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Risk in Context

Federal Overtime Rule Changes Could Lead to Lawsuits

Posted by Kelly Thoerig May 23, 2016

Revisions to the Fair Labor Standards Act overtime rules could bring an increase in employee lawsuits, especially as basic worker classifications are being challenged. Companies should ensure they understand the impact of the new Department of Labor (DOL) regulations, which were released on May 18.  

The DOL’s final rule primarily focuses on updating the salary and compensation levels needed for so-called “white collar” workers (executive, administrative, and professional employees) to be “exempt” and, therefore, not entitled to overtime pay.  Effective December 1, 2016, the rule:

  1. More than doubles the standard salary level from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). 
  2. Raises the “highly compensated employee” threshold from $100,000 to $134,004, above which only a minimal showing is needed to demonstrate an employee is not eligible for overtime. 
  3. Establishes a mechanism for automatically updating the salary and compensation levels every three years.  The threshold is expected to rise to more than $51,000 annually on January 1, 2020.

The Obama administration said the final rule is expected to extend overtime protections to 4.2 million Americans who are not currently eligible under federal law, and to boost wages for workers by $12 billion over the next 10 years.

Insurance and Claims Environment

Even before this sea change in overtime law, the number of FLSA lawsuits had been increasing dramatically, rising for the sixth straight year to a record high in 2015, spiking 11% to 8,954 filings. In comparison, there were only 2,035 FLSA lawsuits filed in 2002. This rapidly growing area of litigation includes allegations that employers failed to pay overtime, did not provide adequate meal and rest breaks, or misclassified employees as exempt rather than nonexempt, or as independent contractors rather than employees.

Claim severity is also increasing. The top 10 private settlements in 2015 totaled $463.6 million, more than double 2014’s total of $215.3 million. Unfortunately, developments in recent months — including broadened interpretations of what constitutes joint employment and independent contractors — have provided new wage-and-hour-litigation opportunities for plaintiffs.

Wage and hour insurance is typically structured to respond pointedly to violations of the FLSA.

Insurance markets have responded with, among other things, a greater variety of coverage options. These may be available on a standalone basis, blended with employment practices liability insurance, or in excess blended layer with a wage and hour dropdown feature.  

Before the new rule takes effect, employers should conduct robust internal audits to identify impacted employees, ensure compliance with the current levels, and take a forward-looking view in light of the automatic increases.

Kelly Thoerig

Senior Vice President, Employment Practices Liability Coverage Leader