The Obama Administration predicts 4.2 million more overtime-eligible workers and $12 billion in increased wages over 10 years. What does this mean for healthcare employers?

On May 23, 2016, the Department of Labor passed long-awaited overtime pay rules, modifying the Fair Labor Standards Act (FLSA) for the first time in 12 years. The overtime rules apply to all industries across the country, but will like have a major impact on the healthcare industry, especially independent physician and other clinician employers. The rule significantly increases the amount of money an employee must be paid for that employee to qualify as exempt from the overtime pay rules. This means a much larger pool of employees that now qualify for overtime pay (an additional 4.2 million Americans), and likely significant cost increases for employers. Some healthcare employers will be hit harder than others.

According to a May 18 article in Modern Healthcare, professions that will likely be affected by the overtime threshold increase are nurses, medical and physical therapist assistants, medical and pharmacy technicians, and paramedics. Average mean salaries in these professions range from $25,710 to $47,010. That includes approximately 4.1 million workers, according to 2015 data from the U.S. Bureau of Labor Statistics. Medicaid-funded home-care providers for individuals with disabilities or facilities with 15 beds or fewer are exempt from implementing the new rule until March 17, 2019.

What is the new threshold?

Today, if an employee meets other criteria in the 4-prong test, described below, related to and is paid more than $23,660 per year, or $455 per week, he or she can be classified as an “exempt” employee. This means that the individual can work more than 40 hours per week and his or her employer would not be obligated to pay overtime. On December 1, 2016, that same employee cannot be categorized as exempt unless he or she makes $47,476 per annum, or $913 per week. The rule also raises the “highly compensated employee” threshold from $100,000 to $134,004. Individuals who make more than the threshold amount are generally not eligible for overtime.  

What does that mean for my practice?

The new rules grant workers whose salaries are below the threshold collect overtime pay. This can have significant implications for some employers, so taking a hard look at the available options is a good investment. Each option requires preparation and execution in a fairly small time frame. The changes take effect in about 6 months. You can expect that this will increase your overhead somewhat, but the financial impact will depend on your pivot. You can (1) raise currently exempt employees’ salaries to $47,476 per annum; (2) restrict the hours of employees to 40 per week; or (3) declassify exempt employees as non-exempt and prepare for the additional overtime calculations and costs. You should work with you accountant to determine what makes the most financial sense.

Refresher: How do I calculate overtime?

Remember that the rate for the purposes of overtime is not the same as their hourly rate (weekly salary amount). If employees are eligible for incentives, those incentives must be factored into the calculation of their “regular rate.” Overtime payments are 1.5 times the “regular rate”, not the weekly salary amount.

The regular rate on which overtime payments are based is generally calculated as follows:
½ of ALL the compensation that an employee receives for a week (even if it is paid in different ways or at different rates)
DIVIDED BY
the hours of work in the week

Monthly salaries, commissions or non-cash wages must be converted into the hourly figure. And, the regular rate can often be HIGHER than the weekly salary amount. There are certain payments that are excluded from the regular rate and OT calculations, and those that are excluded from both the regular rate and OT. You should work closely with your human resources director to make sure they are aware of these important nuances.

“White Collar Exemption” Criteria

Salary threshold is only a single element of the test that determines whether or not an employee qualifies for an overtime exemption. I have included a high level summary of the 3-part test, below. As you evaluate your staff, look at each individual employee to determine whether they meet this 3-part test. Make sure you document your evaluation, and why you believe an employee is or is not exempt. Again, there is no bright line standard here, so this is about your best judgment.

  1. TEST ONE: SALARY LEVEL: Is the employee paid a salary of at least $913 per week
  2. TEST TWO: SALARY BASIS: Does the salary paid to the employee meet the below requirements?
    •  Any hour-by-hour reductions in pay are made only for employees who take intermittent or reduced schedule leaves under the federal Family and Medical Leave Act. (Docking is permitted to pro-rate a salary in proportion to unpaid leave taken pursuant to the federal Family and Medical Leave Act. 29 C.F.R. § 541.602.)
    • Deductions for sick leave are only made for complete days of absence due to illness and are made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability (i.e., deductions for absences are made only before sick leave benefits accrue or after they are exhausted). (Docking is permitted for absences of one or more full days due to sickness, if there is a plan for providing compensation for such absences in place. If such a plan is in place, docking may occur before an employee is eligible for plan benefits or after plan benefits are exhausted.
    • Vacation time is only deducted in full-day increments and only if the employee was absent the entire day. Docking is permitted for absences of one or more full days for personal reasons, other than sickness or disability.
    • If an employee works part of a week and misses part of the week due to jury duty, witness duty or military duty, no deductions are made. But the fees for such service in a given week may be offset against the salary due for the absence in that week
    • If an employee works part of a week and misses part of a week due to lack of work (e.g., because of a plant closing or holiday when no work can be performed), no deductions are made.
    • If there is a lack of work, employees are not required to use vacation time to make up for such days.
    • Advanced sick leave or advanced vacation leave are not deducted from employees’ pay for incomplete final weeks of work.
    • Prorated salaries are only paid for incomplete initial weeks of work or incomplete final weeks of work. (Docking is permitted to pro-rate a salary in proportion to the time actually worked during the first and last weeks of employment.)
    • Employees who work only intermittently are not treated as salaried employees.
    • Disciplinary suspensions without pay are for violations of written standards of general applicability (as opposed to safety violations) and are either for entire workweeks or in full-day increments. (Docking is permitted for suspensions of one or more full days for the violation of written workplace conduct policies that are applied to all employees, such as rules against sexual harassment and workplace violence.)
    • Disciplinary reductions in salary, though they can be made in any amount, are taken only for violations of safety rules of major significance.
  3. TEST THREE: DUTIES (One of the below (1)-(4) must apply)
    • Is the employee an Executive Employee? Here are the general criteria for Executive Employees:
      • The employee’s primary duty must be management of the enterprise or of a customarily recognized department or subdivision of that enterprise (an employee’s primary duty is broadly defined as an employee’s “main, major or most important duty” in consideration of the job as a whole)
      • The employee must customarily and regularly supervise two full-time employees or their equivalent;
      • The employee must have the ability to hire or fire employees, or be able to make recommendations that are given particular weight regarding hiring or firing or material changes in employees’ status
    • Is the employee an Administrative Employee? Here are the general criteria for Administrative Employees:
      • The employee’s primary duty must be the performance of office or non-manual work that is directly related to the management or general business operations of the employer or the employer’s customers;
      • The employee must exercise independent judgment and discretion regarding matters of significance
      • With regard to exercising “independent judgment and discretion,” the regulations identify the following duties as those demonstrating such exercise of independent judgment and discretion:
        • the authority to formulate, affect, interpret, or implement management policies or operating practices;
        • carrying out major assignments in conducting operations;
        • the authority to commit the employer in matters that have significant financial impact;
        • the ability to waive or deviate from established policies and procedures without prior approval;
        • the investigation and resolution of matters of significance; and
        • Similar tasks.
    •  Is the employee a Professional Employee? The primary duty test under the learned professional exemption requires that:
      • The employee must perform work requiring advanced knowledge;
        • The phrase “work requiring advanced knowledge” means “work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment, as distinguished from performance of routine mental, manual, mechanical or physical work.”  The phrase “customarily acquired by a prolonged course of specialized intellectual instruction” restricts the exemption to professions where specialized academic training is a standard prerequisite for entrance into the profession.  The best prima facie evidence that an employee meets this requirement is possession of the appropriate academic degree.”  Occupations that “require only a four-year degree in any field or a two-year degree as a standard prerequisite for entrance into the field . . . do not qualify for the learned professional exemption.”
      • The advanced knowledge must be in a field of science or learning; and
        • Work that “requires knowledge of an advanced type” means work that is predominantly intellectual in character and requires the “consistent” exercise of independent judgment and discretion. Fields of “science and learning” are those areas of professional endeavor such as accounting, law, medicine, and engineering.
      • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
        • “[T]he learned professional exemption is not available for occupations that customarily may be performed with only the general knowledge acquired by an academic degree in any field, …The learned professional exemption also does not apply to occupations in which most employees have acquired their skill by experience rather than by advanced specialized intellectual instruction.” Only occupations that customarily require specialized academic training are considered learned professional fields under the regulations; occupations that do not customarily require specialized academic training at the level intended by the regulations as a standard prerequisite to enter the field do not qualify for the learned professional exemption.
    • Is the employee Highly Compensated? A white collar employee who earns $134,004 a year or more in “total compensation” is overtime exempt if:
      • The employee is paid a salary of at least $913 per week;
      • The employee is paid at least $134,004 per year, with any deficiency between the amount paid in the course of the year and $134,004 made up within one month after the end of the year;
      • The employee performs office or non-manual work; and
      • The employee customarily and regularly performs one or more of the duties required of an exempt executive, administrative or professional employee. 29 C.F.R. § 541.601

If you have any questions about how to apply these rules to your medical practice, Nixon Law Group's attorneys are here to help.