Federal judge in Texas blocks implementation of new overtime regulations: what does this mean?

Just a few days ago (November 22, 2016), a federal judge in Texas granted an injunction against enforcement of a change in Department of Labor overtime regulations scheduled to go into effect next week, on December 1, 2016.

By way of recap, the regulation would  double the minimum salary requirement for a worker to be considered exempt from overtime, from $455 per week to $913 per week.  What that would mean is that anyone who earns less than the new threshold must be paid time and a half for overtime, regardless of the kind of duties they perform (see post below for further explanation of the regulation).  The Department of Labor had estimated that 4.2 million U.S. workers would become entitled to overtime pay on December 1 based on the new threshold earnings alone.

That was a game changer in itself, and it seems like the game has changed again.

Here is what happened.  A group of states brought a lawsuit in September seeking to enjoin enforcement of this rule, arguing, among other things, that the Department of Labor exceeded its statutory authority by raising the salary threshold.

Judge Amos Mazzant of the United States District Court for the Eastern District of Texas ruled yesterday that the two-fold  increase in the threshold salary was beyond the authority delegated to the Department of Labor  by Congress, and issued a preliminary injunction barring enforcement of the rule pending a final determination on the merits of the case.

By way of background, the Department of Labor, as an administrative agency,only has the authority to make rules when Congress delegates that authority to it.  The federal statute that created the overtime rules stated that employees were exempt if they were "bona fide executive, administrative, or professional" employees, and delegated to the Department the responsibility for defining what kinds of employees fell into those categories.

The Department of Labor did so, ultimately creating a labyrinth of regulations addressing the kinds of duties that would be considered exempt. The Department has also employed a minimum salary test, at varying amounts, since 1940 as a threshold requirement for exemption from overtime.

The state plaintiffs in this case argued that, though the salary test has been in use for decades, this was "always as a DOL invention" and "has never been ratified by Congress." They further suggested that the reason the salary test had not met with serious challenges before now was because "the threshold was set low enough that the DOL’s perversion of the statute, in practical terms, affected so few actual EAP employees."  In other words, the explanation for the fact that this structure (a threshold salary plus an evaluation of exempt duties) has been in place and accepted for over 75 years is that the previous salary threshold only excluded the lowest paid employees from overtime rights.

Interestingly, according to the Department's brief, in the extensive period allowed for comments on the proposed regulations, many opponents (including states like the plaintiffs) had submitted comments critical of the regulations, but none had questioned the existence of the threshold salary test, instead criticizing the degree to which the Department proposed to raise that number.

It also appears that the plaintiff's assertion that the salary test had not "met with serious challenge" is not altogether true: both the Department and Judge Mazzant cited a Fifth Circuit Court of Appeals decision from 1966 in which the court specifically upheld the use of a salary test as a legitimate exercise of the Department's discretion (Wirtz v. Mississippi Publishers Corp., 364 F.2d 603), an opinion that seems to have been followed by several trial courts over the years, and does not appear to have been overruled or questioned by the Court of Appeals.

What does this mean for employers still trying to figure this out?  It is hard to say.  On the one hand, December 1 will now come and go without the new requirements being put into place.  On the other hand, the Department has the right to appeal, and from a preliminary look at the papers in the case, it appears there they would have a reasonable argument if they did.  If the injunction is overturned, there is a possibility the the effect of the regulations would still be retroactive to December 1.  The Department may choose not to go after employers for noncompliance during that interim period, but it is a separate question whether individual employees who believe they should have been paid overtime would bring private lawsuits.

Workers who stood to benefit from this change (people currently earning between $455 and $913 per week) will be understandably frustrated by this new development.  Employers, however, may be equally frustrated.  Many employers have already implemented pay increases to bring exempt employees above the new threshold, or otherwise modified their compensation structure to be in compliance with the new regulations. And everyone faces uncertainty in the interim, with no way of knowing whether or to what extent the Department of Labor regulations will have the force of law after the trial and/or appeal process play out.

Then there is the additional wrinkle of a new Presidential administration, one that has already promised to roll back many federal regulations.

Perhaps the best way to manage this uncertainty is to take steps to manage the amount of overtime worked in your business.  There is nothing wrong with a strict policy that requires management approval of overtime, and that approval can be denied.  If all the things that need to get done can't get done without any employee working more than 40 hours in a week, there is also nothing wrong with bringing on new employees, even temporary employees, to ensure that all time worked is "straight" time, not overtime, regardless of the exemption status of your employees.

Another  point that many employers miss is the importance of accurately tracking hours.  If the new regulations stand, they will affect a large number of workers who don't traditionally punch time cards. If overtime pay becomes an issue for them, and you do not have a system for tracking how much they worked, you may find yourself in a contest of credibility if they later claim to be entitled to overtime pay.



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How do the new overtime regulations affect your small business?

The rules are changing, soon, and in a big way.  New Department of Labor overtime regulations take effect on December 1, 2016, which will significantly expand the number of employees who must be paid at an overtime rate for hours worked over 40 per week.  Will these changes affect your business?

The answer is almost certainly.  Under current overtime laws (Massachusetts and federal), an employee is exempt from overtime only if two things are true: First, he or she is paid on a salary basis and earns at least $455 per week, and second, his or her actual job duties fall into one of the exempt categories (a bona fide executive, administrative, or professional employee- more on these later).

Who falls within the exempt duties has been fertile ground for litigation for years, and the new regulations don't change that reality.  What is so significant about the regulations is that they raise the threshold earnings from $455 per week to $913 per week, almost doubling it.  In plain language, it means that no matter what an employee's duties are, or whether you currently classify them as exempt from overtime, if they make less than $913 per week (approximately $47,000 per year), they must be paid overtime under the federal laws (1.5 times their hourly rate for all hours worked over 40 in any given week).

To make matters worse, it is your obligation as the employer to keep a record of hours worked, which means if you don't have accurate records you may find yourself on the losing end of a dispute about whether an employee actually worked overtime.

Finally, you should be aware of the consequences if an employee files a successful claim for unpaid overtime.  You could be responsible for two or three times the amount of unpaid overtime, and the employee's legal fees (in addition to what you have to pay your own lawyer).

How can you address this change in your business?  You could, of course, raise the rate of pay for affected employees to preserve their exempt status.  This is, however, a significant increase in expenditures, and depending on the number of employees you have, simply may not be possible.

Other steps you might consider:

• Make sure you have a policy and controls in place to ensure that any overtime worked is approved in advance by management, so that you are not caught by surprise by overtime expenses, and so that you can make sure that the work being done at the increased rate is necessary and worth the expense.

• Make sure you have a reliable means of tracking hours- if you do not have good records of time worked, you may have difficulty defending a claim for overtime compensation where is a dispute about the number of hours actually worked.  If your employees work in a fixed location where there are defined business hours, this is not difficult to do.  If you have employees who can and do perform work remotely, you may want to look into available time tracking apps that you can require your employees to use when they start and stop working.

• You can legally adjust the base compensation going forward to offset increased overtime expenses- so long as the employee is paid the Massachusetts minimum wage, and so long as the change is not retroactive, this is legally allowed, though as a business matter it could have extremely negative effects on morale and retention, and might cause real hardship for your employees.

Some things you should not do:

• You should not ignore the change in law in reliance on your good relationship with employees, even if they are family.  We have seen more of these relationships sour than you might think, and if they do, you could find yourself with significant liability to an unhappy employee.

• You should not try to convert any employees to independent contractor status to avoid overtime obligations, at least not without getting legal advice from an employment lawyer.  There are very strict rules in Massachusetts about who may and may not be treated as an independent contractor, and the penalties for getting it wrong can be harsh.

If you are unsure how to address the new law in your  business, or if you are reading this after December 1, 2016 and think you might already have a problem, a consultation with an experienced employment law attorney would be well worth the cost, and could save you both money and headaches in the future.


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Are my non-compete agreements worth the paper they are written on?

A key employee has left or is leaving your business, and you have reason to believe they are going to work for a competitor, armed with vital information about your business and/or relationships with your customers.  Can you legally prevent this if you have a non-compete agreement with that employee?  The answer is “maybe,” depending on what you are trying to accomplish and protect with a non-compete agreement.

In Massachusetts, courts will enforce non-compete agreements if they are reasonable in time and geographic scope, supported by consideration, and only to the extent necessary to protect a legitimate business interest.  There is a lot packed into that sentence.

First, what is a “legitimate business interest” that can be protected through a non-compete agreement? This is one place where the words used by lawyers do not have the same meaning you might give them in everyday language.  For example, you might consider it perfectly legitimate to want to keep your competitors from employing someone you have invested a lot of time and money in training, but that is not enough, even though it has practical and very real consequences for your business.  In the eyes of the law, to rise to the level of a “legitimate business interest,” the harm you are trying to avoid must involve something more, such as the protection of trade secrets and confidential information and protection of the employer’s good will with its customers and prospective customers.  So, for example, a sales representative who has built up customer relationships over a period of years very well might be ordered not to compete for a period of time in order to protect your interest in the goodwill he or she has built up while working for your company.  In contrast, a back office employee with no access to confidential information or customer-facing responsibilities, however capable and important an employee, most likely would not be held to a non-compete agreement.

Second, non-compete agreements must also be supported by “consideration.”  This means the employee must receive something in exchange for agreeing to the non-compete.  You can ask a new employee to sign a non-compete as a condition of being hired, but if you want an existing employee to sign one, you should be prepared to connect that to something of value beyond simply keeping their job: a raise, a promotion, or even a one-time bonus or stock offering should be sufficient.

Third, what is “reasonable”?   It is important to remember that “reasonableness” depends upon the circumstances, and there is no bright line rule about how long a non-compete can last, or how far it can reach geographically, because both of those questions depend on whether the time or scope of the non-compete is reasonable in light of the interest the employer is seeking to protect.  So, for example, a nationwide non-compete might be found reasonable if the affected employee had a nationwide sales territory, while a 25 mile non-compete might be found unreasonable for a hair stylist, whose range of influence while employed was much smaller than that.

What does all of this mean? Because there are no bright-line rules, and every non-compete is analyzed on its own facts, it is difficult to be certain whether the agreement you ask your employee to sign will be enforced.  Below are some steps you can take, however, to maximize the chances that your agreement will accomplish your goals.

Do not use a boilerplate contract, at least not without having it reviewed by an employment lawyer- remember that a court will look at the agreement in light of the facts specific to your company and your employee, and using a “one size fits all” agreement could hurt you in that analysis.

Provide something in exchange for the non-compete.  If the employee is a new hire, make sure you are clear in the offer letter that signing the agreement is a condition of the job offer.  For an existing employee, you can tie the agreement to a promotion, a raise, or a one-time payment.  The amount does not need to be large- it simply has to be something of value.

Be careful about threatening termination if the employee does not sign.  The law is unclear on this point. Some courts have concluded that an employer has a right to condition continued employment on the execution of a non-compete; others have found this a form of “practical duress” that weighs against enforcement of the non-compete agreement.

Be consistent.  You do not need every single employee to sign a non-compete, but it is important that employees who are similar are treated similarly.  For example, if you are concerned about your sales people leveraging your company’s goodwill for a competitor, you do not need your mail clerks to sign non-competes, but if some sales reps have an agreement and others do not, a court may not believe that the company truly has an interest in protecting its goodwill.

Be reasonable.  The law will not prevent a person from working in his or her own field for longer than necessary to protect the former employer’s legitimate business interests, so it is worth taking care to identify the time period and geographic reach that accomplishes that goal without overreaching.

Consult an employment lawyer.  It should not take an attorney with experience in this area more than a few hours to gather the facts about your business and employees and draft an appropriate non-compete.  In contrast, a legal battle over a questionable non-compete can cost many thousands of dollars, with uncertain results.      

The lack of clarity in the law of non-compete agreements in Massachusetts has been frustrating to both businesses and employees, and every so often legislation is proposed to define more clearly what is and is not a legitimate post-employment restriction.  To date, none of these bills have passed, however, leaving all parties with little guidance about how to proceed.  In the meantime, we hope the above information is helpful to you in charting a reasonable course through these waters.

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Business Growth, Cash Flow, and the Massachusetts Wage Act: Traps for the Unwary

50% of small businesses surveyed identified hiring new employees as one of their top challenges for 2016.  In the same survey, 36% (39% of businesses with 11-50 employees) identified cash flow as one of their top challenges. 

There is an obvious tension between the need to find and retain high quality people to grow your business and the cash flow pressures you face as a small business, which creates the temptation to employ some common but legally and financially risky strategies.

Deferring compensation for key employees: this is something that many start-up companies do.  Often the key employee and the owner are friends or have some other pre-existing relationship, and agree in good faith and with the best of intentions that they will defer some part of their compensation until the company gets off the ground and becomes profitable.   However, you should know that even executive employees are subject to the Massachusetts Wage Act, which:

1. requires timely payment of wages to all employees, including executives;
2. imposes mandatory triple damages and payment of the employee's legal fees and costs if the employer violates the statute;
3. expressly states that you cannot make an agreement with an employee to avoid the requirements of the Wage Act, even if the employee is sophisticated and even if the agreement is in writing;
4. allows an aggrieved employee to recover not only from the employing company, but from officers and certain management personnel personally.

What this means is that if your company does not begin to make money before your employee(s) get tired of deferring compensation, or if your relationship with that key employee goes bad for some other reason, both your business and you personally could be subject to significant financial liability and the added burden of your own legal fees.

Some of these pitfalls can be avoided in the first place by employing a different compensation structure, which establishes a minimum base salary with additional compensation available in the form of bonuses tied to the performance of the company. 

Hiring independent contractors:  particularly if your need for staff fluctuates or is seasonal, it is tempting to bring in people to provide services as independent contractors rather than W-2 employees.  It is less expensive for the business, since you do not pay employment taxes, unemployment, or workers compensation insurance for those individuals.  You also may feel like it is a more appropriate arrangement if the employment is temporary, or if you only need that person’s services for a limited time each week and they work elsewhere on the other days.

Be very, very careful about this.  Under Massachusetts law, this arrangement is legal only under a narrow set of circumstances, and almost never legal if the services being performed are part of your core business operations.  If an employee complains about being misclassified as an independent contractor, damages are measured by what that employee would have been entitled to as a W-2 employee and, like other damages under the Wage Act, are subject to mandatory tripling.  These damages can include the amount the employee had to pay in self-employment taxes, the value of any benefits offered to others in the company who were classified as employees, and any lost opportunity to collect from unemployment or workers compensation based on their classification.   Also like other Wage Act claims, if the employee wins in court, you must pay their legal expenses and costs in addition to your own.

You can employ someone on a part time or temporary basis, and you can structure that relationship so that it is clear that they can provide services to others when they are not working for you, all while still paying them as a W-2 employee and avoiding the risk of a misclassification lawsuit.

Delaying payment of commissions:  The Wage Act applies to commissions when they are “definitely determined” and “due and payable.”  It is perfectly appropriate to structure employee compensation to be a mix of salary and commissions, so long as the employee is making at least minimum wage.  Some employers pay commissions on the closing of a sale, others on invoicing a new customer, and still others on payment by the customer.  Any of these are acceptable, so long as you have a written commission policy that specifies the event that triggers a commission obligation. Without such a policy, the default position is that commissions are due on the closing of a sale, and if you hold commission payments until the customer pays you could face a Wage Act claim for unpaid commissions.

Creating a bonus structure that operates as a commission:  when considering ways to structure compensation, you should be aware that there is a critical difference between a “bonus” plan and a “commission” plan, namely, the employee’s entitlement to payment and the applicability of the Wage Act.  A commission is a form of wages, as described above, while a bonus is generally discretionary.  If you call your plan a “bonus,” for example, but it is calculated according to sales an employee makes, it is in all likelihood actually a commission.   There is an important balance to strike here: if you are seeking to attract top talent, you may do better with a compensation plan that is concrete and tied to a mathematical formula than you would with a lower salary and a discretionary bonus, as the prospective employee will discount the value of the bonus because it is uncertain.  You can almost have it both ways, however, if you structure your bonus plan to be tied to the revenue or profitability of the business as a whole.

These are some of the traps for the unwary small business person that lie in the Massachusetts Wage Act, and we have seen many very well intentioned employers fall into them.  If you need to employ non-traditional compensation strategies in order to bring in new employees and manage cash flow, a consultation with an experienced employment lawyer is well worth the cost.

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