Significant changes announced over the past two weeks will entitle approximately 1.3 million US workers to overtime pay and severely restrict the use of independent contractors in the state of California. These changes require immediate action by employers and are likely to leave a lasting impact on the US employment landscape.

The US Department of Labor Increases Salary Level Threshold Required to Meet Overtime Exemption

Effective January 1, 2020, the salary level threshold required to exempt executive, administrative, or professional employees from federal minimum wage and overtime pay requirements will increase from $455 to $684 per week ($35,568 annually). Non-discretionary bonuses or other incentive compensation can be used to satisfy up to 10% of this salary threshold. The US Department of Labor (USDOL) predicts that the increase will “make 1.3 million workers newly eligible for overtime pay”.

The USDOL’s final rule also increases the salary level for “highly compensated employees” from $100,000 to $107,432 per year and sets special salary levels for employees working in the motion picture industry and US territories (e.g. Puerto Rico and Guam).

Employers should evaluate their current exempt classifications in advance of the effective date, taking into account state or local laws with higher thresholds and/or differing laws on compensation items that can be considered in meeting the threshold.

New California Law Presumptively Considers All Workers to be Employees Under the “ABC Test”

California employers should evaluate their current independent contractor relationships in light of Assembly Bill 5. The bill codifies the “ABC Test”. The ABC Test significantly restricts who may be classified as an independent contractor by creating a presumption that a worker performing services for hire is an employee unless the hiring entity can establish the worker:

(A) is free from the control and direction of the hiring entity in performing the work;
(B) performs work that is outside the usual course of the hiring entity’s business; and
(C) is customarily engaged in an independently established trade, occupation or business.

Part B presents a significant hurdle for hiring entities operating in the so-called gig economy. This includes app-based platforms, such as Uber and Lyft, with business models that rely heavily on independent contractors to provide services core to the company’s business.

The ABC Test has applied to California wage claims since a court decision in April 2018. The new law extends the ABC Test to all claims arising under the California Labor Code and Unemployment Insurance Code. It goes into effect on January 1, 2020.

Certain professions are exempt from the ABC Test. A non-exhaustive list includes: lawyers, architects, engineers, accountants, securities broker-dealers or investment advisers, direct sales salespersons, commercial fishermen, human resources administrators, certain healthcare providers, hairstylists, graphic designers, and real estate licensees. Exempt occupations are subject to the “Borello test,” which has a lower burden for establishing independent contractor status. Lobbying efforts for additional exemptions are ongoing. It remains to be seen whether any of these efforts will succeed.

For questions, please contact Barbara Roth or Tyler Hendry.

Barbara Roth
Barbara Roth
Partner, New York
+1 917 542 7858
Tyler Hendry
Tyler Hendry
Senior Associate, New York
+1 917 542 7866