
This article was originally published on InsuranceJournal.com.
Time is running out for employers to familiarize themselves with new federal rules on overtime pay.
Starting January 1, the threshold for who is entitled to overtime pay â and who is not â changes. Itâs the first change since 2004.
The new rule raises the income threshold that employees must reach to $684 per week, or $35,568 per year, to qualify as exempt from overtime. Employers are allowed to count up to 10% (or $3,556.80 per year) in bonuses or commissions towards the threshold.
Workers making less than the threshold are entitled to earn one and one-half times their regular rate of pay for all hours over 40 during a work week.
Failure to properly implement the new regulations could expose employers to wage-and-hour type claims under the Fair Labor Standards Act (FLSA).
For some employers, that could mean employment practices liability insurance claims.
Thatâs one reason Chris Williams is trying to raise awareness. Williams is employment practices liability product manager for Travelers. He is responsible for employment practices underwriting strategy, including policy language, target markets, overall profitability of the book, marketing, and serving as a general resource for underwriters on employment practices.
In a recent talk with Insurance Journal, Williams discussed the overtime rule change and what it means for employers, employees and insurance.
Thereâs so much else going on in the area of employment practices, the overtime pay issue hasnât gotten much attention.
âThat is a concern because the lawâs already fairly complicated for employers to comply with,â Williams said. âThen, anytime you have a change in a complex law, youâre likely to see one, compliance challenges, and two, potential litigation coming out of that.â
Williams said the starting point is understanding the basics of the current rule compared to the new rule that starts in January.
Under the FSLA, employees that satisfy three requirements â they are paid on a salary basis, they are paid more than $23,660 per year, and they perform certain functions considered executive, administrative, or professional duties â are currently not entitled to overtime wages.
âFor example, if youâre an executive, youâre a manager in an organization, youâre managing folks, you have the ability to hire, to fire people, and you make more than $23,660 per year, you are not entitled to overtime,â he explained.
Exempt executive, administrative and professional employees include teachers and academic administrators in elementary and secondary schools, outside sales employees and employees in certain technology occupations, according to the Department of Labor. Certain casual, seasonal and farm workers are also exempt from the overtime requirement.
For the new year, while the definitions and exemptions for those doing executive, administrative, professional and other work remain, the key change for employers to be aware of is that the salary threshold is going up from $23,660 to $35,568 per year.
âAs a result of that, youâre going to have folks that are now within that pay band that are going to be entitled to overtime that previously werenât entitled to overtime,â Williams said.
âEmployers are going to have to one, figure out who those individuals are. And two, theyâre going to have to make sure theyâre tracking their time, and if those folks are working more than 40 hours per week, theyâre going to have to make sure that theyâre compensated on a time-and-a-half basis for that time in excess of 40 hours per week.â
While $35,568 is the threshold and where the primary impact is felt, there is also an upper limit as well. The high threshold under what is called the highly-compensated employee rule is going from $100,000 to $107,432.
âIn other words, if you make more than $107,000, you have some administrative or executive functions within the organization, and youâre doing non-manual work, youâre not going to be entitled to overtime,â he explained.
The upper limit rarely is an issue. âWe donât see very much claim activity arising out of those individuals. Itâs much more on the lower spectrum,â Williams noted.
In addition to the federal rule, depending on the state they are in, employers may have state laws on overtime pay they must follow as well. California is one such state.
âEmployers in those situations are obligated to comply with both the state and the federal law. For example, in California, most of our overtime wage claims that we see pertain to state law as opposed to claims under the Fair Labor Standards Act,â he said.
Williams sees a few potential trouble spots for employers.
âOne of the things we see today is employers, and I donât think a lot if it is malicious, I just think itâs a misunderstanding of what their obligations are, but they may not pay their employees overtime.
âThey may not correctly classify individuals as exempt or not exempt, meaning theyâre entitled to overtime. They may not track their time correctly.â
Another area is claims for not compensating workers for time they spend putting on their gear to prepare for work. âIf you work in a meat processing plant or something like that, you have to put on protective gear, and then you werenât compensated for that time,â he said.
There are things employers should do to prepare for the new overtime situation, according to Williams.
âEmployers will want to go back and make sure that theyâve correctly identified who is now entitled to overtime and are they, in fact, tracking their time and making sure those individuals are compensated correctly.
âItâs probably a good idea, given this change in the law, to review all your employees and make sure that you classify them correctly and youâre tracking their time properly and that youâre compensating them appropriately.â
Williams also noted that some employers may decide to raise the salary of their workers above the threshold of $35,568 to avoid an overtime issue. However, in order to avoid paying overtime for those workers, the employer would need to make sure the worker also qualified for an exemption under professional, administrative or executive.
âIn other words, if the employer raised the salary of a worker above $35,568 per year, and the worker did not qualify for one of the exemptions, the worker would still be entitled to overtime,â he said.
Williams recalled that happened in some cases after the Obama Administration in 2016 initiated an even high threshold of $47,000. Some employers increased the pay of some of the workers beyond that threshold. But then the Obama change was struck down in court in September 2017 when a judge ruled that the ceiling was set too high and might apply to some management workers who are supposed to be exempt from overtime pay protections. Business groups and 21 Republican-led states had sued to challenge the 2016 rule.
The Department of Labor estimates that 1.2 million additional workers will be entitled to overtime pay as a result of the increase to the standard salary level, while an additional 101,800 workers will be entitled to overtime pay as a result of the increase under the highly-compensated employee rule.
Williams urges agents to advise their clients to take advantage of resources available to them to be sure they are in complianceâ whether that be a human resources department, payroll processor or general counsel. He also recommends the DOLâs website that has information about the final rule.
Williams added that a number of insurance carriers including Travelers also have resources available. âItâs sort of a matter, one, of employers educating themselves, and then, two, taking action on that information,â he said.
Wage-and-Hour Claims
Those caught not in compliance could face wage-and-hour claims. Defense costs only for such claims may be covered under employment practices liability insurance (EPLI) but only for those purchasing a separate endorsement under their EPLI. Itâs not part of the traditional EPLI. (Coverage of unpaid wages may be available to large firms with sizable self-retentions but this coverage is not typically available to small and medium firms.)
âA lot of carriers, including Travelers, will provide a sublimit that applies to defense expenses only for wage-and-hour claims. That generally includes issues like failure to pay overtime, misclassifying workers as exempt, potentially misclassifying workers as independent contractors when theyâre in fact employees,â Williams explained.
There are certain state statutes, like in California, where employers are obligated to provide rest and meal periods. The separate coverage would include defense expenses for those types of claims as well.
Travelers offers a sublimit up to $250,000. âI think the marketâs generally between $100,000 and $250,000, and there may be some outliers beyond that,â he said.
Since itâs been 15 years since the overtime rule was changed, this is in a way a new exposure, one agents may want to explore with clients.
âI think thatâs a good idea. We sell this coverage to privately held companies and nonprofits, and we try to be proactive in selling it because itâs an exposure for employers thatâs out there,â Williams said.
He noted that these claims are attractive to the plaintiffsâ bar because there is a fee shifting provision in the statute so that if the plaintiff prevails on the claim, theyâre entitled to their attorneysâ fees. âYou can have cases where the actual recovery amount may not be that significant in terms of the unpaid wages, but the attorney fee is potentially significantly more than that unpaid wage portion,â he said.
Other EPLI Issues
Overtime is hardly the only pressure on employment practices liability insurance (EPLI) these days when workplace issues are in the news on a regular basis.
EPLI provides protection against many kinds of employee lawsuits including claims alleging sexual harassment; discrimination based on age, race, gender or disability; wrongful termination, hiring or promotions; retaliation and wrongful infliction of emotional distress.
According to Williams, there are two areas in particular where EPLI is currently seeing increasing claims activity: sexual harassment and privacy.
âIâll start off with the sexual harassment, and thereâs been an uptick, particularly in severity, on those claims. Thereâs been an uptick in the frequency of those claims as well. Itâs a challenging environment to litigate one of those cases in,â he said.
The second issue is biometric claims, driven by the Illinois biometric information privacy act.
âOne of the requirements under that is that if youâre going to use biometric information of your customers or employees, you have to get a signed release from the employee or customer,â he said.
A number of employers have been using fingerprint technology to scan employees in and out and to clock when theyâre coming and leaving work. In many cases, they did not get a signed release from the employee. âThatâs resulted in class action claims brought against those employers alleging violation of this statute, sort of quasi-invasion-of-privacy claims,â he said.
Other claims areas that are relatively new include websites not in compliance with the Americans with Disabilities Act. âThe website isnât compliant if it doesnât allow the disabled individual full use of that website because it hasnât been programmed properly,â he said.
Travelers is among the insurers that will provide workplace violence expense reimbursement coverage that reimburses employers for certain expenses in the event of a workplace violence event. The expenses might include counseling, additional security, and services of a public relations firm to help a business through the crisis.
An employment practice claim is not a recommended experience.
âNo oneâs ever gone through an EPLI claimâ which is a tremendously burdensome process in terms of the documents that have to be turned over, all the emails, the personnel files, the deposition the employer has to go throughâ no oneâs gone through that process and ever said, âBoy, weâd like to do that again,’â Williams said.