Worker classification remains one of the most complicated aspects of HR management.  Between court decisions and agency appeals, the status of the FLSA Overtime rule is still undecided.  In addition, businesses need to remain careful when they classify a worker as an independent contractor instead of an employee of the company.  

Employees: Exempt or Non-exempt?

Back in August, we updated you on a Texas District Court decision that struck down the Obama-era FLSA Overtime Rule, holding that the Department of Labor (DOL) exceeded its authority when it increased the salary for exempt employees to $913 per week.  In late October, the DOL notified the District Court they would be appealing the August order. More recently. the agency has indicated they will undertake further rulemaking to determine a new salary threshold. This assertion is despite some uncertainty from the Court ruling whether the DOL has the authority to determine exempt salary levels without Congressional approval.

What does this mean for employers?

In December 2016, many employers implemented changes to be compliant with the rule now under appeal. For example, reclassifying workers as non-exempt when they were below the salary threshold, which made them eligible for overtime pay. Some employee’s salaries were increased so they would continue to qualify for an exemption. 

With the August court decision and the more recent appeal, employers are facing a dilemma. Maintaining the changes taken to comply with the proposed rule likely creates an increase in payroll costs, but any roll-back of changes may create morale issues.  Add to this the possibility that the new administration will bring forward a revised proposed rule that would raise the level above its current threshold, but not raising it to the level the Obama administration sought. 

In mid-November, Secretary of Labor Alexander Acosta gave some hints of his agency’s plans when he held a meeting with the Chamber of Commerce to discuss possible variations on a new proposed rule.  According to Bloomberg News, two items under consideration are automatic adjustments for inflation and different levels for regional variations in cost of living.  Both of these items have raised concerns due to administrative complexities and may not survive the final rule. 

Experts predict a notice of proposed rulemaking and a new proposed salary level in early 2018 and interested employers should be prepared to comment on any new proposed rule. 

In addition, each organization should carefully review their current salary structure with close attention paid to the duties tests.  Employers should also remember if you reclassify an employee as non-exempt you may need to pay back wages and overtime.

Employee or Independent Contractor?

We’ve written many times on the factors employers must consider when determining whether a worker is an employee or an independent contractor. Click hereto read our article on UEA’s HR Beat laying out the complexities of the distinction. 

The IRS’ Voluntary Classification Settlement Program (VCSP) can help if your review determines you have improperly classified a worker as an independent contractor. This program is available to change the prospective classification of your worker. 

To be eligible for the program, an employer must:

• Have consistently treated the workers to be classified as independent contractors or other nonemployees, including having filed all required Forms 1099 for the worker for the previous three years.
• Not currently be under employment tax audit by the IRS
• Not currently be under audit by the Department of Labor (DOL) or a state agency concerning the worker’s classification.
• Have complied with the results of any previous IRS or DOL audit concerning the classification of workers.

To participate in the program, employers need to complete Form 8952, Application for VCSP, which must be filed at least 60 days prior to the date you want to treat the worker as an employee.

The IRS released a video highlighting some features of the program. To view the video click here. For more information on the VCSP, click here.