03 March 2016

Upcoming New FLSA Regulations Should Prompt Health Care Employers To Review Pay Practices

The U.S. Department of Labor’s Wage and Hour Division released proposed new regulations regarding overtime exemptions under the Fair Labor Standards Act (FLSA) last summer, and the final regulations are widely expected to be issued this year, potentially this summer. The proposed rules significantly narrow the availability of exemptions from overtime pay under the FLSA by increasing the minimum weekly salary for the executive, administrative and professional exemptions.

The impending changes to the FLSA’s white collar exemptions should encourage health care employers to review their pay practices to ensure that employees who are currently classified as exempt meet all of the requirements for an exemption under the FLSA. Further, establishments that employ individuals who will need to be reclassified as non-exempt should start planning for how they will compensate these newly non-exempt employees and review their policies regarding overtime and “off-the-clock” work to ensure that exposure for overtime costs is limited.

White Collar Exemptions Under the Current Regulations
Under the current FLSA regulations, an employee is exempt from overtime pay if (1) they have the “primary duty” of performing exempt work, and (2) they earn a predetermined and fixed salary of at least $455 per week, or $23,660 annually (the so-called Salary Basis Test). An employee is also exempt from overtime pay if they earn at least $100,000 in total annual compensation and performs at least some exempt duties.

The Minimum Salary Under The New Regulations
Under the proposed new rules, the Department has more than doubled the standard salary level for white-collar employees to $970 per week (for 2016), or $50,440 annually (for 2016). The proposed salary requirement for highly compensated employees has increased to $122,148 annually (for 2016).

The Department has also proposed a mechanism to automatically update the salary thresholds on an annual basis. Under the proposed new rules, the standard salary level for exempt executive, administrative or professional employees would be equal to the 40th percentile of earnings for full-time salaried workers. The proposed salary requirement for highly compensated employees would be equal to the 90th percentile of earnings for full-time salaried workers. In other words, the minimum salary for exempt employees is likely to increase every year.

The Primary Duty Requirement
In addition to the salary basis requirements discussed above, in order to qualify as an exempt, white collar employee, an employee must have the “primary duty” of performing exempt duties. The most common exempt duties are executive, administrative, professional, computer, or creative duties. “Primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.

While many anticipated proposed changes to the primary duties tests in addition to the salary basis requirement, the proposed rule does not make any specific recommendations to modify the standard duties tests. Notably, however, the Department sought public comment on whether the tests are working as intended to screen out employees who are not bona fide executive, administrative or professional employees. In particular, the Department has noted its concern that the current tests may allow exemption of employees who are performing “such a disproportionate amount of nonexempt work that they are not [exempt white-collar] employees in any meaningful sense.”

Effect on Health Care Employers
Employers in the health care field will be greatly impacted when the new regulations go into effect. The affected employees, however, are not likely to be the actual health care providers. Doctors are automatically exempt from the overtime and minimum wage provisions, and Physicians Assistants and Nurse Practitioners generally fit into the professional duties exemption, and are usually paid more than $50,000 annually. Moreover, while Registered Nurses (“RN’s”) also meet the professional duties test, most health care employers voluntarily classify RN’s as non-exempt (although these regulations will affect employers who classify RN’s as exempt but pay them less than $50,000 annually). Other nursing staff, such as Licensed Practical Nurses, have never been eligible for exempt status because they fail to satisfy the professional duties test, and thus they will be unaffected by the new regulations.

The proposed regulations will likely have their biggest effect on the non-medical staff employed in the health care industry, such as employees in administration, human resources, information technology, compliance, facility management, marketing, and research. Social workers may also be greatly affected because although they often meet the duties test for exempt learned professionals, many may make less than $50,440. The minimum salary is not prorated for part-time employees, thus many part-time employees will no longer meet the new minimum salary. The new regulations will force health care employers to either reclassify many employees as non-exempt, or raise their salaries.

Next Steps For Health Care Employers
At this stage the proposed changes to the FLSA white collar regulations are proposed, not final. However, there are some important steps that employers should be taking right now to determine the future impact of the revised regulations on operations and finances and ensure compliance with the impending regulations:

  • Employers should conduct an audit of their workforce and determine which employees may no longer be considered exempt due to the proposed regulations. This is also a good opportunity to review the primary duties of all employees that are currently classified as exempt to ensure that they are properly classified.
  • Employers will need to determine how to compensate newly non-exempt employees. The easiest method is hourly, but there are other compensation methods available such as salary or piece rate (i.e. pay-per-visit).
  • Employers will also have to determine the pay rate for new non-exempt employees. The easiest method is to divide the employee’s current salary by work hours in a year, but if the employee is currently working more than 40 hours per week and will continue to work more than 40 hours per week, the employer may want to calculate the hourly wage to include the overtime rate so that the total weekly wages will equal the total weekly salary under the former compensation system.
  • For employees that were exempt that worked a considerable amount of overtime, employers may want to consider hiring another employee so that the employee will not be required to work overtime.
  • Employers may need to budget for salary increases and/or increased overtime costs in the near future. However, they should also review their pay policies to ensure that the policies appropriately limit their exposure for overtime costs.
  • Policies should make clear that overtime may not be performed without supervisory permission, that discipline will result if overtime is worked without permission, and that “off-the-clock” work is strictly prohibited. 
  • Employers must determine how these new non-exempt employees will record their work hours, and have a policy that requires all work time to be recorded.