Federal Compliance Update

Hold on tight, we are in for a bumpy ride...

DOL Increases Exempt Employee Minimum Salaries

On April 26, 2024, the U.S. Department of Labor (DOL) published the much-anticipated final rule that will increase the minimum salary for many exempt employees. The increase will take effect in two steps. If you’d like to review the regulations yourself, they are available here — the relevant changes start on page 130 of the downloadable pdf.

Executive, Administrative, and Professional Employees

Under the new rule, exempt executive, administrative, and professional employees (often referred to collectively as “EAP” employees) must be paid at least:

• $844 per week ($43,888 per year) beginning on July 1, 2024
• $1,128 per week ($58,656 per year) beginning on January 1, 2025

Exceptions

Teachers and practicing doctors and lawyers are exempt from these minimum salary requirements under federal law but may be subject to different state minimums. School-specific minimums apply to academic administrative employees.

Computer Employees

Exempt computer employees can be paid on a salary or hourly basis. If salaried, they’re considered part of the EAP group and need to make the minimums listed above. Alternatively, they can be paid at least $27.63 per hour—this hourly rate was not changed by the rule.

Highly Compensated Employees (HCE)

Employees who are exempt under the HCE exemption must be paid at least the minimums listed above on a salary basis and receive total annual compensation of at least:

• $132,964 per year beginning July 1, 2024
• $151,164 per year beginning January 1, 2025

State Law

As usual, if a state law requires higher minimum salaries than what is required by the federal rule, the state minimums must be followed.

Future Increases

The rule implements automatic updates to the minimum salary levels every three years starting July 1, 2027. We don’t know what the future minimums will be, but employers will have at least 150 days’ notice before those changes take effect.

Potential Challenges

The last time the DOL attempted a significant change to the salary minimums, the rule was challenged and ultimately blocked just weeks before taking effect. While we have no way of predicting if that will happen again, it’s very likely that this final rule will be litigated.

According to the DOL, updating the salary level test will help ensure that the FLSA’s intended overtime protections are fully implemented. Employers should become familiar with the final rule and evaluate what actions they may need to take to comply with its requirements. This summarizes the rule changes and describes steps employers may take in response to the final overtime rule barring any delays from legal challenges.

Responding to the New Overtime Rule Identify Affected Employees

Employers should review payroll data to identify which employees will be affected by the new overtime rule. Specifically, the final rule will affect employees classified as exempt and earning an annual salary of less than $43,888, and HCEs classified as exempt and earning annual compensation of less than $132,964 as of July 1, 2024. In determining total compensation for purposes of the HCE exemption, only $43,888 of such compensation must be paid on a salary basis, and the remaining compensation may consist of commissions, nondiscretionary bonuses and other nondiscretionary compensation. Employers’ efforts to prepare for the new overtime rule should also include identifying any employees that will be affected by the further increase to the standard salary level ($58,656) and HCE total annual compensation threshold ($151,164) that will occur on Jan. 1, 2025.

Employees who are already classified as nonexempt from overtime under the FLSA will not be affected by the new overtime rule, regardless of their compensation.

Determine Treatment of Affected Employees

Highly Compensated Employees

To qualify for a white-collar exemption, HCEs are subject to a more relaxed duties test, which requires only that the employee’s primary duty must be office or nonmanual work and the employee must customarily and regularly perform at least one of the bona fide exempt duties of an EAP employee. For HCEs who are currently classified as exempt but earn less than the annual compensation threshold under the final rule ($132,964 as of July 1, 2024, and $151,164 as of Jan. 1, 2025), employers should assess whether they may still qualify for an exemption under the more stringent duties test applied to other white-collar exemptions. If they cannot satisfy that duties test, then employers must decide whether to raise their salaries to meet the new HCE compensation threshold or reclassify them as nonexempt employees once the new rule becomes effective.

All Other Affected Employees

After identifying any affected employees, employers need to take one of the following actions with respect to such employees as of the rule’s effective date:

• Raise their salaries so as to satisfy the salary level test for an exempt classification or
• Reclassify the employees as nonexempt from overtime.

Employers are not required to take the same approach for all affected employees. However, it is generally considered best practice to assign the same classification to employees with the same job title and duties. Thus, employers may wish to make such determinations on a position-by-position basis rather than individually.

Further, to the extent employers choose to reclassify affected employees as nonexempt, employers will need to decide whether to pay newly nonexempt employees on an hourly rather than salary basis. Nonexempt employees are typically, but not required to be, paid on an hourly basis. Paying nonexempt employees hourly generally simplifies the process of determining overtime pay and ensures employees are paid only for hours worked. However, some employees view salaried positions as more prestigious and appreciate the predictability of a salary that does not fluctuate between paychecks.

Therefore, employers may also need to consider the potential impacts on employee morale.

Track and Analyze Hours Worked

Under the FLSA, employers are required to track hours worked by nonexempt employees for purposes of calculating overtime (i.e., payment for hours worked in excess of 40 in a workweek under federal guidelines – state requirements may be different). Employers may better prepare for the new rule by tracking and analyzing the hours worked by affected employees. This can help employers determine the potential cost of reclassification and influence an employer’s decision to either reclassify affected employees as nonexempt or increase their salaries. For example, if affected employees rarely work more than 40 hours per week, reclassifying them as nonexempt may be more cost-effective. Conversely, if the affected employees regularly work more than 40 hours per week, it may be more cost-effective to avoid paying substantial overtime by increasing their salaries to retain their exempt status.

Review and Update Employer Policies

Overtime

Employers that want to limit the amount of overtime worked by reclassified employees should consider a policy of requiring overtime hours to be approved in advance and disciplining employees who violate such policy (employers are still required to pay for all overtime work even if not preapproved). However, employees who regularly work more than 40 hours per week as exempt employees may not be able to accomplish as much work if they are limited to working a maximum of 40 hours per week after reclassification. Therefore, employers that choose to restrict overtime may also consider whether to modify performance expectations, shift duties or responsibilities, or hire additional workers.

Timekeeping

Under the new overtime rule, employers may consider how existing timekeeping practices will apply to any affected employees the employer reclassifies as exempt and whether any modifications are required. For example, if employers reclassify remote or hybrid workers as nonexempt, employers will need to ensure that such workers will be able to record time remotely. Moreover, employers may need to establish additional guardrails for work performed at irregular times or off-site.

For example, if affected employees conduct work remotely outside of business hours (e.g., answering emails during evenings or weekends), employers may need to modify their policies to ensure that such time is properly recorded or require all work to be conducted during business hours.

Other Employee Policies

Employers may also consider reviewing existing policies that differentiate between exempt and nonexempt workers and consider potential implications for reclassified employees. For example, employers may offer different vacation policies, benefits, or bonus opportunities depending on an employee’s exempt status.

Develop Internal Communications

Employers that choose to reclassify affected employees should communicate the change with employees in advance of the date such reclassification takes effect. The communications should generally include an explanation of the change in employee classification, the date such change goes into effect, a description of the organization’s timekeeping policies (and meal and rest break policies, if applicable), the employees’ obligations under such policies, and a description of any changes under employer policies that differentiate between exempt and nonexempt employees (e.g., vacation policies). Some employees could view the reclassification to nonexempt as a demotion, so employers may want to reassure employees that the change has no effect on their status and emphasize the positive aspects of reclassification, such as overtime eligibility.

Employers should notify managers of the new requirements so that they understand their obligations with respect to newly nonexempt employees, such as reviewing and authorizing overtime. Employers may also consider notifying payroll personnel of any potential changes to employee paychecks, such as paying and calculating overtime and converting salaried employees to hourly employees. As the DOL’s final rule has been published, employers may consider preparing and issuing these communications now. However, the final rule is expected to face legal challenges similar to those of the 2016 overtime rule, which resulted in substantial delays and was ultimately blocked and abandoned by a new administration. Therefore, employers should watch for updates as they develop and issue internal communications regarding classification and other changes.

Prepare Employee and Manager Trainings

Employees who are reclassified may be unfamiliar with timekeeping and other practices applicable to only nonexempt employees. Therefore, in addition to communicating the change, employers may consider training reclassified employees on timekeeping, hours scheduling, overtime approval, meal and rest breaks, and any other policies applicable only to nonexempt employees prior to the effective date of their reclassification. Managers of the reclassified employees may need additional training to understand their obligations with respect to such employees, such as approving or denying overtime and ensuring hours are accurately tracked and reported. While employers can begin preparing training programs and conducting training now, they should watch for updates and monitor potential challenges.

Audit Exempt Employees’ Job Duties

Although the final overtime rule does not make any changes to the duties requirements for exempt classification, employers may also consider a broader audit on whether their exempt employees’ job duties and responsibilities satisfy the FLSA’s duties tests for white-collar exemptions. Employers may wish to review existing job descriptions for exempt positions to ensure they accurately reflect the work performed.

Review Applicable State and Local Overtime Laws

Some employers may already be subject to state or local laws that impose a higher salary threshold to qualify for an overtime exemption. Therefore, employers should continue to evaluate proper employee classifications using applicable state and local criteria as well as federal criteria.

Additionally, certain state and local laws, including those regarding meal and rest breaks, may only apply to nonexempt employees. Employers that reclassify employees as nonexempt should determine whether any such state or local wage and hour laws may apply to the reclassified employees and, if so, should inform the employees of these additional rights and benefits.

Monitor for Updates and Legal Challenges

While employers may take steps now to prepare for the final rule, they may want to wait to implement any concrete changes before it takes effect. As noted, the final rule is expected to face legal challenges. Accordingly, employers should watch for updates and prepare for potential uncertainty following the final rule’s publication. 

FTC Announces Rule Banning Noncompete Agreements

On April 23, 2024, the Federal Trade Commission (FTC) voted to issue a final rule that would ban noncompete agreements in virtually all employment relationships. The final rule has not yet been filed in the Federal Register but is scheduled to take effect 120 days after such filing.

Final Rule

The final rule defines a noncompete clause as a term or condition of employment that prohibits a worker from, penalizes a worker for or functions to prevent a worker from:

• Seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
• Operating a business in the United States after the conclusion of the employment that includes the term or condition. Such terms or conditions include employee contracts or workplace policies, whether written or oral.

Subject to very limited exceptions, the final rule provides that:

• The use of noncompete clauses will be banned as of the effective date;
• Any existing noncompete clauses (other than those entered into with senior executives) will be invalidated
  •  Employers must notify all employees (other than senior executives whose existing noncompete agreements will remain enforceable) that their existing noncompete agreements will not be enforced.

Currently, the enforceability of noncompete clauses is determined by state and local legislatures and courts. The FTC rule would instead govern the enforceability of noncompete clauses at the federal level and supersede any less restrictive state laws or judicial interpretations.

Legal Challenges

On April 24, 2024, the U.S. Chamber of Commerce sued the FTC, seeking to block the final rule. The complaint was filed in the U.S. District Court for the Eastern District of Texas and argues that the FTC lacks the authority to issue rules that define unfair methods of competition. Additional legal challenges are likely, so employers should monitor for updates and anticipate potential uncertainty in the coming months.

Next Steps for Employers

Employers may consider reviewing existing employee agreements or form agreements (such as new hire paperwork) to determine whether any contain noncompete clauses that would be invalidated under the rule. Employers may also begin preparing revisions to such agreements and consider whether to use alternatives to noncompete clauses (e.g., nondisclosure clauses) to protect competitive business information.

Pregnant Workers Fairness Act – Final Regulations Published

The final rule for the Pregnant Workers Fairness Act (PWFA), which applies to employers with 15 or more employees, has been published and takes effect June 18, 2024.

With over 100 pages of preamble, regulations, and interpretive guidance, there’s obviously a lot to take in. Thankfully, you don’t need to spend a whole afternoon reading unless or until you’re considering denying an accommodation—that’s when you should take a close look at what the Equal Employment Opportunity Commission (EEOC) has to say to ensure you’re compliant.

That said, here are some key takeaways to be aware of even if you expect to accommodate most requests.

Some Accommodations Are Presumptively Reasonable

The following accommodations for pregnant employees are presumed to be reasonable, meaning an employer will need an exceptionally good rationale for denying them based on undue hardship:

• Allowing an employee to carry or keep water near and drink, as needed.
• Allowing an employee to take additional restroom breaks, as needed.
• Allowing an employee whose work requires standing to sit and whose work requires sitting to stand, as needed.
• Allowing an employee to take breaks to eat and drink, as needed.

For instance, if a pregnant employee tells you they need more bathroom breaks or to sit on occasion, you should allow it. You’ll want to document the conversation so you have a record of saying yes, but there shouldn’t be a protracted back and forth with the employee about whether their request can be granted. If you believe any of these accommodations do create an undue hardship, we recommend speaking with an attorney or HR consultant before denying them.

Requests for Documentation Are Limited

Employers can only ask for documentation to support a request for accommodation when it’s reasonable under the circumstances. Blanket policies that automatically require documentation aren’t permitted. This is a great time to review the company’s Americans with Disabilities Act (ADA) procedures.

In the following situations, seeking supporting documentation is considered unreasonable and isn’t allowed:

•  When the limitation and accommodation needed are obvious.
  • When the employer already has sufficient information to determine that the employee has a limitation and needs an accommodation because of it.
  •  When a pregnant employee requests one of the presumptively reasonable accommodations listed in the section above.
  •  When the employee requests an accommodation related to pumping at work (or nursing, if feasible).
  •   When the requested accommodation is available to employees with a non-PWFA limitation without providing documentation.

When collecting documentation is permitted, employers can only request the minimum amount that confirms the employee’s condition, verifies that it’s related to pregnancy, childbirth, or a related condition, and describes the adjustment that the employee needs.

The Definitions Are Broad (and Might Surprise You)

Known limitations that must be accommodated can be modest, minor, or episodic and don’t need to rise to the level of a disability—they also include medical care, meaning you need to allow time off for appointments.

Pregnancy and childbirth include (among other things) infertility, fertility treatment, and the use of contraception.

And related medical conditions (among many other things) include termination of pregnancy, including by miscarriage, stillbirth, or abortion.

Employers Can’t Require “Magic Words” or Special Forms

An employee’s request for accommodation can be made orally, in writing, or by any other effective means. Employers can’t require that it be in a specific format or use specific language for them to acknowledge the request. Employers also can’t require that supporting documentation be on a specific form.

Accommodations Should Be Provided Without Delay

Once an employee makes a request for accommodation, the employer should do their best to provide it (or an interim accommodation) as soon as possible, even if supporting documentation will ultimately be required. The EEOC made it clear that they will frown upon delays, particularly with respect to simple or presumptively reasonable accommodations.

If You Thirst for More Knowledge

You can read and word-search the final rule here. The first 87 pages are the EEOC giving background and explaining why and how they responded to public comments. The regulations start on page 88 of the .pdf and the Interpretive Guidance, which includes 78 very helpful examples of how the law would be applied in real life, starts on page 94.

Action Items

Make sure your policy addressing the PWFA accurately reflects the regulations. You should also educate your managers (and anyone else likely to receive a request) on the presumptively reasonable accommodations, the limitations on asking for supporting documentation, and the importance of prompt accommodation. If you don’t have high confidence in your managers’ abilities to respond appropriately, you may want to require that anyone who receives a request immediately communicate it to HR.

Key Information From the EEOC’s Final Rule to Implement the Pregnant Workers Fairness Act

According to the EEOC, the final rule provides important guidance to help employers meet their responsibilities and aid job seekers and employees in understanding their rights. The following is a high-level summary of the important provisions of the final rule, including:

•  Who is considered a covered employee or applicant;
• The scope of known limitations and conditions related to pregnancy and childbirth, including abortion;
• Examples of reasonable accommodations;
• Determination of an undue hardship to employers;
• An employer’s right to request supporting documentation;
• The importance of timely communication and accommodation;
•  Guidance for employers asserting defenses; and
• Interaction with other laws.

Helpful Links & Resources

• EEOC FAQs — What You Should Know About the Pregnant Workers Fairness Act
• EEOC Overview— Pregnancy Discrimination and Pregnancy-Related Disability Discrimination
• EEOC Summary— Key Provisions of the EEOC’s Final Rule to Implement the Pregnant Workers Fairness Act

Federal: Supreme Court Rules on Title VII Discrimination

On April 17, 2024, the Supreme Court of the United States issued a decision in Muldrow v. City of St. Louis Missouri. In this case, a female police officer was involuntarily transferred and replaced with a male police officer. Her rank and pay stayed the same, but her job responsibilities, certain job perks, and schedule did not. She brought a lawsuit claiming discrimination based on sex under Title VII of the Civil Rights Act.

Title VII applies to employers with 15 or more employees and prohibits covered employers from discriminating against employees in the terms and conditions of their employment based on their race, color, religion, national origin, or sex.

The question that the Supreme Court answered in this case is whether a job transfer needs to have “significantly” harmed an employee in order for the employer to have violated Title VII. The Court found that it does not. The law prevents employers from treating employees worse because of a protected characteristic—it does not matter how badly the employee is harmed if a disadvantage occurs due to an involuntary job transfer.

Muldrow v. City of St. Louis Missouri

Federal: Prescription Drug Data Collection Reporting Update

The Consolidated Appropriations Act, 2021 (CAA), Title II, Division BB, included a new annual reporting requirement for group health plans and health insurers to report certain specified data related to prescription drugs and other healthcare spending, known as the prescription drug data collection (RxDC). The 2023 reference year (calendar year) RxDC data report is due by June 3, 2024.

Typically, carriers, third-party administrators, or pharmacy benefit managers submit the data on behalf of a plan sponsor and therefore may request additional information from employers to complete the process.

The Centers for Medicare and Medicaid Services (CMS) published the 2023 reference year instructions. The key updates include:

• Exclusion of certain products: Clarification that medical devices, nutritional supplements, and over-the-counter drugs are to be excluded from the prescription drug lists (sections D3, D4, D5, D7, and D8) unless the product’s National Drug Code (NDC) is listed on the CMS Drug and Therapeutic Class Crosswalk.
• Simplification of premium calculation: The method for calculating the average monthly premium has been simplified. Instead of calculating this on a per-member basis, the total annual premium is now divided by 12.
• Modification of premium equivalents calculation: The calculation for premium equivalents has been simplified by removing the requirement to report on a cash basis and using paid claims rather than incurred claims.
• Updates to benefit carve-out field: Instructions for filling out the benefit carve-out field in section P2 have been updated.
• Clarification on reporting prior year and restated rebates: Additional details have been provided on how to report information in the prior year columns in section D5 and the restated rebate columns in sections D6, D7, and D8.
• Guidance on retained rebates reporting: New instructions have been provided for reporting entities on how to report information on retained rebates when exact amounts are unknown.
• Submission of large data files: Instructions on how to submit data when plan list or data files exceed the maximum allowable size limit in the Health Insurance Oversight System (HIOS) have been included.
• Enforcement of aggregation restriction: The enforcement of the aggregation restriction has been announced, which pertains to how data are aggregated for reporting purposes.
• Addition of enrollment column to D6: A new column to collect enrollment data has been added to section D6.

Read more on the CMS Prescription Drug Data Collection (RxDC) web page, and see the GHP: Prescription Drug Data Collection and Reporting page.

State Compliance Update

Nothing to see here… until next month.

Compliance Calendar

May

Nothing for this month so far…

June

6/3 – Prescription Drug Data Collection Reporting (The Consolidated Appropriations Act, 2021) – group health plans

6/4 – EEO-1 Component 1 Filing Data Filing Deadline (Mandatory annual data collection requirement for all private sector employers with 100 or more employees)

July

7/31 – Form 5500 Filing Deadline (calendar year plans)