The U.S. Department of Labor has issued new guidelines updating the Fair Labor Standards Act, the federal law that governs minimum and overtime wages. Chris Williams, Product Manager for Employment Practices Liability Insurance at Travelers, discusses the topic and suggests what employers can do in advance of the changes being implemented.
What do employers need to know about these changes?
Under the current Fair Labor Standards Act rule, employees satisfying three requirements — that they are paid on a salary basis; that they earn more than $23,660 per year; and that they perform certain executive, administrative or professional duties — are not entitled to overtime wages. Employees whose salaries meet or exceed the Department of Labor’s “highly compensated employee” threshold are also not entitled to overtime wages.
The new rule increases the “standard salary level” threshold from $23,660 to $35,568 and increases the “highly compensated employee” threshold from $100,000 to $107,432. According to Department of Labor estimates, the upcoming changes mean that more than 1.3 million American workers could now be entitled to overtime pay who weren’t previously eligible.
What have insurance carriers seen on this, in terms of claims?
According to U.S. District Court information, from 2005 to 2018 the number of Fair Labor Standards Act lawsuits increased 90% (from 4,039 to 7,711). The resulting increase in claims frequency can be attributed to the complexity of the law, misclassifying employees as exempt when they are not, an employer’s failure to properly track hours and failure to pay eligible workers overtime wages.
Insurance carriers (such as Travelers) offer Employment Practices Liability policies, which include coverage for defense costs and damages related to various employment-related claims. Many of these policies also offer the option for insureds to purchase defense cost coverage via sub-limit for “Wage & Hour” type claims.
These types of policies can help protect companies that face claims alleging a lack of compliance with a new labor law or regulation. Whenever laws change, it’s important for executives to speak with an agent or broker to understand their coverage, learn about new offerings and find the best policy to suit their needs.
What can employers do to prepare for the changes?
First, employers should consult with legal counsel and a Human Resources professional to make sure everyone understands the obligations under the new rule. Another important step is to inform and train company managers on the new regulations and requirements. Since a number of employees might be impacted, communicating any compensation or schedule changes to affected workers should be a high priority.
In addition, reviewing the job responsibilities and wages of employees to determine whether they may be entitled to overtime can make the transition easier, and it’s wise to document those decisions. Ensuring that the company has a process in place to document all hours worked by hourly employees is also critical.
Some employers might decide that it is easier to simply increase employees’ pay above the $35,568 annual threshold. Doing so, obviously, has a cost impact on the company.
What do you think will happen after the new overtime rules go into effect on 1 January 2020?
I’m not going to speculate, but employers will have some decisions to make. For workers whose wages are implicated by the new rules, an employer will have to pay time-and-a-half for overtime work, limit the workers’ hours to 40 hours per week or raise the workers’ salaries to meet or exceed the new thresholds.
It would be a smart practice for employers to consult with legal counsel and a Human Resources professional to consider how the new earnings thresholds may impact their workforce and what actions – if any – make the most sense for their business.
Any time there is a change in the law, it can create exposure, and the potential for litigation. While changes in salary thresholds might not seem overly complicated, managing changes can be challenging. For employers that don’t follow the rules, they could be subjected to wage and hour claims, either on a class basis or individual basis.
Those actions come with a cost and can be tremendously disruptive. A company addressing a wage and hour claim may be faced with paying defense expenses and possible settlement or verdict costs, not to mention the time and effort involved in the litigation process. That can include providing payroll records, job descriptions and personnel files to plaintiffs, as well as participating in depositions and testimony.
This story originally appeared in Reactions.