A Salary Threshold Working Over Time
In December, new U.S. Department of Labor rules will require employers to pay overtime to salaried workers earning less than $47,476 a year, effectively doubling the current overtime annual salary threshold of $23,660.
Employers who have not yet audited their wage and hours practices are running out of time to make sure they are in compliance with this new base salary limit, experts warn. The Department of Labor estimates as many as 4.2 million U.S. workers could be affected by the change.
By some estimates, as many as 70 percent of companies are in violation of the rules.
“For anybody who hasn’t looked at this yet, this is the ‘all-nighter before the test’ window,” said Noel P. Tripp, a principal at Jackson Lewis P.C., who represents employers in wage and hour cases.
Those that don’t comply may find themselves joining an ever growing club of litigants, including well-known companies such as DuPont Co. and Tyson Foods, scrambling to prove they paid their workers fairly.
Even before this change, the number of lawsuits filed under the Fair Labor and Standards Act (FLSA) more than tripled in the past decade and is expected to hit an all-time high this year.
Conduct an audit of your workforce and bring all employees to compliance if they are not already, said Catherine K. Ruckelshaus, general counsel at the National Employment Law Project.
“For anybody who hasn’t looked at this yet, this is the ‘all-nighter before the test’ window,” — Noel P. Tripp, principal, Jackson Lewis P.C.
With many existing state rules already much higher than the federal threshold, companies often find they are already in compliance, which is much more cost effective than defending a wage and hour claim.
That’s because the company bears the legal burden of proof; it’s hard to manage payroll records on time worked for every single worker if the proper systems are not in place, and it takes a lot of money and time away from the core responsibilities of a business to fight a case in court.
With so many companies at risk of being non-compliant, this looming deadline is as good a time as any to review for problems, said Chris Williams, an employment practices liability product manager at Travelers.
“If you haven’t fixed it by Dec. 1 [and you are sued] you paint yourself in an even worse light in a courtroom,” said Lisa Doherty, co-founder and CEO of Business Risk Partners, a specialty insurance underwriter and program administrator.
States and business organizations have tried to delay the rule change by filing complaints recently with the federal courts. Experts say those are unlikely to prevail, so companies should proceed with greatest caution and keep the Dec. 1 deadline as the target.
Wal-Mart Stores was most likely aiming for broad-based compliance ahead of the deadline when just last month it raised all salaries for its entry-level managers to just above the threshold at $48,500 from $45,000 annually, according to Reuters.
A Change Long Overdue
The FLSA was enacted in 1938 and established the 40-hour work week salary threshold, which entitled workers to time-and-a-half their regular hourly wage for any overtime.
White collar workers making more than the threshold and meeting certain “duties tests” were exempt from receiving overtime pay if they worked more than 40 hours in a week. The current threshold of $455 a week or $23,660 annually, has been in place since 2004.
“It’s a long time overdue,” Ruckelshaus said. “Workers could be making around $23,000 and be called exempt white collar workers, which is kind of crazy.”
The new rule more than doubles the minimum to $913 per week, or $47,476 annually. And to make sure there’s not such a long gap before the threshold goes up again, it will now automatically increase every three years based on wage growth.
Employers with exempt salaried workers within this range generally face three options.
One: Raise the annual pay to above $47,476 to maintain the exempt status. This option works best for employees paid a salary close to the new level, such as those Walmart managers.
Two: Reclassify salaried employees as hourly and pay time and a half when they exceed 40 hours in a week. This approach works best when there are only occasional spikes that require overtime for which employers can plan for and budget.
Three: Strictly limit employees’ time to 40 hours and hire additional workers. That’s not always a welcome path if it triggers a new record-keeping system to track hours. It can be difficult to get workers to change their behavior to start recording when they arrive at work and leave.
Establishing a 40-hour week was meant to encourage employers to hire more people rather than pay one worker overtime, but often adding staff is not in the labor budget.
In many cases, there’s tremendous pressure from the higher level to the middle level to be more efficient and less costly, said attorney Thomas More Marrone who represents employees in FLSA cases.
“A mid-level manager with a labor budget and no compliance training regarding overtime rules is a loaded weapon you have pointed at the business because you have given that manager an incentive with no context,” Tripp said.
What’s at Stake? Legal Cases Are Growing
There were 8,000 FSLA wage and hour claims filed last year, making it the single fastest growing type of employment litigation, Doherty said.
One reason for that claims volume is that there are a variety of ways a company can violate the rules.
There’s straight-out failure to pay overtime when a worker is entitled to it. There’s “donning and doffing” claims when an employer doesn’t include the time to put on protective gear as part of the work day. DuPont and Tyson were both targets of class action lawsuits citing donning and doffing.
“A mid-level manager with a labor budget and no compliance training regarding overtime rules is a loaded weapon you have pointed at the business because you have given that manager an incentive with no context.” — Noel P. Tripp, principal, Jackson Lewis P.C.
DuPont argued that the employees recouped that time by taking paid breaks throughout the day.
“It has been the law for many decades; if you don’t keep track of it there’s a presumption against you,” said Marrone, who is representing employees against DuPont.
Some newly emerging FLSA cases involve the time employees spend checking email and on computers at home, Williams said.
Often, it’s not until a claim is filed that employers — who bear the burden of proof in most cases — realize they haven’t maintained the appropriate records to defend the business, Williams said.
He adds that it is not unusual to see wage and hour claims filed after an employee is fired. That’s why it is so important to keep in compliance and maintain accurate records.
FLSA cases are often “lawyer driven,” he said. It’s not uncommon for a fired employee to inquire with a lawyer about a wrongful termination case. “The lawyer says, ‘I don’t care about [your termination] but answer these 10 questions about the hours you worked and how you were paid.”
Something to keep in mind: Employers who are liked by their workers are far less likely to get sued, said Tripp.
Protect Your Business
It’s important that companies talk to a broker about coverage for some of that exposure, Williams said.
A coverage endorsement attached to employment practices liability insurance (EPLI) policy forms may cover the cost of defending claims alleging that an employer failed to pay overtime to a nonexempt employee — that is, an employee who is not exempt from, and therefore eligible to receive, overtime pay under the FLSA.
Travelers can provide a $100,000 defense expenses sublimit for wage and hour claims for most clients, Williams said. No coverage typically applies under these endorsements to settlements or judgments (i.e., they cover only defense costs), and a sublimit usually applies.
As for when to be ready for the higher threshold, Williams said “the prudent employer should plan on the law going into effect on Dec. 1 until there’s a definitive word to the contrary.”
A group of 21 states filed a complaint in the Eastern District of Texas challenging the new U.S. Department of Labor regulations that redefine the white collar exemptions to the overtime requirements of the FLSA. The States argue the DOL overstepped its authority by, among other things, establishing a new minimum salary threshold for those exemptions.
More than 50 business groups including the U.S. Chamber of Commerce, the National Association of Manufacturers and the National Retail Federation also filed a lawsuit in the same court, on the same day, contending the new regulations were implemented in violation of the federal Administrative Procedure Act.
Travelers recommendations to protect against wage and hour claims:
- Consult with an attorney and a human resources representative to understand all obligations required by the law.
- Review all employee job responsibilities and wages to determine whether they are entitled to overtime, and document those decisions.
- Ensure you have a process in place to document all hours worked for non-exempt employees.
- Communicate and train managers on the new regulations and requirements.
Risk Favors the Prepared
A recent study published in the “New York Times” highlighted an interesting discovery. Scientists researched how special operations soldiers and race car drivers achieved resilience during the physical and emotional stresses of their jobs.
These individuals were placed in brain-scanning machines and were fitted with face masks through which the researchers were able to control the flow of oxygen at the press of a button.
In another control group, 48 healthy adults were placed in the same machines and were given the same face masks to wear. These adults were divided into three groups: high resilience, average resilience, and low resilience. These categories were determined by questionnaires given to them about their self-perceived emotional and physical resilience.
As the researchers began restricting the flow of oxygen, something interesting happened. The control group of “low resilience” healthy adults had brain signals that were quite inactive right before they realized the button was going to be pushed, resisting the flow of oxygen.
However, after they started having trouble breathing they experienced extremely high levels of activation in the section of their brains leading to bodily awareness; overreacting to the threat once breathing became difficult.
The more we are prepared for impending disasters, the more favorable the outcome will be when the inevitable actually occurs.
The control group of “average and high resilience” adults, as well as the elite soldiers and racers, showed increased levels of brain activity right before they thought their oxygen was about to be restricted. However, the level of activity in their brains sending signals to bodily awareness were muted. This group experienced a stressful condition but did not overreact physically or mentally.
The aforementioned example accurately illustrates the power of resilience; the ability to maintain a level of functionality despite changing conditions in one’s environment.
For a family, attaining a level of high resilience could mean knowing what to do in case of a fire at home. For a nation, ensuring that local, state, and national agencies are operating under the same procedures and nomenclature leads to a higher level of resilience. The establishment of the Department of Homeland Security after 911 is a great example.
For businesses, attaining a high level of resilience includes:
- Ensuring employees have proper cyber hygiene; having dual levels of authorization for money transfers above a certain threshold, limiting privileged access to sensitive data, continuous training of employees on current cyber threats, and conducting mock cyber-attack drills.
- Implementing wellness programs to encourage employees to stay healthy, saving the firm money on health insurance claims and potential lost man-hours due to sick employees.
- Having a detailed active shooter plan in place. Active shootings are becoming more prevalent, and it is important for companies to train for these much like they would for fire drills.
- Ensuring employees traveling abroad are educated on potential risks in that country. Having the phone number of the U.S. embassy, procuring the services of emergency evacuation firms, and providing adequate health care coverage abroad are all noble efforts.
The more we are prepared for impending disasters, the more favorable the outcome will be when the inevitable actually occurs.
Sparking Innovation and Motivating Millennials
Two trends in the insurance industry, if they continue, could compromise its vitality in today’s fast-paced, technology-driven business world: slow innovation and a scarcity of millennial talent.
The quests to develop innovative solutions and services and to recruit young people to the field have raised concerns in the industry for several years, causing some insurers to think about how they will stay viable in the future when senior-level managers begin to retire.
But Lexington Insurance Company, a member of AIG, may have found a way to spark innovation that also engages millennial minds.
Innovation Boot Camp started three years ago as a one-off project meant to identify young, high-potential employees, give them exposure to senior management and evaluate their teamwork and leadership capabilities.
“The original concept was fairly straightforward. We would bring together a group of about 30 high potential employees for some semblance of team project work and it would allow management to gauge and assess talent,” said Matt Power, Executive Vice President, Head of Strategic Development, Lexington Insurance.
Little did he know how well the program would not only generate a plethora of innovative ideas that would drive the company forward, but also reinvigorate younger employees.
“The boot camps would be focused on innovation, with the idea that if we ended up with a concept or product that we could commercialize, then the boot camp would have been effectively self-funded. When they came back at the end of the 12 weeks, we were absolutely shocked because they produced about half a dozen products that have since been commercialized and are in some phase of being rolled out.”
— Matt Power, Executive Vice President, Head of Strategic Development, Lexington Insurance
New Ideas Emerge
The inaugural Innovation Boot Camp began with a two-day kick off meeting for participants— consisting of six teams with five or six participants. Each team was tasked with developing a business plan, and began to connect virtually over the next 12 weeks. The plan would culminate in a presentation to a senior management judging panel at the program’s conclusion.
“The boot camps would be focused on innovation, with the idea that if we ended up with a concept or product that we could commercialize, then the boot camp would have been effectively self-funded,” Power said. “When they came back at the end of the 12 weeks, we were absolutely shocked because they produced about half a dozen products that have since been commercialized and are in some phase of being rolled out.”
Power credits the program’s success in part to the participants’ youth. They were tuned in to different trends and issues than their more experienced counterparts.
Cyberbullying, for example, was a problem that didn’t exist for Power and his contemporaries as they grew up, but was salient for millennials. Based on the presentation of one group, Lexington developed coverage on their personalized portfolio for exposures associated with cyberbullying.
Likewise, “they educated us on the emergence of the craft brewing industry and how rapidly it was growing in the U.S.,” Power said. “That led to us launching a whole suite of products for craft brewers.”
Another team brought forth the concept of how rapid sequencing laser photography could be used to create a three-dimensional picture of a construction work site. That would allow contractors or claims managers to virtually walk through the site at a given point in the construction process to identify deviations from the original blueprint plans.
The images could memorialize the building process down to the millimeter, to every screw and wire. If a loss emerges later on due to a construction defect, the 3D map would be a valuable investigation tool.
Innovation Boot Camp proved so successful that Lexington expanded it to other arms of AIG all over the world.
“Suddenly we started getting calls from London, Copenhagen, Brazil,” Power said. “We were doing these programs for our global casualty team, for our lead attorneys in New York, for our financial lines group, and so on. We recently embarked on the 16th iteration of this program in London, with additional programs in the works.
“It’s a journey that has evolved from trying different things and not being afraid to fail, not being afraid to try new ways of thinking about the business.”
Engaging Millennial Minds
In addition to generating new product ideas, Innovation Boot Camp also engages younger employees more fully by offering the opportunity to make meaningful contributions to the company through independent work that requires some creative thinking.
Past participants are often great crusaders for the program.
“A program like IBC is something rarely seen at a large corporate conglomerate, and really a concept for new age startup companies,” said Alyson R. Jacobs, Vice President, Broker and Client Engagement Leader in AIG’s Energy & Construction Industry Segment. “But we were given a chance to work with people of all different professional backgrounds, and that environment unearthed concepts and solutions that have made a significant impact in the lives of our insureds and their employees.”
The chance to do work that makes a difference, both for the success of their company as well as the clients its serves, is what attracts millennial employees to the program and motivates them to devote their best effort to the project.
“Millennials want to be able to share their ideas and make meaningful contributions at work,” Power said. “Innovation Boot Camp has evolved into the perfect forum for that.”
David Kennedy, Esq., Product Development Manager for Lexington Insurance and former Coach for two Innovation Boot Camps, said the program engenders an “entrepreneurial spirit of developing something new, of applying analytical rigor to emerging risks to create unique and timely solutions for our clients and the marketplace.”
Exposure to senior executives doesn’t hurt either.
“It provided a platform for me to not just interact with our Senior Executive leadership but present a concept that could potentially be adopted by our company in the future,” said Ryan Pitterson, Assistant Vice President, AIG. “It helps to build your internal network, elevate your profile in the company and connects you with our client base as well.”
At a time when recent college graduates choose employers based on how much opportunity they’ll be given to have meaningful input — as well as opportunities for advancement — projects like Innovation Boot Camp could be the answer to the insurance industry’s struggle to pull in millennials.
“We give them the time, space and resources to create something new,” Power said. “When employee engagement is done right, it inspires passion and creativity.”
As multiple arms of AIG adopt Innovation Boot Camp around the globe, both the quantity and quality of new ideas are bound to flourish.
“The bottom line is, many heads are greater than one, and AIG has figured out how to leverage this. AIG hears their employees’ voices and enables those ideas to take our company into the future,” Jacobs said.
To learn more about Lexington Insurance, visit http://www.lexingtoninsurance.com/home.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.