While recent changes to the federal regulations that govern eligibility for overtime under The Fair Labor Standards Act (FLSA) affect all employers, health care providers typically have been affected in a bigger way than most.
Therefore, it is especially important for employers at hospitals and health systems to understand what is, and what is not, considered exempt from overtime — and the impact these rules have on their rewards plans.
Regulation changes announced May 18 make employees earning less than $913 weekly ($47,476 annually) automatically eligible for overtime, effective December 1. (This salary threshold, based on data provided by the Bureau of Labor Statistics, will be automatically updated every three years.) The FLSA establishes federal minimum wage, overtime pay, record keeping and child labor standards affecting full-time and part-time workers in the private sector and in federal, state and local governments.
Here’s what health care employers need to know:
The new salary threshold likely includes roles that were formerly considered exempt based on the executive duties exemption.
The industry often classified supervisory roles exempt because they met three criteria: surpassed the former salary threshold, were paid on a salaried basis and met the requirements under the law’s executive exemption. Starting December 1, if these roles fall below the salary threshold, they are automatically nonexempt and, therefore, must receive overtime.
Non-profit health care organizations are not exempt from the rules.
Whether or not an entity is subject to the FLSA is generally dependent on the non-profit enterprise having annual gross revenue of at least $500,000. However, this threshold doesn’t apply to health care providers. FLSA covers employees of all hospitals, residential medical or nursing care providers, schools and public agencies, irrespective of sales figures.
These new overtime rules may impact other rewards.
That is, any reward plan that is tied to exemption status and/or pay type (hourly, salaried) should be reviewed in light of changes to overtime exemption status, salary or compensation level and other pay-based changes made in response to the new FLSA rules. Examples of such rewards may include incentive plans, paid-time-off, etc. Employers should analyze, understand and implement adjustments as needed in these affected programs.
In advance of the effective compliance date, employers have the opportunity and time to:
- Analyze, understand and implement adjustments as needed for affected programs
- Understand the law and related changes as summarized in the background section of the 2016 final regulations
- Review the implications section and become familiar with potential issues
- Consider total rewards and workforce strategy options, in light of all these issues, as well as potential implications for benefit plans
IMPLICATIONS FOR EMPLOYERS
As employers prepare to comply with the new regulations, we recommend a three-step process:
1. Identify currently exempt jobs with salaries below the new minimum salary threshold and identify HR programs specific to nonexempt employees.
It is possible that some of these exempt jobs will be held by some employees whose salaries have moved above the new salary threshold, and some that are now below. Identify these jobs as the foundation for decision making. Employers should remember to identify closely related or natural progression jobs to test for compression. Employers may also determine a need to adjust pay for jobs at the higher levels in these job progressions.
2. Select the best approach for each job, after analyzing the cost impact from multiple perspectives with both compliance and critical business needs in mind. Increased costs could result from raising employees above the new salary threshold to retain exemption from overtime pay, or from reclassifying certain employees to nonexempt status and paying overtime as required under the law. Other cost drivers could include the indirect impact of these new rules on employee benefits (e.g., health coverage eligibility), 401(k) contributions, employer taxes and premium pay offered to nonexempt employees. Important to your decision will be your cost goals — determine whether you want the job status transition to be cost-neutral or to fall within certain cost parameters.
As a viable alternative, you may consider job redesign in some situations. By involving operations management, employers can identify and reassign tasks to change the primary job duties, and align exemption status and pay accordingly. Conduct compression analysis with a strategy for maintaining internal equity as pay rates and salary ranges may change. In addition, you may need to adjust work arrangements for some jobs to ensure proper oversight and hour-tracking for jobs that may change from exempt to nonexempt status (e.g., under the law, virtual work arrangements may not be provided for nonexempt jobs).
3. Implement changes to pay, job responsibilities, related compensation programs and operations.
And with any type of rewards change, we recommend health care employers be guided by compliance with the law and in support of the HR and rewards strategies.
Finally, implementation will involve updates to HRIS and payroll systems. It may involve training for both managers and employees on the requirements of nonexempt employees, including any state laws related to overtime pay and meal breaks. And no matter the changes, employee communication strategies should recognize and address any disruption these changes may cause.
If you need assistance managing this change, Willis Towers Watson has developed an FLSA Communication & Change Toolkit including communication templates, a change management workshop and training to facilitate and sustain the change. For more information go to: https://microsite.ehr.com/flsa-toolkit/.
Nancy Romanyshyn is a consultant and project manager in Willis Tower Watson’s New York Rewards Practice. As a broad-based compensation consultant and project manager with over 17 years of experience, Nancy provides expertise in salary structure design and implementation, competitive pay analysis and market assessments, job documentation and job evaluation.
Lindsay Wiggins is a senior consultant in Willis Towers Watson's Southern California Compensation Practice. For the past 30 years, she has assisted organizations in designing HR and compensation programs that support business performance. Lindsay is responsible for managing and conducting client assignments in the development of HR and reward strategies, development of global job frameworks and salary structures, salary administration, performance management and related HR programs. In addition to her consulting role, Lindsay is a leader in the organization’s efforts in job analysis for determining FLSA status and pay equity.