IDOL’s New Expansive Wage Rules Are in Effect

In the classic holiday story, Dr. Suess’s How the Grinch Stole Christmas!, while all the Whos in Whoville are celebrating with happiness and joy, the Grinch slips into their homes unannounced to steal gifts from every girl and boy. Last year, Illinois employers, including local government agencies, were surprised by their own unannounced visitor.

Without any public announcement, the Illinois Department of Labor (IDOL) issued new regulations expanding the reach of the Illinois Wage Payment and Collection Act (Act). Among the many issues the Act governs related to salaries and wages, some of the most common are how often employees are paid, in what form they must be paid and what payment records employers are required to keep. The Act is a broad law that affects public as well as private employers on a daily basis.

IDOL’s new regulations took effect on August 22, 2014, and this serves as a reminder as IDOL’s enforcement begins to incorporate the new rules. Some of the new regulations significantly expand the reach of the Act, and nearly all of the new regulations enhance employee rights and legal protections that can be used against public employers.

1. Personal Liability.

The new regulations sharpen IDOL’s enforcement teeth. An employee can now seek to establish personal liability against anyone who “acts directly or indirectly in the interest of an employer in relation to an employee” in any conduct that violates the Act (56 Ill. Admin. 300.620(a)).

The incredibly broad language in this section could conceivably include anyone who has a role in the agency’s payroll process. Accordingly, we recommend educating your payroll employees about the Act and its requirements, as well as contacting your insurer to determine whether your insurance coverage needs to be revised to best protect your entity and its officers and employees.

2. Tracking Exempt Employees’ Hours.

In a change to legal record keeping obligations, employers must now track Exempt employees’ (as defined by the Illinois Minimum Wage Law, 820 ILCS 105/4a(2)) work hours. Otherwise, if an employee classified as Exempt is later found to have been misclassified and therefore owed back wages for overtime, the employee will presumptively prevail based on his or her accounting of hours worked. As the new rules describe it:

From a practical perspective, this is not a significant change in the law. Before the new IDOL regulation, if an employee successfully sued an employer for being misclassified as Exempt, the employer had the burden to produce evidence rebutting the employee’s claimed amount of overtime worked. Yet employers have been hesitant to require Exempt employees to keep track of their hours based in part on the fear that to do so when not legally required might be construed by IDOL as indicia that the employer did not really consider them to be Exempt employees.

It is helpful to note that while the new regulation affirmatively creates a record keeping obligation that applies to all employees, it does not impose an independent penalty for employers that do not comply. Perhaps there is some recognition of the issues and difficulties created for employers by the new regulation.

In light of this change, you need to determine if you will comply with the new regulations and if so, the most efficient way to retain records of Exempt employees’ hours worked.

3. Vacation Policies.

IDOL added a new provision affecting employees’ accrued vacation time in that “an employer cannot effectuate a forfeiture of earned vacation by a written employment policy or practice of the employer” (56 Ill. Admin. 300.520(h)). Additionally, the new regulations require employers to keep a three year record of all employees’ vacation days accrued and used.

However, an existing part of the same section of the regulations, which IDOL did not remove or modify, explains that “an employment contract or an employer’s policy may require an employee to take vacation by a certain date or lose the vacation, provided that the employee is given a reasonable opportunity to take the vacation” (56 Ill. Admin. 300.520(e)).

At least two interpretations of the new provision have emerged. First, some interpret the new section to ban employers from enforcing “use it or lose it” vacation policies. Under this reading, even if an employer gives its employees advance notice that they have to use paid vacation by a certain deadline or lose it, such a policy would be unenforceable.

We disagree with that interpretation. We interpret the new provision to do two things: (1) confirm the existing law that employers cannot force employees to forfeit accrued vacation time upon separation of employment; and (2) prevent employers from changing their policies in a way that would strip existing employees of accrued paid vacation time without either paying employees for time previously accrued or giving employees a reasonable opportunity to use previously accrued vacation time. We spoke with IDOL officials who agreed with our interpretation, though, when we asked, they declined to put their agreement in writing.

This leaves employers with several options for how to administer vacation policies:

• The safest option is to pay all accrued vacation time regardless of a “use it or lose it” policy. This requires employers to incur additional costs, but it eliminates the risk of employees or former employees filing claims for unpaid vacation time.
• Alternatively, to avoid the issue of vacation time forfeiture, employers can revise a “use it or lose it” policy to impose a vacation accrual limit on the front end. For example, during years of employment 1-5, all employees would be eligible to accrue up to 20 days of paid vacation time. Once an employee reaches the limit, he or she stops accruing paid vacation time.
• Finally, employers can continue to administer a “use it or lose it” policy. To effectively pursue this option, employers should provide all employees with advance notice of exactly what the policy requires, and give all employees a reasonable opportunity to take paid vacation time before they lose it.

Under any of the options above, there is nothing in the law that prevents employers from compelling employees to take unused accrued vacation time. If an employer chooses to compel employees to take paid time off, we recommend providing plenty of advance notice. Review your existing policy and determine whether it is consistent with this guidance.

4. Employee Handbooks as Enforceable Agreements.

A common practice among public employers has been to add a general “disclaimer” to the beginning of an employee handbook stating that nothing in the handbook would create an enforceable agreement. IDOL’s new rules invalidate that practice. The definition of “agreement,” at least as it applies to wage issues, is now expanded to include “company policies and policies in a handbook…even when the handbook or policy contains a…provision disclaiming the handbook from being an employment contract” (56 Ill. Admin. 300.450). Thus, if one provision in a handbook creates an agreement, that provision will be enforceable regardless of whether the handbook also includes blanket disclaimer language.

We strongly recommend you review your personnel manuals with the new understanding that any contractual language within has the potential to bind your agency to an enforceable agreement with its employees. We still recommend keeping the commonly used disclaimer language in your personnel manuals as this provision is not fully vetted, not court tested and we have yet to see how IDOL will enforce this new rule against employers.

5. Method of Payment.

The new rules clarify the level of flexibility that employees have to dictate their preferred method of payment. Direct deposit and payroll cards are strictly “voluntary” methods of payment that employers can choose to offer if they want to, and employees can choose to utilize if they so desire. The rules explain that any employer offering a choice between two voluntary payment methods must also offer payment by cash or check. One significant exception to this requirement is for employers that have reached alternative payment arrangements through collective bargaining agreements (CBA). If a CBA provides that all covered employees will be paid via direct deposit, then that provision will remain in effect under the new rules (56 Ill. Admin. 300.600).

Review payroll practices to ensure that employees are given the option to receive either cash or a live check for their wage payment.

6. Payroll Notices.

The new rules require that employers provide the following written notices: rate of pay when hired (with “mutual assent” indicated by the employee – e.g., the employee’s initials written next to the rate of pay on a “new hire” form); new rate of pay whenever the rate changes; and regardless of the method used to pay wages, at each pay period, employers need to provide employees with a written receipt showing: hours worked, pay rate, overtime pay and overtime hours, gross wages, itemized deductions, and wages and deductions year to date (56 Ill. Admin. 300.600(a), 300.630(d)).

While many employers issue written pay stub receipts as part of their regular payroll operations, all employers should review their practices to ensure that all of the information listed above is included with written receipts. The regulations do not specify whether the receipts need to be printed on paper or, alternatively, can be delivered electronically. We interpret this regulation to allow for paper or electronic receipts, provided that all employees can reasonably access the information.

7. Continuing Deductions.

There is one positive change for employers, but it will likely be used infrequently. The new rules allow for continuing deductions to be made from employee wages in equal amounts across multiple pay periods if, at the time the deductions begin, the period of time during which the deductions will continue is identified by a written authorization signed by the affected employee (56 Ill. Admin. 300.720(b)).

If an employee is required to reimburse your agency over multiple pay periods, you can take advantage of this option.

8. Enforcement Changes.

In addition to the changes above, there are a number of changes to IDOL’s enforcement powers, including:

• If IDOL discovers an employer practice that it believes deprived multiple employees of their rights under the Act, IDOL now has the ability to consolidate proceedings and treat its enforcement similar to a class action.
• The Act now provides for a new class of “retaliation” claims. Any employee who feels that he or she was subject to retaliation for “making a complaint to his or her employer that he or she has not been paid in accordance with the Act” has one year to file a claim.
• Even if an employee now resides out of state, if the work at issue was performed in Illinois, IDOL will assert jurisdiction over a wage claim.
• IDOL will now oversee two additional issues that had not expressly been part of its legal enforcement powers: severance agreements and agreements for employer paid expenses. Note that the Federal District Court in Chicago has ruled that employee waivers of the Act’s rights are unenforceable, see Ladegaard v. Hard Rock Concrete Cutters, Inc., No. 00 C 5755, 2001 IL 1403007 (N.D. Ill. Nov. 7, 2001), and at least one Illinois state court has signaled general agreement with this finding, see Lewis v. Giordano’s Enterprises, 921 N.E.2d 740 (1st Dist. 2009)

What Does This Mean for Local Government Agencies?

The new rules signal an expansion of IDOL’s enforcement of the state wage law. As IDOL begins to test its new enforcement powers, you can protect your agency against any wage-related liability by reviewing and updating your policies and guidelines on: new hires, timekeeping, wage payment, raises and vacation pay. Also, employers should revisit their human resources practices to account for the new possibilities of individual liability and wage retaliation claims. Please consult your Tressler attorney to help your agency come into compliance with IDOL’s new rules or respond to any inquiry from IDOL concerning the new rules.