HR Professionals Struggle over FMLA Compliance, SHRM Tells the DOL

In addition to the daily struggles that HR Professionals have to resolve, they are faced with many frustrations that have stemmed from the federal Family and Medical Leave Act (FMLA). Read this blog post to learn more.

In a Sept. 15 letter to the U.S. Department of Labor (DOL), the Society for Human Resource Management (SHRM) highlighted many of the challenges and frustrations that confront HR professionals as they comply with the federal Family and Medical Leave Act (FMLA).

"SHRM supports the spirit and intent of the FMLA, and our members are committed to ensuring employees receive the benefits and job security afforded by the act," wrote Emily M. Dickens, SHRM's corporate secretary, chief of staff and head of Government Affairs. "While it has been more than 25 years since FMLA was enacted, SHRM members continue to report challenges in interpreting and administering the FMLA."

The letter, developed with input from SHRM members, was in response to a request for information issued by the DOL's Wage and Hour Division on July 17. The DOL solicited comments and data "to provide a foundation for examining the effectiveness of the current regulations in meeting the statutory objectives of the FMLA."

According to Ada W. Dolph, a partner at Seyfarth Shaw who practices labor and employment law in Chicago, “SHRM’s comments echo what we are hearing from clients in terms of their challenges in implementing FMLA leave, particularly now with the patchwork of additional state and local leave requirements that have emerged as a response to COVID-19."

She added, "Our experience shows that regulatory gray areas add significant costs to the administration of the FMLA and impact the consistency with which the FMLA is applied to employees. We are hopeful that [the DOL] will implement SHRM’s proposed revisions, which provide much-needed clarity for both employers and employees."

Wide-Ranging Challenges

In its comment letter, SHRM addressed several issues its members have reported:


"Continuing treatment by a health care provider" as currently defined in federal regulations creates uncertainty for SHRM members on how to treat an absence of more than three consecutive days, according to SHRM's letter. "If there is not 'continuing treatment,' then it does not constitute a 'serious health condition' under the regulations," the letter explained. "However, if the employee does receive additional treatment, it's not clear whether these initial three absences are related to a serious health condition."

SHRM pointed out that several members "have suggested increasing the time period of incapacity, indicating they spend a lot of time processing employee certifications for missing four days that they believe more readily falls under sick time or paid time off."

Further guidance, including criteria and examples of when employers may obtain second and third medical opinions, "would be helpful, as many SHRM members reported declining to challenge an employee's certification at all because the conditions under which they may challenge those certifications are unclear or cumbersome," SHRM said.

Members also reported that obtaining documentation from health care providers on the need for employees to take leave to care for a family member with a serious health condition was difficult, and that doctors were often vague about identifying how the employee fits into the caregiving equation.


SHRM members reported that intermittent leave-taking is the most likely FMLA leave to be abused by employees.

"Employees are permitted to take incremental leave in the smallest increment of time the employer pays, as little as .10 of an hour, which members reported allowed employees to use the time to shield tardiness or other attendance issues," the letter read. "SHRM strongly urges [the DOL] to increase the minimum increment of intermittent or reduced schedule leave that is unforeseeable or unscheduled, or for which an employee provides no advance notice." SHRM suggested several alternative approaches.

For instance, the DOL could:

  • Require that employees take unforeseeable or unscheduled intermittent or reduced schedule leave in half-day increments, at a minimum.
  • Establish a smaller increment, such as two hours, that automatically applies in any instance in which an employee takes unscheduled or unforeseeable intermittent or reduced schedule leave.

Additionally, when an employee takes intermittent or reduced FMLA leave, an employer may transfer an employee to an alternative position. However, under current regulations, employers may only require such a transfer when the leave taken is for "a planned medical treatment for the employee, a family member, or a covered servicemember, including during a period of recovery…."

"Given the potential burden and hardship that intermittent and reduced-schedule leave have on employers, SHRM believes that an employer should be permitted to temporarily transfer an employee on intermittent or reduced-schedule leave to an alternative position, regardless of whether the leave is foreseeable or unforeseeable or whether it is scheduled or unscheduled," SHRM told the DOL.


Employees continue to regularly exhaust and replenish their 12-week FMLA entitlement, based on the rolling 12-month entitlement period, SHRM members reported.

"Combined with the Americans with Disabilities Act Amendments Act requirements to accommodate absences under some circumstances, these unrelenting absences become unreasonable and unduly burdensome to employers," SHRM commented.

Similarly, many SHRM members reported being frustrated that there weren't more mechanisms to challenge potential abuses of intermittent leave (e.g., when employees take every Friday or Monday off).


Many employees provide notice of even foreseeable leaves after the leave has begun, noted SHRM, which recommended that notice of foreseeable leave be required prior to the commencement of leave and not "as soon as practicable."

SHRM also suggested that "a more definitive requirement be imposed so that employees understand clearly that they must provide notice of leave prior to beginning leave," and that "if an employee does not give advance notice, it should be the employee's burden to articulate why it was not practicable to provide such notice prior to the start of the leave. If they are unable to meet this burden, the regulation should permit and specify the consequences."


If an employee fails to provide sufficient information to demonstrate that he or she may seek FMLA leave, then the employee can be required to provide additional information "to determine whether an absence is potentially FMLA-qualifying," SHRM explained. "However, there is no deadline by which the employee must provide this clarifying information, resulting in extensive, continued delays and continued administrative burdens."

SHRM recommended tightening this time frame to seven days and that the DOL "endeavor to provide firmer and clearer deadlines and notice requirements throughout the regulations."

SHRM members also reported that health-provider fees for completing paperwork often slowed or halted the certification process and asked whether providers' ability to impose these fees could be limited.

New FMLA Forms

Overall, SHRM members expressed satisfaction with recently updated FMLA forms. However, members continue to report that the information received from medical providers is often unclear and that they struggle to determine whether the reported condition constitutes a serious health condition.

The new forms do not account for the possibility that an employee does not qualify for FMLA because the employee doesn't meet the requirement of being unable to perform the functions of his or her job. "As such, we suggest that the medical provider be given the option to indicate that an employee does not meet this requirement," SHRM wrote.

Many members suggested that the DOL allow completion of online forms to speed processing times and reduce the administrative burdens of processing FMLA leave.

Among other issues, SHRM members also reported struggling with how to effectively reconcile FMLA with other leave laws enacted in the wake of the COVID-19 pandemic.

SOURCE: Miller, S. (21 September 2020) "HR Professionals Struggle over FMLA Compliance, SHRM Tells the DOL" (Web Blog Post). Retrieved from

Labor Department Issues Final Rule on Calculating 'Regular Rate' of Pay

The New Year is bringing changes to the current "regular rate" of pay definition. Recently, the U.S. Department of Labor updated the FLSA definition of the regular rate of pay. The final ruling will take effect on January 15, 2020, and will provide modernized regulations for employers. Read this blog to learn more.

Employers now have more clarity and flexibility about which perks they can include in workers' "regular rate" of pay, which is used to calculate overtime premiums under the Fair Labor Standards Act (FLSA). The U.S. Department of Labor (DOL) announced a final rule that will take effect Jan. 15, 2020.

This is the first time in more than 50 years that the DOL has updated the FLSA definition of the regular rate of pay. Here's how the new law will impact employers.

Reduced Litigation Risk

Currently, the regular rate includes hourly wages and salaries for nonexempt workers, most bonuses, shift differentials, on-call pay and commissions. It excludes health insurance, paid leave, holiday and other discretionary bonuses, and certain gifts.

Many employers weren't sure, however, if certain perks had to be included in the regular rate of pay. So instead of risking costly lawsuits, some employers were choosing not to offer competitive benefits.

Employers were concerned that, for example, if they offered gym memberships to employees, they would have to add the cost to the regular-rate calculation, explained Kathleen Caminiti, an attorney with Fisher Phillips in Murray Hill, N.J., and New York City. The new rule says that gym membership fees and other similar benefits don't have to be included.

The new rule is intended to reduce the risk of litigation and enable employers to provide benefits without fearing that "no good deed goes unpunished," Caminiti said.

The final rule largely tracks the proposed rule, noted Susan Harthill, an attorney with Morgan Lewis in Washington, D.C. But it includes more clarifying examples and provides additional insight into the DOL's views on specific benefits, she said.

This rule was relatively uncontroversial, said Tammy McCutchen, an attorney with Littler in Washington, D.C. She noted that only a few employee and union groups commented against the rule, and those comments addressed very specific points.

"Employees like these benefits, too," she said.


The rule clarifies that employers may exclude the following perks from the regular-rate calculation:

  • Parking benefits, wellness programs, onsite specialist treatments, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits, and adoption assistance.
  • Unused paid leave, including paid sick leave and paid time off.
  • Certain penalties employers must pay under state and local scheduling laws.
  • Business expense reimbursement for items such as cellphone plans, credentialing exam fees, organization membership dues and travel expenses that don't exceed the maximum travel reimbursement under the Federal Travel Regulation system or the optional IRS substantiation amounts for certain travel expenses.
  • Certain sign-on and longevity bonuses.
  • Complimentary office coffee and snacks.
  • Discretionary bonuses (the DOL noted that the label given to a bonus doesn't determine whether it is discretionary).
  • Contributions to benefit plans for accidents, unemployment, legal services and other events that could cause a financial hardship or expense in the future.

"Unlike the upcoming changes to the FLSA white-collar regulations, which will have the force of law, this final rule is predominately interpretative in nature," said Joshua Nadreau, an attorney with Fisher Phillips in Boston. "Nevertheless, you should review these changes carefully to determine whether any of the clarifications are applicable to your workforce."

Employers who follow the rule can show that they made a good-faith effort to comply with the FLSA.

Paying Overtime Premiums

Under the FLSA, nonexempt employees generally must be paid 1.5 times their regular rate of pay for all hours worked beyond 40 in a week. But the regular rate includes more than just an employee's base hourly wage. Employers must consider "all remuneration for employment paid to, or on behalf of, the employee," except for specific categories that are excluded from the calculation, such as:

  • Discretionary bonuses.
  • Payments made when no work is performed, such as vacation or holiday pay.
  • Gifts.
  • Irrevocable benefits payments.
  • Payments for traveling expenses.
  • Premium payments for work performed outside an employee's regular work hours.
  • Extra compensation paid according to a private agreement or collective bargaining.
  • Income derived from grants or options.

The final rule updated and modernized the items that can be excluded from the calculation, Caminiti said. For example, the prior regulation referenced only holiday and vacation time, whereas the new rule recognizes that many employers lump together paid time off. The rule clarifies that all paid time off will be treated consistently as to whether it should be included in the regular rate.

The DOL eliminated some restrictions on "call-back" and similar payments but maintained that they can't be excluded from an employee's regular rate if they are prearranged.

The rule also addresses meal breaks, scheduling penalties, massage therapy and wellness programs.

"Some of these benefits didn't exist even a decade ago," McCutchen noted.

Harthill observed that the line between discretionary and nondiscretionary bonuses has created uncertainty and litigation. So the final rule's text and preamble give more examples and explanations about certain bonuses in response to commenters' requests. For example, the final rule provides more clarity about sign-on and longevity bonuses, but the DOL declined to specifically address other types of bonuses commenters asked about.

Action Items

"Now is the time for a regular-rate audit," McCutchen said. Compensation specialists should gather a list of all the earnings codes they're currently using for nonexempt employees, note each one they are including in the regular rate and compare that with the new rule to see if changes need to be made.

Most employers presently are not including paid sick time, tuition reimbursement and other perks in the regular-rate calculation, McCutchen noted, and DOL has confirmed the practice.

Now is also a good time for employers to decide if they want to start providing certain perks that are popular with employees, she said.

Harthill noted that it is important for employers to check whether the relevant state law tracks or departs from the federal law, because state laws might have stricter rules about overtime calculations.

SOURCE: Nagele-Piazza, L. (12 December 2019) "Labor Department Issues Final Rule on Calculating 'Regular Rate' of Pay" (Web Blog Post). Retrieved from

DOL reverses course on ‘80/20’ limitations for tipped employees

On November 8, the Department of Labor (DOL) released four new opinion letters, providing insight into their views on compliance with federal labor laws. Read this blog post to learn more.

Last week, the DOL issued four new opinion letters providing both employers and employees further insight into the agency’s views regarding compliance with federal labor laws.

While the letters touch on a variety of issues, perhaps the most notable change involves the DOL’s about-face regarding the amount of “non-tipped” work an employee can perform while still receiving a lower “tip-credit” wage.

Essentially, this new guidance does away with the previous “80/20” rule regarding tipped employees. Under the 80/20 rule, businesses were barred from paying employees traditionally engaged in tip-based work, like servers and bartenders, a lower minimum wage and taking a tip credit for the other portion of the employee’s wage up to applicable state and federal minimum wage requirements when those employees’ side work, like napkin folding or making coffee, accounted for more than 20% of the employee’s time.

In recent years, there has been an explosion of litigation across the country over the 80/20 rule, questioning whether the tipped employee’s “side work” amounted to more than 20% of the employee’s duties and time. Likewise, in many of those same suits, plaintiffs would challenge individual tasks associated with their side work, attempting to claim that those tasks were not so closely related to their tipped duties, but rather rose to the level of a completely different or “dual job,” meaning that the employer should not be permitted to take the tip credit for hours worked performing those tasks.

What followed was case after case of lawyers, courts and employers quibbling over minutes spent folding napkins, wiping counters, slicing lemons, and painstakingly calculating and arguing as to whether those tasks added up to 20% and whether those tasks were not closely related enough to be included in the 20% calculation.

In these kinds of cases, we’d see arguments over circumstances like the server that moonlights as a “maintenance man” versus the server that changed the lightbulb or helped sweep underneath the tables.

The ultimate result: confusion, chaos and, frankly, a treasure trove for plaintiff’s attorneys who had another arrow in their quiver in which to seek additional purported wages for clients from employers that would find it difficult, if not impossible, to account for all minutes and tasks employees were performing in busy restaurants.

Following the DOL’s opinion letter, the landscape will change. Recognizing that the existing guidance and case law had created “some confusion,” the DOL expressly stated that they “do not intend to place a limitation on the amount of duties related to a tip-producing occupation that may be performed, so long as they are performed contemporaneously with direct customer-service duties...”

However, in attempting to provide additional clarity, the DOL may have instead opened up the proverbial Pandora ’s Box of uncertainty. In identifying the list of duties that the DOL would consider “core or supplemental,” the DOL refers to the Tasks section of the Details report in the Occupational Information Network (O*NET). It goes without saying that no document can provide an exhaustive list of tasks in today’s changing marketplace. While the DOL attempted to recognize the changing nature of today’s environment in a savings-type footnote, one does not have to look too far ahead to foreshadow the response from the plaintiff’s bar arguing over the related duties listed on O*NET.

While the DOL’s new position on the 80/20 rule will certainly come as a relief to many employers with tipped employees, employers should still be mindful in evaluating tipped employees’ job duties on a regular basis. Employees that are engaged in “dual jobs” are entitled to the full minimum wage, without the tip credit.

SOURCE: Kennedy, C. (15 November 2018) "DOL reverses course on ‘80/20’ limitations for tipped employees" (Web Blog Post). Retrieved from

This article originally appeared on the Foley & Lardner website. The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.

Civil Penalties Adjusted with Interim Final Rule for ERISA Violations

Released by the United States Department of Labor through The Federal Register on July 1, 2016.

Effective August 1, 2016, the amounts for civil penalties will be adjusted as required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.

The interim final rule made adjustments to the civil monetary penalties enforced by the Employee Benefits Security Administration (EBSA) under the Employee Retirement Income Security Act of 1974 (ERISA). The adjustments apply to penalties assessed after August 1, 2016, whose violations occurred after November 2, 2015.
Some highlights of the new penalty amounts for ERISA violations include:
  • The maximum penalty for failure/refusal to properly file a plan annual report (Form 5500) increased from $1,100 per day to $2,063 per day the Form 5500 is late.
  • The maximum penalty for failure to provide a Summary of Benefits Coverage under the Public Health Services Act increased from $1,000 per failure to $1,087 per failure.
  • The maximum penalty for failure to provide an automatic contribution arrangement notice under ERISA increased from $1,000 per day to $1,632 per day.
  • The penalty for providing required CHIP notices under ERISA is increased from $100 per day to $110 per day
  • The maximum penalty for failure of a multiple employer welfare arrangement (MEWA) to file a report required by regulations issued under ERISA increased from $1,100 per day to $1,502 per day.
  • The maximum penalty for failure to furnish reports (e.g., pension benefit statements) to former participants and beneficiaries or maintain records increased from $11 per employee to $28 per employee.
  • The maximum penalty for failure to comply with ERISA requirements relating to genetic information increased from $100 per day to $110 per day.

To read the full release from The Federal Register, click here

Fact Sheet

U.S. Department of Labor Proposes Improvements to Form 5500

Released by the United States Department of Labor on July 11, 2016.

Form 5500 affects us all and the Department of Labor is looking for your input on the proposed revisions to the form. Below you will find the proposed revisions and some details about them. 

The Form 5500 is the primary source of information about the operations, funding and investments of private-sector, employment-based pension and welfare benefit plans in the U.S. There are an estimated 2.3 million health plans, a similar number of other welfare plans and nearly 681,000 pension plans. Covering roughly 143 million private-sector workers, retirees and dependents, these plans have an estimated $8.7 trillion in assets.

The proposed revisions are intended to:

  • Modernize the financial statements and investment information filed about employee benefit plans.
  • Update the reporting requirements for service provider fee and expense information.
  • Enhance accessibility and usability of data filed on the forms.
  • Require reporting by all group health plans covered by Title I of ERISA.
  • Improve compliance under ERISA and the Internal Revenue Code through new questions regarding plan operations, service provider relationships, and financial management of the plan.

The proposed regulations also would make improvements to the certification requirements for the limited scope audit requirements under 29 CFR 2520.103-8, and allow group health plans to use the Form 5500 to satisfy certain reporting requirements in the Affordable Care Act. The proposed changes to the DOL regulations are also needed to implement the form revisions.

“The proposed form changes and related regulatory amendments are important steps toward improving this critical enforcement, research and public disclosure tool,” said Assistant Secretary for the Employee Benefits Security Administration Phyllis C. Borzi. “The 5500 is in serious need of updates to continue to keep pace with changing conditions in the employee benefit plan and financial market sectors. We must also remedy the form’s current gaps in collecting data from ERISA group health plans.”

To read the full article from the Department of Labor, click here

DOL Overtime Rule Will Impact Hospitality Industry

Originally Posted by

By: Allen Smith

The hospitality industry will be hit hard by the Department of Labor’s updates to the overtime rule implementing the Fair Labor Standards Act (FLSA), experts say. With high overhead costs and a low-profit margin, hotels and restaurants typically don’t have enough money in reserve to give employees big raises to preserve their exempt status or to pay many hours of overtime if employees are eligible.

As a result, hospitality employers will need to explore alternative compensation models, schedules and staffing options to try to mitigate costs, according to Ryan Glasgow, an attorney with Hunton & Williams in Richmond, Va.

Some choices will be simple, he noted. For employees with relatively high salaries who work long hours, the logical choice is to increase their salaries, as the minimum increase in salary likely will be less than the employer would have to pay in substantial overtime hours. As for employees with low salaries who don’t work much overtime, it makes sense to convert them to nonexempt and pay overtime for the few overtime hours they might work.

“For all other employees, the decision will be much more difficult and will require a lot of strategic planning and analysis,” Glasgow said. “For example, in certain circumstances, it may be feasible for the employer to combine two exempt positions into one position so that the cost of increasing the salary for the remaining one employee is offset by the cost-savings from the elimination of the other employee’s position.”
He added that it may be better for the employer to convert a position to nonexempt and hire more employees to perform the work so that none of the employees work overtime. “Similarly, employers should evaluate each impacted position to determine whether there are unnecessary and/or inefficient tasks that can be eliminated or given to another employee so that the position requires fewer hours of work, thus lowering the impact of paying overtime,” he noted.

Domino Effect

Be aware of the potential domino effect when an employee’s salary is increased above the new salary level. The employee and the employee’s supervisor may suddenly be making similar salaries. Supervisors may ask for an increase as well, leading to salary increases up the organizational chart, Glasgow said.

Bonus and commission plans will have to be re-evaluated since there may be overtime pay consequences if employees who have been converted to nonexempt are paid bonuses or commissions, noted Robert Boonin, an attorney with Dykema in Detroit and Ann Arbor, Mich., and immediate past chair of the Wage and Hour Defense Institute, a network of wage and hour lawyers.

Rule’s Potential Winners

Salaried workers earning less than $913 a week or $47,476 annually and who regularly work more than 40 hours per week stand to gain from the overtime rule, said Wendy Stryker, an attorney with Frankfurt Kurnit Klein & Selz in New York City. These workers will have their salaries raised above the new threshold, be paid overtime or have their hours reduced to a 40-hour workweek, she said. These employees include entry and midlevel professionals, such as chefs, sommeliers, and hotel or restaurant managers and assistant managers, she added.

The hospitality industry has a lot of employees earning in this range, according to Stryker. She noted that the average U.S. wage for chefs, head cooks and pastry chefs is $45,920. For bakers, the average U.S. wage is lower, at $26,270, Stryker noted.

While workers may benefit from the overtime rule, Michael Layman, vice president, regulatory affairs for the International Franchise Association in Washington, D.C., said the overtime rule will hit the hospitality industry particularly hard. Its employers “disproportionately face unpredictable season- or weather-dependent schedules and variable labor demands, which makes tracking hours and managing overtime costs a significant challenge,” he said.

“Given the need for onsite guest services, employers in the hospitality industry may have less flexibility than other employers to automate or offshore operations,” said Nancy Vary, director of the compliance consulting center at Xerox HR Services in New York City.

However, Carolyn Richmond, an attorney with Fox Rothschild in New York City, said, “I think we will see the live reservationist all but disappear as reliance on [online booking apps] OpenTable, Resy and the others grows.” She added, “Owners are looking at more and more automation—programs that monitor and control labor costs and even how to replace certain employees.”

Other Significantly Affected Industries

Hospitality isn’t the only industry to feel the brunt of the new overtime rule.

“The construction and retail industries will be impacted significantly because, like the hospitality industry, they have unusually high concentrations of low-salaried managers,” Glasgow said. He also expected large research and educational hospitals to be uniquely impacted because they have many low-salaried professionals.

“Any industry that has traditionally offered low pay to its skilled workers is likely to be hard-hit by the new overtime rules,” Stryker said. “In New York City, this is likely to be the creative industries such as advertising and film/television production, where hours are traditionally long, and the work product cannot necessarily be created on a 40-hour-per-week schedule.”

The point of the rule isn’t to benefit employers, though. “The new overtime rules were created to benefit employees,” Stryker said. “As the president noted when he directed the Department of Labor to update the relevant regulations, the FLSA’s overtime protections “are a linchpin of the middle class, and the failure to keep the salary level requirement for the white-collar exemption up to date has left millions of low-paid salaried workers without this basic protection.”

That said, Richmond noted that “While the Department of Labor hopes and expects these changes will lead to increased wages through overtime, I don’t expect that to be the case in [the hospitality] industry. Payroll has already risen dramatically with minimum wage increases and resulting wage compression, and owners will spend more time looking at controlling overtime.”

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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Fiduciary Rollout: DOL to Extend a Hand

Original post

WASHINGTON -- As the dust begins to settle after the Department of Labor issued its hotly contested fiduciary regulation, one of the key officials who led the rulemaking initiative says that he anticipates issuing clarifying guidance on an ongoing basis as industry feedback trickles back on how the rules are working in practice.

“This is a major undertaking and that we need to be mindful of what impact it's having as people are implementing it,” said Timothy Hauser, a deputy assistant secretary at the Labor Department, on Tuesday at a policy forum hosted by the Investment Company Institute. “We need to have the courage to make changes and to be responsive as problems emerge. And I can assure you we have every intent of doing so."

The ICI is a trade group that has been sharply critical of the rulemaking process.

Rule opponents have argued that many firms would be more likely to abandon middle-income clients planning for retirement, rather than submit to the contractual provisions relating to best-interest advice. But Hauser noted that the department made changes as it redrafted the final rule, in a bid to make the provisions less burdensome.


Hauser took pains to explain that that process is still ongoing, insisting that he will entertain further tweaks to the rule and will publish clarifying guidance, likely in a question-and-answer format on a "rolling basis."

"We did our level best, really, to try to find the legitimate concerns and objections people had to what we were doing and try to be responsive," Hauser said. "We'll continue to do that as we move forward."

At the same time, Hauser offered a strong defense of the rule and the underlying rationale for the department's effort to crack down on conflicted advice in the retirement sector.

"The basic idea, first and foremost, is that we want advice to be in the customer's interest rather than in the interest of the adviser," he said. "The basis for this project — the reason we undertook this in the first place — was our belief that there was a significant problem in this marketplace."

The department's solution: update its rules under the 1974 Employee Retirement Income Security Act to extend fiduciary obligations to financial professionals working with retirement savers and plans, a threshold that is generally met when an adviser makes an investment recommendation and in turn receives compensation, Hauser said.

Hauser acknowledged that the ERISA statute has a "strong default position against conflicts of interest," but pointed out that the new rule explicitly permits conflicts such as commissions and proprietary products, provided that advisers offer up-front disclosures and aver in a binding contract that they will act in their clients' best interests.

That so-called best interest contract exemption has been one of the chief complaints of industry critics. But Hauser was quick to remind his audience that the rule will have minimal impact on advisers who offer advice that is free of conflicts.

"[T]there's nothing in the natural order of things that requires people to receive conflicted compensation streams as a condition of giving advice," he said. "However, we also don't outlaw conflicted compensation streams. The firm can continue to get commissions, it can get 12b-1 fees, it can get revenue sharing, it can get the variety of third-party payments."

Hauser continued: "But there's a quid pro quo for that. There's a basic deal that you need to strike with your customer, by and large, if you want to do that, and the deal is simple. You have to make a commitment to the customer that you're going to act in their best interest, and it needs to be enforceable."


Hauser also said the DoL is not looking at the rule as a vehicle for a punitive enforcement policy. Instead, he said that the department is hoping to serve as a resource for affected firms and to work with them in a collaborative spirit as they implement the new rules.

"Our primary efforts are not going to be about finding people to sue, it's going to be about helping people to comply," he said. "Any problems you're wrestling with, issues you're trying to deal with, operational issues you're confronting — we'd love to hear from you, we'd love to be able to give advice. I would much rather get advice out early rather than have you build entire systems only to have us say, 'Nah, we don't think that complies.' I think it's in all our interest to make this work."

DOL Narrows Independent Contractor Classification

Originally posted by Allen Smith on July 16, 2015 on

More workers may be entitled to overtime due to July 15, 2015, Department of Labor (DOL) guidance that defines “independent contractor” narrowly enough for many previously classified as independent contractors to now be properly classified as employees.

This narrowing of the definition of independent contractor is due partly to the DOL deemphasizing the degree to which a business controls an individual’s work, and focusing instead on the economic realities test, which looks at whether the worker is economically dependent on the employer or in business for him or herself.

“This is part and parcel of the Obama administration’s push to give America a raise,” said Allan Bloom, an attorney with Proskauer in New York City, who added, “There certainly have been companies that have misclassified workers.”

He remarked that the latest guidance is important because “the DOL significantly downplays the ‘control test,’ which has long been the guide many businesses consider when determining whether or not a worker is truly an ‘employee’.”  Bloom recommended that, “Businesses worried about staying under the DOL radar on this issue should make sure that they are doing business with established independent service providers if they intend to pay on a 1099 basis.”

Matthew Disbrow, an attorney with Honigman in Detroit, said, “The subjective nature of the DOL’s interpretation, and its narrow focus on ‘economic dependence,’ creates substantial challenges for companies who wish to maintain their independent-contractor relationships. Furthermore, although the elements of the ‘economic realities’ test may appear understandable at first blush, a careful reading of the DOL’s guidance reveals that there are no bright-line rules upon which to rely. The same person could be considered an independent contractor or an employee simply based on the business at issue.”

He added that the administrator’s interpretation [AI] “arguably restricts the use of independent contractors to very few specific situations.” Disbrow explained, “Because no factor is determinative, and the AI rejects any ‘mechanical’ application of the test, inside counsel or other executives will not always know what factor the DOL or a reviewing court might find most important. Such ‘fuzzy’ multifactored tests usually create more problems than they solve."

Six Factors

In conducting an economic realities test, an employer should look to six factors, the DOL noted:

  • The extent to which the work performed is an integral part of the employer’s business.
  • The worker’s opportunity for profit or loss depending on his or managerial skill.
  • The extent of the relative investments of the employer and the worker.
  • Whether the work performed requires special skills and initiative.
  • The permanency of the relationship.
  • The degree of control exercised or retained by the employer.

“In undertaking this analysis, each factor is examined and analyzed in relation to one another, and no single factor is determinative,” the DOL noted. “The ‘control’ factor, for example, should not be given undue weight.”

“The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis,” the DOL stated.

“The subjective nature of such a test is a slippery slope and provides no practical, objective criteria on which businesses can rely,” Disbrow said.

Under the department’s analysis of the six factors, positions frequently considered as independent contractors—such as carpenters, construction workers, cable installers and electricians—aren’t necessarily independent contractors if they don’t satisfy the factors.

Suppose, the department hypothesized, a highly skilled carpenter provides carpentry services for a construction firm. But the carpenter does not exercise his skills in an independent manner. He does not determine the sequence of work, order additional materials or think about bidding for the next job, but instead is told what work to perform where. “In this scenario, the carpenter, although highly skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills),” the DOL emphasized. “He is simply providing his skilled labor.”

By contrast, “a highly skilled carpenter who provides a specialized service for a variety of area construction companies (for example, custom, handcrafted cabinets that are made to order) may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill,” the DOL stated.

Monitor Classifications

“While the human resources function clearly ‘owns’ employee issues in corporate America, many companies do not monitor their independent contractor relationships,” said Michael Droke, an attorney with Dorsey and Whitney in Palo Alto, Calif., and Seattle.

“Companies should make clear which department within the organization is responsible to understand the law, know which contractors have been engaged and monitor compliance. Often, the human resources or finance department is put in charge,” he noted.

“Employers should maintain basic records on the independent contractor determination process, and the facts used to make that determination. For example, they should keep records of business licenses, business cards, contractor tax records, project work plans showing limited engagements and correspondence from the contractor,” according to Droke.

For Disbrow, some main takeaways from the guidance are:

  • The DOL believes most work should be performed by employees. So, independent contractors should be used sparingly.
  • Entering into independent contractor agreements or hiring a business entity (rather than a person) does not necessarily protect you from liability under the Fair Labor Standards Act.
  • A careful review of the type and scope of work being performed should be completed before engaging the services of any nonemployee.
  • When entering into agreements with other service providers, ensure that you obtain appropriate indemnification provisions to protect the company from the wage and hour claims of the service provider’s workers.

“Companies should avoid giving contractors rights or access that cut against contractor determination. For example, contractors should not have internal e-mail accounts, should not be given server access and should not be invited to employee functions,” Droke observed. “The DOL guidance reminds employers to periodically audit existing contractors to make sure they have not inadvertently slipped from contractors to employees. If an otherwise-valid contractor arrangement becomes economically dependent on the work, then the relationship may convert to an employee entitled to overtime.”

This guidance is Administrator’s Interpretation No. 2015-1.

DOL Updates Definition of Spouse in FMLA Regulations

Originally posted February 24, 2015 by Rick Montgomery, JD on

On June 26, 2013, in U.S. v. Windsor, 570 U.S. 12, 133 S. Ct. 2675 (2013), the U.S. Supreme Court struck down section 3 of the Defense of Marriage Act (DOMA) as unconstitutional under the Due Process Clause of the Fifth Amendment. Immediately following the decision in Windsor, the U.S. Department of Labor (DOL) announced what the then-current definition of “spouse” under the Family and Medical Leave Act (FMLA) allowed, given the decision: Eligible employees could take leave under the FMLA to care for a same-sex spouse, but only if the employee resided in a state that recognized same-sex marriage. This has been commonly referred to as the “state of residence” rule.

In order to provide FMLA rights to all legally married same-sex couples consistent with the decision in Windsor, the DOL issued a Final Rule on February 25, 2015, revising the definition of spouse under the FMLA. The Final Rule amends the definition of spouse in 29 C.F.R. §§ 825.102 and 825.122(b) to include all individuals in legal marriages, regardless of where they live. More specifically, the definition of spouse is now a husband or wife as defined or recognized in the state where the individual was married (“place of celebration”) rather than where the individual resides, and specifically includes individuals in same-sex and common law marriages. The Final Rule also defines spouse to include a husband or wife in a marriage that was validly entered into outside of the United States if it could have been entered into in at least one state.

The Final Rule goes into effect on March 27, 2015.

To assist employers, the DOL has released a Fact Sheet and Frequently Asked Questions about the Final Rule.

DOL cracks down on employer 401(k) issues

Originally posted March 31, 2014 by Scott Wooldridge on

The press release headlines are sobering: “U.S. Labor Department files suit to remove trustees,” “Department of Labor files suit to recover unpaid contributions to 401(k) plan,” and “Judge orders trustees to restore losses.”

The Department of Labor website is overflowing with cases of regulators taking action against employers accused of mishandling employee benefit plans.

Among the most common cases: errors in administering 401(k) plans. Although Labor Department officials and experts in the ERISA field say the majority of cases are errors in reporting and do not result in civil lawsuits, the numbers of benefit plan cases investigated (of all kinds) are still impressive: the DOL closed 3,677 investigations in 2013, with nearly 73 percent of those resulting in monetary fines or other corrective action. Lawsuits were filed in 111 of those cases.

The department says it is working to educate employers about how to avoid errors, including conducting seminars and providing information on the DOL website.

In a March 21 blog post, Phyllis Borzi, assistant secretary of Labor for employee benefits security, noted that employers could find it challenging to administer benefits such as 401(K) plans.

“Most fiduciaries — people who have key responsibilities and obligations to an employee benefit plan — and employers want to do the right thing,” she said in the piece. “However, inadvertent mistakes can create significant problems for fiduciaries and participants.”

The problems can lead to substantial monetary fines and settlements.

In January, for example, the DOL announced that a Chicago-area manufacturing firm, Hico Flex Brass, would pay $79,000 to settle a case in which the company failed to properly distribute 401(k) earnings to employees.

A Jan. 10 complaint by the DOL asked the courts to rule that a machine shop in Santa Maria, Calif., should restore $58,000 in 401(k) contributions that the company improperly mixed with other business accounts.

For large companies, the costs are even higher.

A lawsuit brought by employees of International Paper resulted in a $30 million settlement in January, although that case was litigated by a law firm and not the DOL.

Even when the dollar figures aren’t as high, cases involving 401(k) administrative errors can hit small and medium-sized employers hard.

Lawyers who work on employee benefits cases say many employers don’t pay close enough attention to the complexities of administering retirement plans.

“It’s just difficult at times for employers to keep up and attend to all the details,” said John Nichols, an employment benefits lawyer with Minneapolis-based Gray Plant Mooty. “The rules are complex, and the administration of the plans is correspondingly complex.”

Plenty of room for error

“The reality is that running a benefit plan such as a 401(k) plan has a lot of room for error built into it,” said Stephen Rosenberg, an ERISA attorney with The McCormack Firm, based in Boston. “Many of these small and medium-sized companies are focused on running their business. They need to provide a 401(k) as an employee benefit but they don’t really have the internal resources to do this.”

Rosenberg said even large businesses often stumble with retirement plan administration. “Retirement plans, including 401(k) plans, are probably more regulated than anything in American economic life short of nuclear power plants,” he said. “It’s very difficult for any company not large enough to have a dedicated legal staff to hit every hurdle correctly.”

Nichols said that the DOL tends to investigate certain areas of plan administration pretty consistently. “You see a lot of similarity” of the cases, he noted. “One exercise (employers can consider) is to go down the list of typical cases and say, ‘How are we doing in each of these areas?’”

Common pitfalls

So what are the areas the DOL tends to investigate? The experts interviewed for this story agreed that there are several areas where problems may trigger a DOL investigation of employers.

One is failing to make a timely remittance to the 401(k) plan. Under federal rules, funds from an employee’s paycheck have to be submitted to their retirement account no more than 15 days after the money is withheld from the paycheck.

A second common issue is making sure employees get their statements in a timely manner. Proper disclosure of fees owed to the plan’s fiduciaries (the company in charge of administering the funds for the plan) is another area that DOL looks at closely. And some companies have been found noncompliant for failing to maintain fidelity bonds for their plans, a safeguard against misuse of funds.

“I do see companies who are loose about when they make deposits; they just treat it like the rest of the cash flow in the company,” said Rosenberg.

Avoiding costly mistakes

Rosenberg and Nichols said there are several steps employers can take to avoid trouble with DOL regulators.

They both said companies need to take their fiduciary responsibilities seriously, and not expect that a retirement plan will run itself. An important first step is keeping good records.

“If you have a committee that is responsible for the administration of the plan or its investments, make sure that they meet regularly and that you keep a good record of committee actions, what’s discussed, and how decisions are made,” Nichols said.

Getting help

Rosenberg said companies need to be realistic about whether they have the time, resources, and knowledge to administer and monitor retirement plans themselves.

“The key in many ways for smaller and midsized companies is really to find a very good outside consultant — and I don’t mean your vendor,” he said. “If you have a huge company you have a department to do this. If you’re not, bring in a consultant and outsource that role.”

Nichols agreed that the vendor — the financial services company that provides the investment plan — has a limited role. “Vendors are pretty good at allocating accounts and providing access to account information,” he said. “That doesn’t mean that the whole job is done. You didn’t get a totally turnkey product. There are things you need to do as well.”

Failing to watch, of course, could mean triggering a DOL action.

“There’s always a monitoring responsibility,” a DOL spokesperson said. “The criteria we use is, ‘You should have known. You might not have known, but you should have known.’”