Look for New Overtime Rules in 2019

As announced here, the U.S. Department of labor will issue a Notice of Proposed Rulemaking (NPRM) in early 2019 to determine the updated base salary level for exempt executive, administrative and professional employees.  As a reminder, the proposal will replace the Obama administration’s proposed minimum salary level of $47,476 and update the current minimum salary of $23,660.

At this point, the new rules are a year away.  However, for most employers, the problems created by the white color exemptions are already here.  Let me explain.

The standard rule under the FLSA is that all employees must be paid minimum wage and overtime.  The FLSA and state wage and hour laws have carved out some exemptions from this general rule.  One of these exemptions is for what are known as “white collar” employees.  To be exempt under the white collar exemptions, employees must satisfy three criteria:

• First, they must be paid on a salary basis, and that salary must not be reduced based on the quality or quantity of the employee’s work;
• Second, the employee must be paid at least a minimum salary level, which is currently $455 per week or $23,660 annually; and
• Third, the employee’s primary job duties must involve the kind of work associated with exempt executive, administrative, or professional employees (the “duties test”).

When employers are fined under a wage and hour audit or find themselves the subject of a wage and hour lawsuit, more often than not it is because they failed to pay their exempt employees their salary for any week in which the exempt employee performed work, or because their exempt employees were improperly classified as exempt to begin with.  These risks are present now.

As we saw in 2016, over the coming year employees will be paying attention to this issue, and employers will be under greater scrutiny.  Proactively auditing your exempt employees now to determine whether they are properly classified as exempt and ensuring you are paying them on a salary basis will leave you in a much better position to address the minimum salary levels when the DOL releases the NPRM.  We can help.

California Adopts a New Independent Contractor Test

Earlier this week, the California Supreme Court brought the independent contractor dilemma back into the news when it issued a decision in the matter of Dynamex Operations West, Inc. v. Superior Court of Los Angeles. In a monster, 82-page decision, the California Supreme Court adopted a new standard for determining whether workers should be classified as employees or independent contractors for the purposes of the wage orders.  As a reminder, the wage orders impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees.

The California Supreme Court determined that the “suffer or permit to work” definition of “employ” must be “interpreted broadly to treat as “employees,” and thereby provide the wage order’s protection to, all workers who would ordinarily be viewed as working in the hiring business.”  In other words, the Court created a presumption that all workers are employees.  Employers seeking to classify workers as independent contractors must now establish that the classification is proper under the “ABC” test adopted by the Court and already in use in other jurisdictions (including Massachusetts).

Under the “ABC” test, a worker may properly be considered an independent contractor only if each of the following factors is met:

(A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B)the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The “ABC” test is virtually impossible to meet for any company with workers providing services that are within the company’s usual course of business.  While this will be particularly relevant for businesses operating in the “gig economy,” it is important for all businesses to understand the importance of properly classifying workers, and to understand the consequences of misclassifying independent contractors.

Where the Court’s decision is limited to wage claims arising from wage orders, it is possible that some California businesses will have workers who must be classified as independent contractors for purposes of the wage orders, but not for other laws.  As such, we recommend reviewing any independent contractor classification with an attorney to avoid misclassification headaches.

And, if you’re curious as to how courts in another jurisdiction enforce the “ABC” test, look no further than our March 7, 2018 blog entry, found here.

Understanding Your EMAC Supplement Determination

Now that the first quarter of 2018 has concluded, employers are receiving “EMAC Supplement Determination” notifications from the Massachusetts Department of Unemployment Assistance (DUA).  Many employers have been unpleasantly surprised by the size of the penalty and want to understand their options.

To help you evaluate your options, we offer the following today:   a refresher on the law,  and an explanation of the reasons an employer may elect to appeal. Detail on what to expect if you choose to appeal will be addressed in a second article next week.

A Summary of the Employer Medical Assistance Contribution (“EMAC”) Supplement

The EMAC Supplement, which went into effect on January 1, 2018, requires that an employer with 6 or more employees working in Massachusetts pay a contribution for each employee who receives health insurance coverage through the MassHealth Agency or ConnectorCare.

The EMAC relies on the definition of “employee” set out in Massachusetts’ unemployment insurance laws.  This means that any regular employee, regardless of full or part-time status, contributes to an employer’s count.  Depending on the length of employment, temporary/seasonal workers may also need to be included.  To be clear, an employee should be included in an employer’s count, and may subject the employer to an EMAC penalty, even where the employee is not qualified for employer-provided benefits under the Affordable Care Act.

The employer will pay a penalty for each employee who receives health insurance through either the MassHealth agency (the Office of Medicaid) or ConnectorCare (available where the household income is less than 300% of the federal poverty line) for fourteen or more consecutive days in the quarter.  The contribution is 5% of annual wages for each non-disabled employee.  Wages are capped at $15,000, rather than actual wages, making the maximum penalty $750 per affected employee per year.

The penalty does not apply for any employee who receives coverage through the MassHealth agency either:  a) on the basis of permanent and total disability, or b) as a secondary payer where the employee is enrolled in the company-sponsored insurance.  Premium assistance does not trigger the penalty.

Note, too, that most individuals who are otherwise eligible for MassHealth will be required to take their employer’s plan if the plan meets the basic coverage criteria and the employer pays at least 50% of the premium. Therefore, if your company pays at least 50% of premiums, you will generally not be subject to the fines.

What We Believe Are Appropriate Bases for an Appeal

At the outset, please note that although we believe that an appeal is appropriate in the circumstances outlined below; this is based on our legal interpretation of the statute and guidance published to date by DUA. We do not know how DUA will handle these appeals, and cannot make any guarantees related to the success of an appeal on any of the grounds set forth below.  What we do know is that this is the first opportunity employers have to challenge the way in which DUA is assessing these penalties, and appealing is the only avenue employers have to contest these assessments.

When considering an appeal, an employer may want to challenge (1) the correctness of the DUA’s decision to find the employer liable for a supplemental payment; and/or (2) the amount of the supplemental payment.  Below, we review a variety of legitimate bases for appeal and also discuss bases we believe will be unsuccessful.

The Employer Should Not be Liable Because…

…The employer is not subject to the law.  A Massachusetts employer, including a not-for-profit employer, with 6 or more employees working in Massachusetts, is subject to the EMAC supplement.  Any regular employee, regardless of full or part-time status, contributes to an employer’s count.  Depending on the length of employment, temporary/seasonal workers may also need to be included.  The employee count is determined each quarter by calculating the average number of employees who worked during or received wages for the pay period that includes the twelfth day of each month of the applicable quarter.  If the employer had fewer than 6 employees for the first quarter of 2018, the employer should not be subject to any EMAC penalties for that quarter.

…The employee does not work in Massachusetts.  An employee is considered to work in Massachusetts if he/she:  a) performs work entirely in Massachusetts; b) performs work in and out of Massachusetts, but the work out of state is incidental to the work within the state.  If the employer’s EMAC Supplement Determination includes employees who do not work within Massachusetts, the employer may wish to appeal the penalties for the out of state employees.

…The employee did not have MassHealth coverage for the required minimum period.  To subject the employer to a penalty, the employee must have received his/her insurance coverage from MassHealth for a continuous period of at least 56 days in the quarter.  If an employee enrolled in or unenrolled from the employer’s coverage during the quarter, this basis for appeal may be considered.

…The employee receives coverage through MassHealth either:  a) on the basis of permanent and total disability, or b) as a secondary payer where the employee is enrolled in the company-sponsored insurance.

…The employer provides affordable coverage.  Employers that offer affordable coverage to their employees should not be assessed an EMAC penalty for any benefit-eligible employee.  MassHealth/Affordable Care Act rules makes these employees ineligible for subsidized coverage.

The Amount of the Penalty is Incorrect

Assuming employer liability is appropriate, you may appeal based on incorrect calculations of the penalty.  The penalty is 5% of annual wages for each non-disabled employee.  Wages are capped at $15,000, rather than actual wages, making the maximum penalty $750 per affected employee per year.

We have learned from this first round of determination notices that, for employees whose actual wages exceed the wage cap, the DUA appears to be front-loading the penalty rather than spreading it evenly among the quarters.  For example, for an employee with $10,000 of actual taxable wages in Q1, the employer was assessed $500.  Hypothetically, the employer would incur a $250 penalty in Q2 and $0 in Q3 and Q4.

Inappropriate Bases for an Appeal

While certainly frustrating and costly, many of the penalties assessed are likely to be valid.  Before you spend time, effort, and money filing an appeal, be sure you’re contesting for one of the reasons recognized by the law, as listed above.

Many employers (logically) believe that they are not subject to the penalty for an employee who is not eligible for company benefits based on hours worked or tenure.  Unfortunately, an employer is subject to the penalty for any part or full-time regular employee who works in Massachusetts regardless of the rules of company benefit eligibility.

Similarly, employers believe that they are not subject to the penalty for an employee who was eligible for benefits, but declined them.  The employee’s rejection of employer coverage does not, in and of itself, provide a basis for appeal.  As explained above, there may be a basis for appeal if the offered coverage was affordable.

Considering an Appeal?  You Must Act Fast. 

First and foremost, the employer must request a hearing in writing delivered to the DUA. The request should identify the reasons for the appeal, setting forth the reasons why the employer claims the determination is erroneous.

The request for a hearing must be filed not more than ten calendar (not business) days after the employer’s “receipt of notice” of the determination.  Most employers receive DUA communications through UI Online.  For these employers, the “Date of Determination” listed on the bill is the date the DUA will presume the employer received the notice.  There are limited exceptions to this, which include communications posted after 5pm, on weekends, or state or federal holidays.  If the employer receives communications via regular mail, the date of receipt is assumed to be three days after the determination notice was mailed.  If the third day falls on a state or federal holiday, Saturday, or Sunday, the notice will be presumed to have been received on the next business day.

Despite the fact that the penalty and appeal process is new for both the DUA and employers, the DUA has indicated that it will not make exceptions and will not consider appeals submitted outside this 10-day timeframe.

To begin the appeal process, an employer should deliver its request to:

EMAC Supplement Program – Appeals
Department of Unemployment Assistance
Charles F. Hurley Building
19 Staniford Street
Boston, MA 02114

You Filed Your Request for an Appeal.  Now What?

First, be aware that your payment obligations are not suspended while the appeal is pending.  Employers who appeal are still responsible to submitting payments in a timely manner.  The DUA will charge interest on unpaid penalties at a rate of 12% per quarter.  The DUA has indicated that it will refund penalties paid if the employer prevails on appeal.

Second, begin preparation for the hearing.  Our next communication will help you do this by answering the many questions you may have, including:

• What will the hearing process entail?
• When will the hearing occur?
• Who will preside over the hearing?
• Who has the burden of proof?
• Will witnesses be called?
• What rules of evidence are followed?
• Must the employer be represented by an attorney?

What Should Employers Do?

Because this law and this process are new, it’s impossible for us to know how the DUA will respond to appeals.  We certainly hope the DUA will give due consideration to all legitimate and timely filed appeals; but we cannot know for certain.  However, if employers don’t appeal, the DUA will go unchallenged and will have no reason to ensure its enforcement aligns with the law.  This is employers’ first opportunity to assert influence.

If you’re questioning whether to appeal, we can help you weigh your options.  If you have already appealed, or plan to appeal, we can assist in generating your appeal or preparing for your hearing.  You can reach us at questions@foleylawpractice.com or (508) 548-4888.