New Wage and Hour Legislation in 2020

Chester Hanvey, Berkeley Research Group

The labor and employment legal landscape is constantly evolving and staying up to date with the latest developments can be challenging.  In this article, I highlight two areas where new legislation will have a significant impact on wage-and-hour compliance: (a) FLSA exemptions, and (b) independent contractor classification.  For each topic, I’ll highlight the new legislation and discuss anticipated implications for businesses and I-O psychologists.

FLSA Revisions Finally Take Effect in 2020

On January 1, 2020, revisions to the Fair Labor Standards Act (FLSA) took effect.1  The revisions modify the criteria for employees to be classified as “exempt” from FLSA protections.  Exempt employees are typically paid a fixed salary, regardless of the number of hours they work (salaried) whereas non-exempt employees are paid and based on the number of hours worked (hourly) and are entitled to overtime.  The most notable revision for 2020 is an increase to the minimum salary an employee must be paid in order to qualify for the most common exemptions²—increasing from $455 per week ($23,660 per year) to $684 per week ($35,568 per year).3 The U.S. Department of Labor (DOL) estimates that 1.2 million U.S. workers will no longer qualify for an exemption and will have become eligible for overtime pay and other FLSA protections as a result of the change.

The final rule has a long history that I detailed in a prior TIP article.4  The change was initiated by President Obama in 20145 and in response, the DOL developed and published a final rule in 2016, which would have set the minimum salary level to $913 per week ($47,476 per year).  However, the 2016 rule was challenged and ultimately blocked by a federal court6 that reasoned, in part, that the proposed minimum salary in the 2016 rule was so high that it would supplant the analysis of the employees’ job duties, which Congress intended to be a critical component of the analysis of one’s exemption status.  The new rule sets the salary threshold at a level that retains the importance of the job duties analysis.

The DOL’s estimate of 1.2 million impacted employees reflects the number of employees who exceed the $455/week minimum salary under the old rule but do not meet the $684/week minimum salary under the new rule.  Without intervening action by their employers (e.g., increasing employees’ salaries), these employees will lose exemption status and gain overtime eligibility.  The four industries expected to have the most employees impacted are (a) education and health services, (b) professional and business services, (c) financial activities, and (d) wholesale and retail trade.  A large majority of these employees fall into two occupational groups: (a) management, business, and financial; and (b) professional and related.  Almost all of these employees are from the private (for-profit) sector.

Implications

This legislation is expected to have two primary implications for I-O psychologists.  First, the new rule sets the salary level such that the importance of one’s job duties is retained.  Traditionally, this is where I-O psychologists have contributed to an evaluation of exemption status, either in a proactive audit or in litigation as expert witnesses.  As a result, I-O psychologists should continue to play a meaningful role in this area and be able to apply job analysis tools to help address significant legal questions.

Second, the impact of this rule for many organizations is that previously exempt employees will be reclassified as non-exempt employees.  Reclassification often impacts a variety of internal systems that are relevant to I-O psychologists and HR professionals including staffing, labor budgets, scheduling, payroll, and timekeeping.  When reclassification results in changes to employee job duties, a variety of additional systems are potentially impacted including selection, training, and performance management.  Finally, there are unique legal risks associated with non-exempt employees including off-the-clock work and meal- and rest-break compliance.  All of these potential changes are opportunities for I-O psychologists to help employers navigate these changes effectively.

Independent Contractor Classification

One of the hottest topics in wage-and-hour compliance in recent years has been the appropriate classification of workers as employees or as “independent contractors.”  Workers classified as “independent contractors” are, by definition, self-employed and therefore not employees of the company for whom they perform work, meaning they are not protected by FLSA provisions (e.g., minimum wage, overtime) and do not receive employee-type benefits such as family and medical leave and unemployment compensation insurance. Misclassification also results in financial losses to the federal and state governments in the form of lower tax revenues and less contributions to unemployment insurance and workers’ compensation funds.7

The classification of workers as independent contractors has faced increased scrutiny in the past few years both federally and at the state level.  Recently, the most movement on this issue has occurred at the state level.  The most notable example of this effort occurred in the state of California, which passed legislation (AB5)8 that redefines the test to determine whether workers are legally classified as employees rather than independent contractors.9  This new test took effect in 2020.1⁰  The test is referred to as the “ABC test” because it has three prongs.  Under the new law, workers are presumed to be employees unless the organization can meet all three prongs:

1. The worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact;
2. The worker performs work that is outside the usual course of the hirer’s business; AND
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hirer.

This test is seen as considerably more stringent than prior tests and will most likely result in many independent contractors being converted to employees.  The prior test in California, along with tests used federally, tended to focus on the degree of “control” the organization has over the worker.  This is generally consistent with the “A” prong of the new test.  What is widely considered to be the most challenging aspect of the new test is the “B” prong, that is, whether the work performed is “outside the usual course of the hire’s business.”  The introduction of this criterion has the potential to drastically impact many companies, particularly in the gig economy.  If an organization is unable to demonstrate that the work performed by an independent contractor is outside their usual course of business, they would need to reclassify the worker as an employee if they want to continue to hire that worker and remain compliant. 

Though this specific legislation only applies to workers in California, this issue is not unique to the Golden State.  New Jersey and Massachusetts both have a version of the ABC test for assessing employment status, and many other states use a version of the ABC test for other purposes such as unemployment compensation.¹¹  The trend has been towards stricter employment tests at the state level, so it’s likely that other states will continue to adopt similar laws.

Implications

The issue is far from settled.  Many of the largest companies in the gig economy have challenged the applicability of AB5 through legal action.  In addition, Uber, Lyft, and Door Dash have banded together to submit a 2020 state ballot initiative that would alter the law.12 Assuming that AB5 will continue to be enforced, it will likely result in a great deal of litigation over misclassified employees.  Traditionally, I-O methods have been used to address the “A” prong of the new test, which often includes an analysis of the frequency of interaction between the worker and company, the nature of that interaction, the worker’s decision-making authority, and other related topics.  However, the introduction of the “B” prong presents an opportunity for I-O to develop new and innovative methods or applications of existing methods to contribute to the analysis.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

Notes

1 U.S. Department of Labor (2019).

2 The revisions apply to the Executive, Administrative, and Professional Exemptions, collectively known as the “White Collar” or “EAP” exemptions.

3 In addition to federal regulation, exemption status may also be impacted by state labor laws and regulations.

4 Hanvey (2018a).

5 Executive Office of the President (2014).

6 Nevada v. U.S. Dept of Labor, 275 F. Supp. 3d 795, 806 (E.D. Tex. 2017).

7 U.S. Department of Labor (2014).

8 See http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB5

9 There were, and continue to be, many different “tests” to determine employment status. For example, multiple federal agencies including the DOL and IRS have published criteria to determine employment status.  Many states have their own criteria, and various court rulings also provide guidance on relevant criteria.  See Hanvey (2018b) for a more detailed discussion.

10 AB5 was intended to codify the California Supreme Court ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which first introduced the ABC test in California in 2018.

11 Kappel (2018).

12 Meyers (2019).

References

Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903.

Executive Office of the President (2014). Updating and modernizing overtime regulations: Memorandum for the Secretary of Labor (79 FR 15209). https://federalregister.gov/a/2014-06138

Hanvey, C. M. (2018a). FLSA Revisions are permanently dead, at least temporarily. The Industrial-Organizational Psychologist, 55(3), 12–16.

Hanvey, C. M. (2018b).  Wage and hour law: Guide to methods and analysis.  New York, NY: Springer.

Kappel, M. (2018, August 8). The end of an era? How the ABC test could affect your use of independent contractors. Forbes. https://www.forbes.com/sites/mikekappel/2018/08/08/the-end-of-an-era-how-the-abc-test-could-affect-your-use-of-independent-contractors/#210d690d1f66

Meyers, J. (2019, October 29).  Uber, Lyft unveil ballot initiative to counter California gig-economy law.  Los Angeles Times. https://www.latimes.com/california/story/2019-10-29/uber-lyft-doordash-fight-california-labor-law-ab5

State of Nevada et al. v. U.S. Department of Labor et al., No. 4:16-cv-00731 (E.D. Tex. 2017). http://www.txed.uscourts.gov/sites/default/files/notable/Memorandum%20Opinion%20and%20Order%20%20Dated%208-31-2017.pdf

U.S. Department of Labor. (2014). Fact sheet #13: Am I an employee? Employment relationship under the Fair Labor Standards Act (FLSA). https://www.dol.gov/whd/regs/compliance/whdfs13.pdf

U.S. Department of Labor. (2019). Defining and delimiting the exemptions for executive, administrative, professional, outside sales and computer employees (84 FR 51230). [Final Rule]. https://www.federalregister.gov/documents/2019/09/27/2019-20353/defining-and-delimiting-the-exemptions-for-executive-administrative-professional-outside-sales-and