Employers in the U.S. healthcare industry should act now to address recent changes to the overtime exemptions for “white-collar” employees. On May 18, 2016, the U.S. Department of Labor (DOL) published its highly anticipated final rule, which more than doubles the salary threshold required for certain executive, administrative, and professional employees to qualify for an exemption from overtime pay under the Fair Labor Standards Act (FLSA). The new rule will take effect on December 1, 2016. In this relatively short time frame, employers must review their current practices, determine which positions should be reclassified and how they should be classified and paid, consider related policies that should be revised, and plan how to communicate changes to employees.
The DOL identified the healthcare industry as having the highest percentage of exempt workers affected by the final rule. According to the DOL’s projections, 26 percent of exempt workers in the healthcare industry will be affected, resulting in approximately $298 million in additional costs. In addition to the significant impact on the overall healthcare industry, the DOL estimates that of exempt workers employed by healthcare employers operating as small business establishments, 28 percent will be affected, with the largest cost per establishment incurred by individual hospitals. Given these high projections, employers in the healthcare industry should pay particular attention to the final rule and the related opportunity to correct any positions that are currently misclassified as exempt from overtime.
In the past, DOL enforcement efforts directed at the healthcare industry have revealed misclassification of salaried positions as a common violation, so employers in this industry should pay particular attention to the new rule and the related opportunity to correct any positions that are currently misclassified as exempt from overtime.
What Does the New Rule Change?
The minimum salary for white-collar exemptions subject to the salary basis test will increase from $455 per week (or $23,660 annually) to $913/week (or $47,476 annually). DOL set this number based on the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently, the South). The final rule also permits employers to include nondiscretionary bonuses, incentives, and commissions to account for up to 10 percent of the required salary for these exemptions, as long as those amounts are paid on at least a quarterly basis. Catch-up payments are permitted at the end of the quarter.
The minimum salary for workers treated as exempt under the highly compensated employee exemption will be raised from $100,000 to $134,004 annually, which is the 90th percentile of full-time salaried workers nationally.
Beginning on January 1, 2020, both salary thresholds will be automatically adjusted and published every three years to keep pace with the 40th percentile and 90th percentile, respectively.
What Stays the Same?
The final rule makes no changes to the current duties tests. Additionally, the required salary still cannot be pro rated for a part-time employee. Part-time employees who satisfy the applicable duties test, but do not receive at least the minimum salary, must be classified as nonexempt. Their hours must be recorded and, any time they work more than 40 hours in a workweek, employers must pay them overtime of 1.5 times their regular rate.
What Allowance Was Provided for the Healthcare Industry?
The DOL has enacted a time-limited nonenforcement policy for certain employers; however, that policy does not provide as much protection as it might appear and should not give employers great comfort. The nonenforcement policy applies to providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds. The nonenforcement policy does not apply to providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential care facilities with 16 or more beds. The period of nonenforcement by DOL will last from December 1, 2016 (the effective date of the overtime final rule) until March 17, 2019.
During this period, the DOL will not enforce the updated salary threshold of $913 per week for the subset of employers covered by this nonenforcement policy. However, this nonenforcement policy does not apply to any private lawsuits that employees may file pursuant to the FLSA, and it does not relieve employers of their obligation to comply with the new rule. Though the DOL will not conduct any investigations or enforcement actions until after March 17, 2019, employers who may fall within this exception should still work to become compliant by December 1, 2016. Furthermore, the DOL will continue to enforce all other provisions of the overtime final rule as to this subset of employers, including in instances involving employees who meet the salary basis and duties tests but who earn less than the previous salary threshold of $455 per week.
What Can Employers Do to Prepare?
Employers should proactively audit exempt positions to review, reclassify, and correct any existing misclassifications. For employees who fall below the salary necessary to meet an exemption, employers should consider whether to classify those employees as nonexempt — and record hours and pay overtime — or increase their salaries to meet the new levels. It may be necessary to implement new timekeeping procedures, practices, or policies to record newly nonexempt employees’ total hours worked each day and workweek and to train supervisors on them. Employers should also look at hours worked by currently exempt employees who might be reclassified as nonexempt to determine an appropriate new rate. If any functions or tasks are redistributed among employees, job descriptions should also be updated.
For example, qualified healthcare employers operating hospitals or residential care establishments who choose to convert their employees from exempt to nonexempt status may be able to take advantage of the “Eight and Eighty (8 and 80)” overtime compensation system provided under the FLSA.  Employers also should look at hours worked by currently exempt employees who might be reclassified as nonexempt to determine an appropriate new rate. If any functions or tasks are redistributed among employees, job descriptions also should be updated.
As part of any internal audit or review process to address exempt/nonexempt classifications, healthcare employers may also want to take the opportunity to review their current independent contractor arrangements to make sure those individuals are properly classified as contractors and should not be considered employees.  DOL issued guidance in July 2015 that made clear that misclassification of employees as independent contractors is a focus of DOL’s enforcement efforts. 
What Other Issues Should Employers Consider?
New issues may arise when previously exempt positions are classified as nonexempt because employers must begin to record and pay for any work suffered or permitted by those employees. Employers will have to address what constitutes hours worked and how they will track and pay for time spent in certain activities, including:
- Activities at the start and end of the workday.
- Travel time.
- “On-call” time and duties.
- Meal periods.
- Attendance at meetings or training sessions.
- Responding to email or other work performed away from the job site.
Activity at the Start and End of the Workday and Unauthorized Time
Healthcare employees may perform a myriad of tasks before and after their scheduled shifts. Although some of these activities may be considered preliminary and postliminary activities that are excluded from hours worked under the Portal-to-Portal Act of 1947, most are work time that must be compensated. For example, if employees spend time discussing workplace issues (pass downtime) at the transition between shifts, employers must be certain that both employees are on-the-clock regardless of their scheduled shifts. Very short exchanges may be de minimis (and therefore not compensable), but longer exchanges are compensable work. Similarly, time spent stocking and assembling materials, receiving safety instructions and performing various safety activities, and donning and doffing protective clothing is often compensable time. To the extent any of these responsibilities are assigned to employees who will be reclassified as nonexempt, employers must evaluate how such activities will be tracked and compensated.
Even if an employer does not specifically authorize work performed (or requires “prior authorization for overtime”), the employer must pay for any work it “suffers or permits.” Employers may discipline, and even terminate the employment of, employees who work unauthorized overtime, but that discipline cannot include failure to pay for the time worked. When the employer knows or has reason to believe that an employee is continuing to work, or benefits from the work, the time is compensable. Employers should be cognizant of and monitor work employees perform before or after their scheduled shifts and include any such hours in the calculation of overtime.
Because employees in various occupations in the healthcare industry frequently travel between worksites, employers will likely need to review policies and practices regarding compensation of travel time to ensure proper payments are made to any employees who are converted to nonexempt status.
Employers typically do not have to pay employees for time spent in ordinary travel between home and work. Similarly, if an employee’s worksite changes daily and the travel is a normal occurrence for the position, time spent commuting between home and the first worksite of the day (and returning home from the last worksite of the day) may not need to be compensated.
However, if a nonexempt employee is traveling out of town for a job that keeps him or her away from home overnight, the general rule under the FLSA is that the employer must compensate the employee for any travel that takes place during what would otherwise be his or her normal work hours, including those corresponding hours on regularly scheduled days off (e.g.,Saturday and Sunday). If the employee is traveling outside of his or her normal work hours, travel time spent driving must be paid, but time spent as a passenger in a plane, train, bus, boat, or car generally need not be paid.
If an employee has gone home after the regular workday has ended, and he or she is called to travel a substantial distance to handle a client or patient emergency, the time spent traveling should also be compensated.
Employers are required to pay for time that a nonexempt employee spends on-call if the employee is unable to use the time effectively for his or her own purposes. The key question is whether the employee is “waiting to be engaged” (likely not compensable) or “engaged to wait” (compensable). If the employee is required to remain on the employer’s premises, the employer is most likely required to pay the employee for that time. Other factors to consider include the frequency of calls, whether the employee can conduct personal activities during the on-call period, and the frequency of interruption from work calls.
Meal and Rest Periods
Actual meal periods of 30 minutes or more where an employee is completely relieved from duty are not compensable as hours worked. However, if an employee performs work during a meal break, the employee should be paid for the entire break. Some healthcare employees, particularly those directly involved in patient care, are particularly susceptible to interrupted meal breaks. Further complicating matters, many healthcare employers include an automatic mealtime deduction in their time-keeping calculations. When choosing to automatically deduct 30-minutes per shift, employers must ensure that the employees are receiving the full meal break. Any time an employee is not permitted the full meal break, the entire break must be paid. Similarly, time spent in short rest breaks throughout the day should not be deducted from a nonexempt employee’s total hours worked.
The time that nonexempt employees spend in meetings, lectures, or training is considered hours worked and must be paid, unless all four of the following criteria are met:
- Attendance is outside regular working hours.
- Attendance is voluntary.
- The course, lecture, or meeting is not job-related.
- The employee does not perform any productive work during attendance.
Keep in mind that an employer may be required to pay nonexempt employees for time reading and responding to work-related email messages after hours and for work-related phone calls or other work employees perform remotely. Although some of this time may be considered de minimis, employers rely too heavily on the de minimis rule at their peril. Employers may want to consider whether they can limit such after-hours work by restricting remote access and, if not, how they can track time spent on work-related matters outside of normal working hours. Employers should be also be certain that they have an exception time reporting system in place so that they can effectively track time spent on work-related matters away from the worksite and outside of normal working hours.