By Mauro Ramirez and Felix Digilov, Fisher Phillips
On September 24, 2019, the U.S. Department of Labor (DOL) announced significant changes to fundamental requirements under the Fair Labor Standards Act (FLSA), which will expand overtime pay obligations to an estimated 1.3 million additional workers. 
This new “overtime rule” will take effect in a few weeks, on January 1, 2020. Coupled with a historically tight labor market, the changes could place greater strain on health care employers already struggling to attract and retain new talent.
More Money, More Problems
As a general rule, FLSA-covered employers must pay employees who work more than 40 hours in a week overtime pay of at least 1.5 times their regular rate of pay.
The FLSA, however, contains various “exemptions” to the overtime requirement. In short, “non-exempt” employees are entitled to overtime, and “exempt” employees are not. Most employees are non-exempt, as specific circumstances must exist for an employer to properly avail itself of an exemption. Generally, whether an exemption applies depends on three considerations: (1) how much money the employee is paid (the “salary level test”); (2) how the employee is paid (the “salary basis test”); and (3) the kind of work the employee performs (the “duties test”).
The most significant change under the DOL’s announcement involves salary level. Currently, employees must be paid a salary of $455 per week (annualizing to $23,660) to qualify for the administrative, executive, professional, outside sales, and computer-related exemptions (the “white collar” exemptions). This amount will increase to $648 per week (annualizing to $35,568).
Additional details of the overtime rule include:
- Raising the salary level for the highly compensated exemption from the current $100,000 to $107,432.
- Making it easier for employers to use bonuses and commissions as a way to keep employees above the new salary threshold and avoid the need to pay overtime rates. Specifically, employers can “use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level….”
- Rejecting automatic increases to the salary level, as the DOL had previously proposed, but committing to updating the salary level threshold more regularly, using the notice-and-comment rulemaking process.
Although these changes are significant, two simple steps will help employers effectively implement the requirements of the new rule.
Step 1: Review Current FLSA Classifications
First, health care employers should immediately review existing FLSA classifications along with job descriptions and associated budgets.
Reviewing relevant practical information – in concert with legal and compliance obligations – should help in assessing the costs of maintaining an exemption by raising an employee’s salary to meet the new threshold against reclassifying the employee as non-exempt and paying overtime.
Each employer’s response will depend largely on their unique circumstances and business models. If employees consistently work more than 40 hours a week, it may be more cost-effective to raise their salaries above the new $35,568 threshold. On the other hand, if an employee rarely, if ever, works more than 40 hours per week, re-classifying exempt positions to non-exempt may be the more conservative and practical approach.
As indicated above, meeting the salary level is just one requirement for applying an exemption. In assessing the salary level, employers also should take the prudent step of ensuring that the employee’s job duties satisfy the applicable exemption’s requirements. As a reminder:
- For the executive exemption, an employee’s primary duties must be to manage the enterprise or a department or subdivision of the enterprise and to customarily and regularly direct the work of at least two employees. The employee must have the authority to hire or fire, or his/her suggestions and recommendations as to hiring or firing must be given particular weight.
- For the administrative exemption, an employee’s primary duty must be to perform office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers and must include the exercise of discretion and independent judgment with respect to matters of significance.
- For a professional exemption, an employee’s primary duty must be work requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction and study, or in one of a few other similarly highly specialized fields, such as teaching, computer analytics and engineering.
Working through this step, employers may keep costs down by using PRN or temporary employees to ensure that reclassified non-exempt employees work less overtime hours. Also, some reclassified employees’ duties might be reassigned to employees whose classification remains exempt.
A word of caution: Do not attempt to address the changes by reclassifying exempt employees as “independent contractors.” Considering that independent contractors are not “employees” and not eligible for overtime, using this designation may sound tempting but is likely to be fraught with negative legal implications.
Step 2: Communication is Key
If an employer decides to reclassify employees to nonexempt status, the employer must be prepared to effectively communicate changes to affected employees.
With respect to FLSA compliance, the employer must track affected employees’ work hours and pay overtime premiums for all hours worked beyond 40 in a workweek.
A practical consideration, however, relates to employee morale. Many employees equate their professional identities with being “a salaried employee.” Further, reclassifying employees from exempt to non-exempt status could result in the loss of key benefits such as health insurance. Employers, therefore, should be cognizant of the effect a re-classification may have on an employee’s morale.
As an additional wrinkle for health care employers, there will be 7.8 million direct care openings from 2016 to 2026, according to the Paraprofessional Health Care Institute and projections from the U.S. Bureau of Labor Statistics. This means that growth within the direct care workforce will outpace every other occupation in the country. Texas alone will account for 126,140 new direct care openings during that time. Combining the 7.8 million future direct care openings with the 7.5 million unfilled American jobs in 2019 means that health care employers face a particularly competitive environment in attracting and retaining quality employees.
Health care providers, therefore, have additional incentive to effectively communicate any changes in employee pay or classification to their workforce both to comply with legal obligations and avoid competitive disadvantages with other health care businesses with respect to attracting and retaining employees.
Balancing these issues will depend on your workplace culture. As an example, however, consider leaving benefits intact for re-classified workers. Further, consider assuring employees that decisions about reclassification were made on an individual basis, in compliance with the new overtime rule, and have nothing to do with an employee’s performance or standing with the company.
Finally, health care employers should update their handbooks and policies to update and explain timekeeping expectations for recording worked hours. If applicable to your workplace, it may be prudent to remind employees that they must seek authorization prior to incurring overtime hours. (Employers still need to pay employees for unauthorized overtime worked, but they may counsel and discipline employees for not attaining prior authorization.)
Do Not Delay
Although the new DOL overtime rule will not go into effect until January 1, 2020, now is the time for health care employers to audit and review their employee classifications. Staying ahead of these regulatory changes and proactively addressing their impact on employees’ pay and morale may provide a health care employer with advantages in recruiting and retaining talent in a labor market and industry where there is little room for error.