What new rules on overtime pay mean to physician practices

In May of this year, President Obama and the U.S. Department of Labor (“DOL”) released the long-awaited Final Rule revising the minimum salary requirement for an employee to qualify for the overtime exemption under the Fair Labor Standards Act (“FLSA”). All changes under the rule will take effect on December 1, 2016.

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The reason for the changes is explained in the text of the rule: “when left unchanged, the salary threshold is eroded by inflation every year. It has only been updated once since the 1970s – in 2004, when it was set too low…[Therefore,] too many [employees] have been left working long hours for no additional pay, taking them away from their families and civic life without any extra compensation.”

In summary, the Final Rule does the following:

• raises the standard salary threshold for full-time salaried employees to qualify for the overtime exemption from $455 a week ($23,660 per year) to $913 a week ($47,476 per year).
• raises the highly-compensated employee salary threshold to qualify for the overtime exemption from $100,000 per year to $134,004 per year.
• allows up to 10% of the salary threshold for non-highly compensated employees to be met by non-discretionary bonuses, incentive pay, or commissions, as long as these payments are made on at least a quarterly basis.
• automatically updates the salary threshold every three years, beginning on January 1, 2020, to account for inflation. The DOL anticipates that beginning on that date the minimum salary threshold will be $51,168 for full-time salaried employees and $147,524 for highly-compensated employees.

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The rule provides no differential for cost of living, average area compensation, or state income tax rates. Nor does it change the “duties test” that determines whether salaried employees earning more than the salary threshold are eligible for overtime pay. The DOL estimates that fewer employers will have to use the “duties test” because the increase in the salary threshold means more employees’ exemption status will be clear from their salaries alone.

Next: Employers have several options to comply

To comply with the rule, employers will have several options for employees earning more than the current salary threshold, $23,660 per year, but less than the new salary threshold, $47,476 per year. Starting on December 1, employers can:

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• remove the exemption status from these employees and begin paying overtime for all hours worked over 40 per week;
• remove the exemption status from these employees, forbid overtime, and hire or reassign additional employees to cover any increase in workflow; or
• increase the salaries of these employees to meet the minimum salary threshold of $47,476, which will qualify them for the overtime exemption.

How will these changes affect your practice?

As an example, you have a medical assistant that functions as a lead certified medical assistant. She is currently paid $40,000 per year as a flat salary and does not receive overtime pay even though many weeks she works more than 40 hours. Let us further hypothesize that you had her clock in just like all other employees, and that she meets the definition of a supervisor and exercises independent judgement – two criteria often required under state law. Reviewing her compensation last year you find that she worked 220 hours of overtime.

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Under the old law with a threshold of $23,660, you were fine. But on December 1 you will need to make a decision: (a) do you raise her pay to $47,476 (an 18.7% increase), (b) pay her hourly and pay her for overtime (an additional $6,346 if she works the same number of hours as last year), or (c) pay her hourly at $19.23 per hour  ($40,000 per year at a standard 40-hour work week) and forbid overtime?  Keep in mind that forbidding overtime does not exempt the employer from paying the overtime if the employee works it. But if an employee ignores the rule (documented, of course), this can be considered when evaluating her performance.

In the reverse, let’s say you have a full-time front desk supervisor who you are paying hourly at $23 per hour ($47,840 per year). She habitually works overtime and last year you paid her $55,600. Assuming she meets the federal and state definitions to qualify as an exempt employee, do you want to re-classify her as exempt and pay the $47,840? How will this impact her behavior? Will she need a part-time person or more hours from other staff members to get the work done?

Next: Expectations from the DOL

The choice should be carefully considered, because any change in employee classification or reorganization of employee structure may impact employee morale. For these employees whose salaries are on the border of the salary threshold, it is now more important than ever to ensure their correct exemption classification. If you discover improper classifications, use this time as an opportunity to reclassify the exemption status for these employees.

The DOL expects these changes in the overtime rule to increase payroll costs dramatically, especially for small businesses. In addition, because there will be significant payroll tax revenue as a byproduct of the rule, you can expect that states will step up their audits of small business payrolls.

Experience indicates that all practices should begin evaluating the impact of these changes immediately In preparing to comply, employers should do the following:  (1) identify a work group to assist with complying with the new law. Members might include your office manager, a managing partner, a human resource specialist, your accountant, consultant or payroll service; (2) review employee classifications and the practice’s compliance with wage and hour laws; (3) review employee handbooks and policies and procedures; (4) perform an immediate assessment and subsequent annual assessments of overtime paid per-employee, total overtime, and employee classifications (exempt vs. non-exempt) (5) make any necessary changes; and (6) budget for the changes.

Some websites you may find helpful in your preparations are: https://www.dol.gov/featured/overtime/

https://www.dol.gov/whd/overtime/final2016/SmallBusinessGuide.pdf

Remember also that your outside advisers are there to help.  

Amanda L. Waesch is a healthcare attorney at Brennan, Manna & Diamond, LLC with offices in Ohio and Florida. She can be reached at alwaesch@bmdllc.com. Chris Zaenger is a certified healthcare business consultant and owner of Z Management Group, Ltd.  He can be reached at chris@zmanagement.net.