It is fair to say that compliance officers and their corporate brethren in human relations don’t always work hand-in-hand. There may be no better example of “silos” at companies than the self-built wall that all-too-frequently divides the two functions.
When new rules issued by the Department of Labor arrived on May 18, CCOs could be forgiven if they thought it was a matter best left in the hands of HR or the payroll department. That would be a mistake, some experts say.
Concurrently, a Supreme Court decision related to overtime pay could affect how agencies draft and defend rules and further chips away at the long-held legal concept of “Chevron deference.”
The DoL rule modifies the Fair Labor Standards Act and its application to white-collar workers. Previously, only employees with an annual salary of more than $23,660 who performed certain duties could be required to work more than 40 hours a week without being compensated with overtime. The new rules reset that threshold to $47,476 a year, effective Dec. 1. The rule also expands the definition of “salary basis” to allow non-discretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the standard salary test requirement.
Employers are given flexibility in designing systems to make sure appropriate records are kept to track the number of hours worked each day.
So, this is a complication for HR, right? Not entirely, says Lori Brown, president of ComplianceHR, a joint venture of global employment and labor law firm Littler Mendelson and Neota Logic, a company that provides technology solutions for employment law compliance.
In her view, the breadth of the CCO’s responsibilities spans several departments; and, while not all HR issues rise to that level, this one may because of what is at stake and the responsibility to manage risk.
The CCO should be involved in the strategy for complying with the new overtime regulations, because if it’s not done right, it opens companies up to a great deal of costs and litigation, especially through misclassification lawsuits, Brown says. An initial audit analysis to identify affected employees and compare the cost of salary increases versus reclassification as hourly employees will be among the more pressing challenges.
“In the CCO role, the definition of risk is far-reaching,” and HR risk is one of the component parts of the risk mitigation strategy,” Brown says. “The DoL’s changes to the overtime rules come with really high stakes … A single mistake can grow exponentially to include everyone else who is paid the same way.”
A complicating factor is that companies will differ in their approach to compliance with the new rule.
“The DoL’s changes to the overtime rules come with really high stakes … A single mistake can grow exponentially to include everyone else who is paid the same way.”
Lori Brown, President, ComplianceHR
“Employers are highly unlikely to comply with this rule by simply handing over thousands of dollars to otherwise exempt employees who fall beneath the threshold,” Brown says. “The harsh reality is that the new rules are going to force most employers to do the math and, after an extensive decision-making process, choose the option that presents the least dramatic economic impact. That may be reclassifying employees at a new hourly rate that, combined with whatever their projected overtime pay, leaves costs as close to current levels or as neutral as they can.”
“That’s the begrudging concession that was buried and all but hidden in the DoL’s guidance,” she adds. “The not-so-secret byproduct of this is that there isn’t a hidden pool of money out there that employers are just waiting to tap into. They are not going to do that.”
For Brown, there may be “no better example of why the chief human resources officer and CCO positions need to be completely aligned with a communication strategy.” The concern: reputation risk.
“HR is your first tactical line of defense as it relates to the workforce obsession with whatever is going on at the moment,” she says. “That’s all going to be reflected on social media. A poorly communicated or executed decision can be viral in a matter of hours.”
“It is hard for me to think about a more critical opportunity to align the overall compliance strategy and vision with the tactical, day-to-day HR components of how to implement these changes,” Brown adds. “The real question for organizations is defining who owns what pieces of the decision-making processes. It is overly simplistic and probably naïve to leave talent and people issues solely within a siloed HR function.
“With cyber-risk and the regulatory environment being what it is, companies need to decide what they want to see regarding a partnership and collaboration among the roles … It has to be a cross-functional partnership, because everybody owns risk. They need to be setting strategy together, rather than just drinking from the fire hose and coming together to react when something bad happens.”
The DoL rule isn’t the only overtime-related issue upsetting the regulatory applecart. On June 20, the U.S. Supreme Court decided Encino Motorcars v. Navarro, a long-lingering case regarding overtime pay for various employee positions at a car dealership. It found that a Labor Department rule that reversed a three-decade-old exemption from federal overtime pay rules for service advisers at car dealerships was not entitled to Chevron deference.
Below are key provisions from the Labor Department rule.
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:
1.Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
2.Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
3.Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
Source: Department of Labor
Chevron deference, from Chevron U.S.A. v. Natural Resources Defense Council, settled in 1984, is a legal holding that courts should defer to agency interpretations of their own statutes unless they are determined to be unreasonable or illegal. In the Encino Motorcars case, justices (split 6-2) found the DoL’s regulatory flip-flopping to be “arbitrary and capricious.”
“The result is an interim victory for the defendant, which can re-argue the merits of whether service advisers are exempt without deference to the DoL’s recent rulemaking,” says David Carpenter, litigation partner and a member of law firm Sidley Austin’s Supreme Court and Appellate practice group.”
“In terms of legal impact, he says, “the decision confirms an important limitation on Chevron deference that applies when an agency changes a long-standing position without reasoned explanation, although the Court remained vague on how detailed an agency’s explanation must be. The decision doesn’t really explain how extensive that reasoning must be or how much scrutiny it will receive.”
The Supreme Court did not, however, broadly dispute that agencies are entitled to change their policies. “It is interesting that the majority did not take the opportunity to interpret the statute directly, which the dissenting justices would have done,” Carpenter says. “That, in and of itself, might suggest they are still willing to give agencies room to declare regulations or statutes ambiguous and use their rulemaking power rather than necessarily interpreting it themselves.”
Post-decision questions may linger for some time. For example, will how long a policy has been in place affect what level of justification the agency needs to provide to change it?
“I think, logically, the longer a policy has been in place you would need to have different reasons—maybe stronger reasons, but definitely different ones—than if a policy was brand new,” Carpenter says. “But I’m not sure that, legally, we are going to see the Supreme Court creating a different level of deference or scrutiny.”
Encino represents a victory for employers against a Department of Labor rule that has been attempting to rewrite labor and employment law through administrative fiat, says Scott Witlin, a partner with the law firm Barnes & Thornburg. He isn’t sure, however, that it broke new ground.
“It didn’t create a new standard, by any means, for reviewing agency decisions,” he says. “It just took the DoL to task for not following guidelines that had previously been set forth.”
Nevertheless, Witlin does think it signals to the lower courts that they should be more closely examining the sufficiency of the explanations they are getting from the administrative agencies.
“Rules have been coming down fast and furious during the past year, as President Obama moves to lame-duck status and they are pushing to get as much out as they can,” he adds. “They have to be careful now, because they have to carefully explain their rationale if there is a reversal.”
The upshot of the Encino decision for regulators: Chevron deference isn’t a get-out-of-jail free card. “An agency can’t just change [its] mind without explaining why,” Witlin says, cautioning that “what’s sauce for the goose is sauce for the gander.”
“If Donald Trump is elected and his administration wants to take positions that are completely contrary to the positions that the Obama administration took, they are going to have to justify their rationale as well,” he says.
As for Republicans, the recent Supreme Court decision may empower their battle against Chevron deference, which many in that party argue has been abused throughout the Obama Administration and by regulators who use guidance, comment letters, and speeches to express their will without undergoing formal rulemaking.
In his recently released “A Better Way” call for regulatory reform, Speaker of the House Paul Ryan directly addressed the legal precedent under the heading, “End Excessive Judicial Deference to Agencies.”
“Most Americans don’t know it, but under Supreme Court decisions dating from the 1980s and 1990s—Chevron v. NRDC and Auer v. Robbins—lower courts have been allowed to abdicate their duty of saying what the law means in many regulatory cases,” the plan says. “Instead, the courts regularly and generously ‘defer’ to the agencies’ self-serving interpretations of statutes (Chevron), and can defer even more to agencies’ interpretations of their own regulations (Auer).”
“It is the judiciary’s deference to agencies that emboldens bureaucrats to read new meanings into old statutes,” it adds. “And it is the knowledge that agencies can get Chevron and Auer deference that encourages agency enablers in Congress to duck hard choices and write sweeping statutes that must be interpreted by agencies.”
House Republicans will seek the enactment of legislation to clamp down on judicial deference, Ryan promised.