CureMD: Can you take us through the new rule: who are the different stakeholders affected and why is it such a big deal?
Jeff: The Final Rule calls for the following changes to the executive, administrative, and professional exemptions:
- The salary threshold for the executive, administrative, and professional over-time exemptions will increase from $23,660 ($455 per week) to $47,476 ($913 per week), which represents the 40th percentile of full-time salaried workers in the lowest-wage census region (currently the South).
- The total annual compensation requirement for “highly compensated employees” subject to a minimal duties test will increase from the current level of $100,000 to $134,004, which represents the 90th percentile of full-time salaried workers nationally.
- The salary threshold for the executive, administrative, professional, and highly compensated employee exemptions will be automatically updated every three years to maintain the standard salary level at the 40th percentile of full-time salaried workers in the lowest-wage census region to “ensure that they continue to provide useful and effective tests for exemption.”
- The salary basis test will be amended to allow employers to use non-discretionary bonuses and incentive payments, such as commissions, to satisfy up to 10 percent of the new salary threshold.
CureMD: Does this rule apply to everyone?
Jeff: Yes, this rule applies to everyone engaged in an employer-employee relationship. Neither the Rule nor any other requirement pursuant to the Fair Labor Standards Act would apply to workers engaged as bona fide independent contractors who are not employed as employees of an employer. Employers should take heed, however, that the U.S. Department of Labor takes the position that most workers are employees and not independent contractors. In other words, employers should not arbitrarily classify its employees as “independent contractors”, as this would likely result in a misclassification of the employee.
CureMD: What will be the biggest challenge for medical professionals?
Jeff: Conducting an audit of the workforce and determining what changes must be made in light of the new requirements.
With the doubling of salary exemption threshold for executive and administrative professionals, practice owners will need to consider whether it makes good financial sense to increase an employee’s salary to maintain the exemption. The alternative, which many employers are considering, is to reclassify employees presently classified as exempt to non-exempt, continue to pay a salary or comparable hourly wage, and then pay time and one-half when overtime hours are worked. Employers can control their expenses by creating strict workplace policies regarding overtime, such as required authorization, or capping overtime at a certain number of hours over 40 in each work week.
CureMD: How can employers reduce the impact of the “Final Rule”?
Jeff: Employers should take a hard look at what they are presently paying their exempt workforce and determine how many exempt employees will require a salary increase in order to meet the Final Rule which takes effect on December 1, 2016. If the exempt employers are reasonably close in salary to the $47, 476 thresholds, it might make sense to raise the salary slightly to maintain the exemption, especially if the employees at issue tend to work long hours where they would be entitled to overtime pay if they were classified as exempt.
If, however, there is a significant pay gap between what the exempt employee currently earns and the new salary threshold, it might make more sense to reclassify those employees as non-exempt and then control the amount of overtime they work, thus minimizing the financial impact of the Final Rule.
The regulation is not subject to Congressional approval, there is nothing that can be done to amend or repeal the regulation at this time.
CureMD: How much resistance is expected to this “final rule”?
Jeff: Resistance to the final rule can be expected. The Department of Labor (DOL) received nearly 300,000 comments in response to the proposed rule, many of which were from employers and advocacy groups providing thoughtful commentary on the practical issues and repercussions of implementing such a significant increase to the salary threshold. Because the regulation is not subject to Congressional approval, there is nothing that can be done to amend or repeal the regulation at this time.
If a Republican president is elected, the executive branch can, of course, effect changes in the U.S. Department of Labor’s administration, which could eventually lead to nullification or reduction in the severity of this regulation.
CureMD: Do you believe the “Final Rule” will increase the efficiency of workflows?
Jeff: No; in fact, workflow efficiency may be negatively impacted where an employer finds it will need to reclassify a significant number of its presently exempt workforce to non-exempt. Many times non-exempt workers (who are paid by the hour with premium pay for hours worked beyond 40 in a work week ) may not work as efficiently as exempt workers who are incentivized to be more productive because they are earning the same salary for all time worked.
CureMD: What reaction is to be expected from employees, now that they’re being converted from exempt to non-exempt, instead of getting a pay raise?
Jeff: The reaction will likely be mixed because certain employees may feel that being converted to non-exempt is demeaning, and reflects a demotion of sorts because non-exempt employees are required to record their work hours and break time, and will likely be paid by an hourly wage instead of a salary. Certain other employees may react more favorably if they view the reclassification as an opportunity to earn additional wages in the form of premium pay if they work overtime hours.
CureMD: You have worked extensively with organizations in designing and improving their employee policies. What steps can a practice owner take to ensure minimal employee distress?
Jeff: Probably the most effective way to avoid employee relations issues in the workplace when reclassifying is to explain to each employee being converted from exempt to non-exempt the following:
- The reason for the change is not a reflection on their performance, work product or value to the employer.
- Rather, the employer is required by law to reclassify the employee because of a change in regulations.
- This change is not in any way considered a demotion or downward valuation of the employee’s position.
- One of the important benefits of this new classification is that the employee will now be eligible to receive overtime for hours of work greater than 40 in a work week.
This message should be communicated to each employee individually, not in a group setting. The content of the message is a personal and sensitive matter, which should not be perceived by an employer’s workforce as unimportant.
CureMD: What stake holders in the Healthcare Industry are expected to be affected the most?
Jeff: The Final Rule will affect the healthcare industry indiscriminately because many, if not most, employers maintain certain exempt workers who earn below $47, 476 or $134,004, the latter being the new salary threshold for the Highly Compensated Employee exemption. Healthcare industry employers who are more susceptible to off-the-clock work will be particularly impacted by the Final Rule to the extent that they will be required to reclassify certain of their workforce to non-exempt.
CureMD: What about Part-time Employees? Does the salary threshold apply to them too?
Jeff: Yes. The Fair Labor Standards Act does not discriminate against part-time employees and thus applies equally to all employees. It is important to classify correctly for full-time and part-time employees alike because employers are required to record time worked and compensate for all hours worked (including time and one-half for hours worked beyond 40 in a week). Thus, to the extent a part-time employee misclassified as exempt works over 40 hours in one particular work week, the employer will be liable for paying any unpaid back wages for all hours worked including overtime.
CureMD: If an employer pays a Christmas Bonus every year, would that be included as part of the salary to meet the new standard?
Jeff: It depends on whether the bonus is discretionary or not. To the extent the bonus is non-discretionary; it may be used to satisfy up to 10 percent of the new salary threshold. If, however, the holiday bonus at issue is purely discretionary, meaning that it is not guaranteed and is instead contingent on certain defined and undefined factors, such as “success of the business,” then such bonuses may not be relied on in satisfying the new salary threshold.
CureMD: For Highly compensated employees, what must they be paid weekly/annually and how will non-discretionary bonuses factor in?
Jeff: When the Final Rule takes effect on Dec. 1, 2016, employees who only satisfy the HCE duties test may qualify for exemption if they earn at least $134,004 per year and at least $913 per week. HCE employees must receive 100% of the $913 weekly threshold on a salary or fee basis, but non-discretionary bonuses and incentive payments (including commissions) may be used to satisfy the remainder of the $134,004 total annual compensation requirement.
CureMD: Do you see this ‘Exemption Rule’ bringing more positive or negative changes?
Jeff: Employers who diligently ensure their exempt workforce is properly classified on account of the Final Rule will likely avoid heightened scrutiny by the U.S. and state Departments of Labor as well as the private plaintiffs’ bar. Therefore, in that regard, the Final Rule is a good opportunity to avoid future liability.
Unfortunately, the Final Rule can negatively affect the workplace environment due to changes in classification required to maintain compliance. Such changes will, at least to some degree, negatively affect employee relations where reclassified employees feel demeaned, or alienated from their colleagues. Such negative reactions can severely affect the workplace, especially with respect to productivity
CureMD: New policies are being implemented to comply with overtime laws and control overtime work. How do you think these policies will affect businesses in general?
Jeff: Enacting and, more importantly, enforcing policies to counteract the financial impact of the Final Rule, such as off-the-clock and overtime prohibition policies, will likely strain employer resources and detract focus on the business.
CureMD: Can you suggest best practices for controlling over-time work?
Jeff: Here are the following practices.
- Creating and enforcing policies which prohibit overtime.
- Disallowing employees from using smart phones or conducting work outside the workplace that can significantly contribute to time worked
- Self-auditing one’s workforce to determine the headcount needed to avoid having any one non-exempt employee who works over 40 hours per work week.
- Set non-exempt full-time employees’ regular work week at 35, and not 40, hours so that if employees work slightly beyond their regularly scheduled 35-hour work week, overtime hours and premium pay can be avoided.
The DOL announced a time-limited non-enforcement policy (“Policy”) for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds.
CureMD: What allowance is the Health Care Industry affording currently?
Jeff: With the publication of the final rule, the DOL announced a time-limited non-enforcement policy (“Policy”) for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds. Under the Policy, from December 1, 2016 (the effective date of the final rule), until March 17, 2019, the DOL will not enforce the updated salary threshold of $913 per week for employers providing these services.
The DOL issued the Policy in response to interagency discussion between the DOL and the U.S. Department of Health and Human Services (“HHS”) about the concern that the final rule would frustrate the HHS’s goal of providing services to individuals with intellectual or developmental disabilities in integrated settings that support full access to the community and the provision of services through small, community-based settings that maximize individuals’ autonomy, quality of life, and community participation.
CureMD: Your final thoughts on this?
Jeff: While it is certainly good news for employers that the duties tests for the various exemptions will not be augmented in the final rule, the significant increase to the salary threshold is expected to extend the right to overtime pay to an estimated 4.2 million workers who are currently exempt. This change will not only affect labor costs but also require employers to rethink the current structures and efficiencies of their workforces, including assessing how the reclassification of workers from exempt to non-exempt will affect their fundamental business models. In addition, to the extent exempt employees are reclassified as non-exempt, employers will have to consider implementing policies and procedures to both comply with overtime laws and control overtime worked, such as proscription against off-the-clock work and proper maintenance of accurate record-keeping.
July 25, 2016
JEFFREY H. RUZAL is a Senior Counsel in the Employment, Labor & Workforce Management practice, in the New York office of Epstein Becker Green. He is a member of the firm's Wage and Hour group and leads the firm’s Hospitality service team. Mr. Ruzal represents clients in such diverse industries as hospitality, financial services, retail, health care, and technology. You can learn more about him here.