A Look Into New Federal Overtime Regulations

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What do they mean for healthcare employees and companies?

On May 18, the U.S. Department of Labor (DOL) issued its final revisions to the federal overtime regulations. The final regulations significantly impact the common white collar exemptions from the federal overtime requirements, including those applicable to executive, administrative and professional employees. The DOL estimates that millions of employees who were not previously eligible for overtime will become eligible when the new regulations go into effect December 1.

Specifically, the final regulations:

  • Increase the minimum salary level required for exemption for salaried workers to $913 per week ($47,476 annually). The previous minimum salary level was $455 per week ($23,660 annually);
  • Increase the minimum total annual compensation for highly compensated employees from $100,000 to $134,004;
  • Amend the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level; and
  • Establish a mechanism to automatically update minimum salary and compensation levels every three years, which will be tied to the 40th percentile of full-time salaried workers in the lowest income census region. The first update will take effect Jan. 1, 2020.

What Does It Really Mean?

At first glance, the options available to comply appear straightforward. For example, a hospital with a $40,000 salary intake supervisor working 50 hours a week could either increase the salary by $7,476 to reach the threshold, limit the employee to 40 hours per week and assign the extra work to other employees, which may result in hiring more employees; or pay time-and-a-half overtime pay, which would amount to $15,000 per year. But employers who currently pay many employees a salary between $23,660 and $47,476 will see labor costs substantially increase if these options are the only ones considered.

It is likely most healthcare employers will choose from these three options to bring their formerly exempt employees who no longer meet the salary threshold into compliance. However, the Fair Labor Standards Act (FLSA) permits other creative alternatives for employers who cannot absorb the increased labor costs these limited options would produce, or who have other business reasons to reject the options.

The most common alternatives are described and compared below. These include the three simple options listed above, and also modifying the employee’s pay by adjusting the salary or hourly rate, paying a salary that compensates for more than 40 hours in a week, or adopting the fluctuating workweek method. The option that works best for a particular employer will depend on that employer’s unique needs and the amount its salaried employees work relative to the amount they are currently paid.

Raise the Salary Threshold

How It works: The easiest option is for the employer to simply increase the employee’s current salary to the new $47,476 annual threshold. Because the new regulations call for the Secretary of Labor to publish a revised threshold every three years based on the 40th percentile of earnings for full-time salaried workers, the salary may need a subsequent adjustment to satisfy the threshold.

Cost Increase: For an employee with a $40,000 annual salary, the yearly labor cost increase would be $7,476 per employee for 2016 with the potential to increase thereafter due to the automatic threshold adjustments.

Pros: The employee will undoubtedly respond favorably to the salary increase, and this approach may boost morale and productivity. The position may also be maintained as salaried-exempt without the administrative obligation to track and pay for overtime hours worked.

Cons: The labor cost increase is significant for employees with a salary that is not close to the threshold. The proposed automatic threshold escalation may result in a required increase at least every three years.

Makes Sense for: Employees with salaries already very near the $47,476 threshold.

Limit to 40 Hours

How It Works: Another available option that is simple in theory is to require the employee to work a set schedule and prohibit the employee from working over 40 hours. Alternatively, the employee may work overtime only upon receiving proper authorization, which is provided only under limited circumstances.

Cost Increase: None, if the employee works no overtime.

Pros: The labor costs will not increase unless additional employees must be hired to cover the reduced hours. The employees who routinely work more than 40 hours will respond favorably to similar pay for fewer hours in the workplace, which may provide an opportunity to emphasize the employer’s commitment to a work/life balance.

Cons: The decision to limit an employee who used to work more than 40 hours to less than 40 hours will likely require the employer to adjust job responsibilities and assign work to other staff or may result in a need for additional staff. Additionally, a 40-hour limitation can be difficult to enforce, but failure to do so may cause liability for unpaid overtime. It will require the development and implementation of a detailed timekeeping policy for salaried employees limited to 40 hours and impose limitations on their ability to work over 40 hours.

Makes Sense for: Generally, an absolute overtime prohibition makes sense only for salaried employees who have little need to work over 40 hours. For employees who are allowed to work some limited overtime under a detailed overtime policy, cost increases will be small for the overtime worked.

Pay Salary Plus Time-and-a-Half Overtime Pay

How It Works: The employee formerly paid only on a salary basis will now receive 1.5 times his salary divided by 40 for every overtime hour worked. Alternatively, the employee may be converted to an hourly rate derived from his former salary divided by 40 to accomplish nearly the same result. The only difference for the hourly employee would be that he would only be paid his actual hours worked and not the full salary if he did not work 40 hours.

Cost Increase: The cost increase is potentially substantial. The sample employee would receive $15,000 in additional pay annually when the weekly salary divided by 40, times 10 overtime hours for 52 weeks of the year is calculated. Employees who work more than 50 hours per week would receive even more.

Pros: The employees will unquestionably be thrilled to receive the extra pay. The calculation is easy.

Cons: Labor costs will increase substantially for each employee and, if a large number of employees are affected, the costs could be catastrophic.

Makes Sense for: This option is best for generous employers with cash to spare.

Pay Overtime at a Modified Pay Rate

How It Works: The new regulations do not prevent employers from modifying an employee’s pay to avoid significant pay increases. Therefore, employers may either lower the salary for the employee who will now receive overtime, or convert him to an hourly rate that results in a similar total pay to the amount he received before becoming eligible for overtime.

For the sample employee ($40,000 for a salaried employee who works 50 hours per week) to maintain similar pay, the employee’s salary would need to be reduced from $769.23 to $559.60 per week. Likewise, if his pay rate were converted to $13.99 per hour and he continued to average 50 hours per week while eligible for time-and-a-half overtime pay, his annual pay would be $40,000.

Cost Increase: If implemented precisely, the cost impact is negligible.

Pros: The pay adjustment allows employers to minimize additional labor costs while maintaining the same hours worked for the employee.

Cons: This option, while best at cost control, may impact morale. Employees may react negatively to the realization that they will work a particular number of hours (instead of a flexible schedule) to receive the same pay they earned before the change. Also, a reduction in workload would cause pay to decrease.

Makes Sense for: This option is best for employers when it is absolutely critical to prevent any increased labor costs or to better control the increase in labor costs.

Fixed Salary for Greater than 40 Hours

How It Works: Contrary to popular belief, neither the Fair Labor Standards Act nor its regulations require overtime pay at 1.5 times an employee’s salary divided by 40 for hours worked over 40. The appropriate calculation depends on the number of hours for which the salary was intended to compensate.

If the salary is intended to compensate for 40 hours of work, the employee must receive 1.5 times his hourly rate for hours worked over 40. If the employer intends the salary to compensate for a different amount of hours, it can designate in writing that an employee’s salary is intended to compensate for a particular number of hours worked each week, and the employee would only be entitled to 0.5 times overtime pay for hours worked over 40 up to that number. The employee would be entitled to 1.5 times the regular rate overtime pay for hours worked over that number.

For the sample employee, if his salary remained the same and the employer designated that his salary was to compensate for 50 hours, he would receive overtime pay at a 0.5 rate for time worked between 40 and 50 hours. The rate would be calculated by dividing his weekly salary of $769.23 by 50 hours, which would yield an overtime rate of $7.69 for each hour between 40 and 50. If he worked over 50 hours, he would receive pay for each hour at 1.5 times his regular rate, which would be $23.07.

Cost Increase: If the employee worked 50 hours each week with his salary compensating him for 50 hours, he would receive an additional $76.90 each week, which would amount to just short of $4,000 per year. This amount would be larger if he worked more than 50 hours because he would then receive time-and-a-half pay.

Pros: This option allows employers to maintain an employee’s current salary without the substantial increased costs that would occur through time-and-a-half pay.

Cons: The option will increase labor costs, though at a lower amount than time-and-a-half pay. Thus, it does not make sense for employees who often work over the amount of hours the salary is intended to compensate.

Makes Sense for: It is a viable option for employers who want to maintain an employee’s salary with limited increased labor costs and whose employees work a fairly steady schedule.

Fluctuating Workweek Method

How It Works: Under the fluctuating workweek method, employees must receive at least 0.5 times their regular rate of pay for the week (calculated by dividing their weekly salary by the total hours worked for the week) for any time worked over 40 hours. The regular rate of pay for the week will vary based on the number of hours worked.

To utilize this method, employees’ weekly hours should actually fluctuate to some extent. Before implementing the fluctuating workweek method, employers should have a written understanding with each employee and should consult with legal counsel to ensure the method is applied correctly and that it is appropriate for the employees covered.

Cost Increase: For the sample employee, the additional costs would be similar to the “Fixed Salary for Greater than 40 Hours” option, except that if the employee exceeded 50 hours per week, the employer would still only need to pay 0.5 times the regular rate of pay for the week.

Pros: The cost increase for this method is less than any other method (other than adjusting the salary or limiting to 40 hours per week).

Cons: The method is both more difficult to calculate and for the employees to understand. This method also requires careful attention to ensure it is appropriate for the covered employees and is applied correctly.

Makes Sense for: The fluctuating workweek method works for employers willing to undertake the administrative burden and whose employees’ hours actually fluctuate to some extent from week to week.

Since the new regulations become effective December 1, employers should carefully analyze their pay structures and consider the most effective and appropriate method for their unique needs. An option that must be considered is an attorney-client privileged FLSA audit and pay analysis to evaluate the exempt status and pay options for the employees that the proposed regulation will impact. Because these changes can disrupt business operations and create tremendous administrative burden, it is recommended that employers immediately begin to make these important decisions.

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