in duties that involve providing or helping to provide personal services to customers as an essential element of their job. Accordingly, directly tipped employees in New York restaurants cannot share tips with back-of-house employees, regardless of whether the employer takes a tip credit.

If an employer requires or allows ineligible employees (such as managers and supervisors or back-of-house employees) to share in pooled tip money, it loses the right to apply a tip credit toward the minimum wage requirement and could have to repay the money, with additional fines, to the front-of-house tipped employees.

Tip Credits & New Federal Regulations

When relying on a tip credit, the employer pays a cash wage and supplements that wage with the gratuities earned to reach the minimum wage for all hours worked. However, if the employee’s tips are insufficient to cover the difference between the cash wage paid and the minimum wage, the employer must pay the difference. New York City has a $12.50/hour cash wage with a $2.50/hour tip credit, while the remainder of the state currently has an $11.00/hour cash wage with a $2.20/hour tip credit for service employees.

As of March 1, 2021, new federal regulations under the FLSA permit customer-facing employees (front of house) to share their tips with non-facing employees (back of house) if: (1) the employer does not take a tip credit; and (2) no supervisory or managerial employees participate in the arrangement. These new federal regulations acknowledge that both front and back-of-house employees contribute to the guest experience. However, New York has not followed this expansion of tip pools. Thus, New York employers still must limit their tip pools to employees who regularly provide service to customers.

Review Your Tip Pooling Practices

If you haven’t done so lately, now would be a good time to review tipping procedures carefully. Violations of New York’s tip pooling or tip sharing requirements could be costly, both in terms of employee morale and potential financial penalties arising from wage payment claims.

 

Find out more about Horton Law’s representation of employers in the hospitality industry.

FLSA Joint Employer

U.S. DOL Revises FLSA Joint Employer Standard

On January 13, 2020, the U.S. Department of Labor issued a new rule revising its test for evaluating joint employer status under the Fair Labor Standards Act. Among other situations, joint employer analysis is often critical to work arrangements involving staffing agencies and other outsourcing companies. The FLSA joint employer rule change takes effect on March 16, 2020.

Previous Joint Employer Test

In 2016, the U.S. Department of Labor under the Obama administration issued interpretative guidance that promoted greater scrutiny of joint business relationships. That guidance essentially created a standard whereby employers jointly employ workers whose work for one company “is not completely disassociated” from their work for the other company. This action prompted many businesses to change their traditional business practices for fear of incurring additional and unwanted liability for another party’s employees.

Despite this change in “guidance,” the DOL had not formally changed its joint employer rule since 1958.

Joint Employer Scenarios

The 2020 joint employer rule identifies two possible scenarios where joint employment could exist:

  1. Where the employee has an employer who employs the employee to work, but another person/entity simultaneously benefits from that work.
  2. Where one employer employs a worker for one set of hours in a workweek, and another employer the same worker for a separate set of hours in the same workweek.

The most significant revisions to the DOL’s standard relate to the first of these situations. The most common example arises when one company places its workers at the jobsite of another independent business to perform services. This could be a temporary placement by a staffing agency or a consulting firm, among other arrangements.

New Joint Employer Test

The primary thrust of the rule change lies in a new four-factor balancing test for evaluating joint employer status in the first type of scenario identified above.

The four factors ask whether the potential joint employer:

  1. Hires or fires the employee?
  2. Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree?
  3. Determine the employee’s rate and method of payment?
  4. Maintains the employee’s employment records?

While emphasizing these four factors, the new rule allows that:

“Additional factors may be relevant for determining joint employer status in this scenario, but only if they are indicia of whether the potential joint employer exercises significant control over the terms and conditions of the employee’s work.”

Irrelevant Factors

The rule also specifically disregards the question of whether the employee is “economically dependent” on the potential joint employer. That subject is now expressly irrelevant to liability under the FLSA.

The DOL identifies the following as factors that assess economic dependence and hence cannot be considered:

  1. Whether the employee is in a specialty job or a job that otherwise requires special skill, initiative, judgment, or foresight;
  2. Whether the employee has the opportunity for profit or loss based on his or her managerial skill;
  3. Whether the employee invests in equipment or materials required for work or the employment of helpers; and
  4. The number of contractual relationships, other than with the employer, that the potential joint employer has entered into to receive similar services.

The full text, with DOL commentary, of the new FLSA joint emlpoyer rule is available here.

Impact of Joint Employer Status

When two companies qualify as joint employers under the FLSA, they both share responsibilities under the law for workers’ wages. These obligations include the requirement to pay proper minimum wage and overtime.

How Will the New FLSA Joint Employer Test Affect Businesses?

In today’s economy, companies commonly outsource certain facets of their business. This trend has increased the number of outsourcing companies in the market that are willing to take on various services. Companies outsource a range of functions, such as information technology, payroll, or even marketing.

Parties who are outsourcing might want to re-evaluate whether they have joint employer status under the new DOL rule. However, the new standards only govern joint employer determinations under the FLSA. Companies must also consider joint employer status under other state and federal laws, including the Occupational Safety and Health Act, the National Labor Relations Act, and Title VII of the Civil Rights Act of 1964. While many federal agencies are moving toward less restrictive joint employer standards, the opposite is true in some states. Many states have their own minimum wage and overtime laws, for example, and some might trigger joint employer liability even where the FLSA, under the new rule, would not.

As a further caution, and beyond possible legal challenges to the validity of the DOL’s new interpretation of FLSA joint employer status, the 2020 rule’s longevity likely depends on the outcome of the next Presidential election. If a Democrat wins the White House, there is a strong possibility that this rule would be among a substantial package of workplace regulations that the next administration would revise once again.

For the above reasons, your company should not overreact to this single development. If potential joint employer liability is material to your operations, the new FLSA rule warrants further evaluation. But again, it would likely not be the only legal parameter affecting your approach to outsourcing and similar business strategies.

Best Practices Regarding Outsourced Staffing Arrangements

Though specific situations might justify alternative allocations of responsibility, here are some standard rules of thumb as a starting point for setting up or maintaining staffing transactions.

Whenever possible, the employer of record should be making all decisions with respect to conditions of employment, pay and method of payment, schedule, disciplinary actions, employee onboarding, and the maintenance of a personnel file. To the extent practical, that entity should also have direction and control over the work being performed. Almost every joint employer test used by government agencies focuses on those components. To reduce potential liability, companies should work together to modify any factors in the business relationship that raise red flags.

Businesses that are linked and jointly (or arguably jointly) employ workers should use this development as an impetus to review current contracts between the parties to make sure their respective responsibilities are in proper alignment. This review should include ensuring that liability and indemnity for claims have been addressed properly and fairly. Doing so can reduce exposure for both companies. You may want to engage the assistance of an attorney with co-employment experience to review the terms of your current contracts or assist with drafting an agreement to be used moving forward.

 

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