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 DOL Issues Final Rule on Salary Exemption Levels

With a final ruling in place, providers are now in a position to reassess staff positions and how to compensate them.

 

Brooke NixonA long-awaited Final Rule from the U.S. Department of Labor (DOL) raises the minimum salary level for certain workers to $35,568, or $684 per week. This rule, which will go into effect Jan. 1, 2020, affects nearly every skilled nursing, assisted living, and post-acute care facility in the country.

“For the first time in over 15 years, America’s workers will have an update to overtime regulations that will put overtime pay into the pockets of more than a million working Americans,” said Acting U.S. Secretary of Labor Patrick Pizzella.

Looking back a few years to the end of 2016, business owners and human resources professionals were scrambling to comply with DOL amendments to the Fair Labor Standards Act (FLSA). In 2014, President Barack Obama had directed DOL to update and modernize the overtime regulations, and subsequently, DOL issued its final rule on May 18, 2016, raising the minimum salary level to $913 per week, or $47,476 annually. The 2016 Rule was set to go into effect Dec. 1, 2016.

Duties Exemptions from Overtime

Although the FLSA requires overtime pay for most employees, some are exempt from those requirements. To be exempt, an employee must meet both the duties test (workers perform certain duties detailed in the FLSA) and the salaries test (workers are paid on a salary basis at a certain amount per week). Under the duties test, employees must perform certain duties before they can be exempt under the FLSA.

The most commonly used exemptions are the executive exemption, the professional exemption, and the administrative exemption. All three of these exemptions are commonly used in long term and post-acute care (LT/PAC) facilities.

For example, administrators of long term care facilities will meet the duties test for an executive exemption if their duty is managing the facility, if they regularly supervise two or more full-time employees (or part-time equivalents), and have the authority to hire and fire employees (or their recommendations on hiring and firing carry significant weight).

Exemptions in Care Settings

The professional exemption is often used in the LT/PAC care field for certain nurses, doctors, and other professionals in these facilities. Finally, individuals working in LT/PAC facilities may meet the duties test for an administrative exemption if their primary duties are the performance of office or nonmanual work directly related to the management of the facility and they regularly exercise discretion and independent judgment on matters of significance. This exemption may be used in LT/PAC settings by the human resources or financial director. 

However, the 2016 Rule did not alter the duties test. Instead, it primarily focused on updating the salary levels necessary for executive, administrative, and professional (EAP) employees to be considered exempt.

Under the rule prior to 2016, and the rule that is currently in effect today, the minimum salary level for an EAP employee to be eligible for the exemption to overtime is set at $455 per week, or $23,660 annually.

The 2016 Final Rule

Businesses everywhere spent the latter part of 2016 seeking advice from attorneys and accountants and reviewing employee pay rates, exempt versus nonexempt positions, and timekeeping policies. Critics complained that the 2016 Rule set the minimum salary level at an unreasonably high rate, thereby excluding millions of employees from being eligible for an exemption even though they perform exempt job duties.

As a result, many businesses would be forced to change the pay structure of their employees and possibly institute layoffs due to budget concerns. In response, a coalition of business groups and numerous states brought suit against DOL, challenging the 2016 Rule and requesting injunctive relief.

On Nov. 22, 2016, mere days before the Dec. 1 effective date, the U.S. District Court for the Eastern District of Texas issued a nationwide injunction blocking the 2016 Rule from going into effect. The court concluded the plaintiffs demonstrated a likelihood that DOL had exceeded its rule-making authority. The preliminary injunction only temporarily blocked the rule until the court could make a final decision.

For most of 2017, businesses were in limbo. The 2016 Rule had not gone into effect, but some business owners had already made significant changes to their business practices and employee pay rates. Other businesses decided to wait it out and see how the court would ultimately rule. On Aug. 31, 2017, the Texas federal court granted summary judgment for the plaintiffs challenging the rule. This decision effectively invalidated the 2016 Rule in its entirety.

The 2019 Final Rule

Fast-forward to March 7, 2019, when DOL issued a new proposed rule increasing the minimum salary level and, after a comment period, issued the Final Rule Sept. 24, 2019. For an employee to be considered exempt under the FLSA, and not be paid overtime, the individual must meet the traditional duties test detailed above (which has remained unchanged) and be paid on a salary basis of at least $35,568 per year, or $684 per week. 

Accordingly, any worker in a LT/PAC facility who is currently considered exempt from overtime but who makes less than $35,568 per year must be evaluated. After Jan. 1, 2020, EAP employees working in such a facility must be paid overtime unless they meet the duties test and be paid the minimum salary.

The highly compensated worker level was increased from $100,000 to $107,432. The Final Rule allows employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level. Unlike the proposed rule, the Final Rule provides that DOL will update the thresholds “more regularly in the future” but did not specify that changes would be made every four years.

DOL’s stated goal is to enable employees who have been classified as exempt to receive a pay raise (at least to the new $35,568 level) or to be reclassified as nonexempt so they can receive overtime pay. According to DOL, this Final Rule should impact approximately 1.3 million workers in the United States.
Employers now must make a decision to either reclassify these employees as nonexempt or raise their salaries to the new exemption rate.

The time to address this matter is now. These changes are sure to inspire a fresh round of FLSA compliance lawsuits in 2020 for employers that do not address or fail to address them effectively.
 
Potential Steps to Consider
  • Identify nonexempt positions—those employees making less than $35,568.
  • Identify which of those positions to increase to the new exempt salary level.
  • For those employees required to be reclassified as nonexempt, determine whether changes should be made to their job duties or work schedule to limit overtime hours.
  • Calculate a new hourly rate for classified employees that will closely approximate current total annual salary compensation for all hours worked to limit the impact on the labor budget.
  • Consider alternate employment structures, such as salaried nonexempt employment.    
  • Draft comprehensive communication and training plans to help reduce the projected costs associated with the transition.
  • Train new hourly employees on timekeeping requirements and on what exactly constitutes hours worked that are due payment. For example, time spent working on mobile devices at home must be tracked and factored into the overtime analysis.
Brooke Nixon is a partner at Constangy, Brooks, Smith & Prophete. She can be reached at bnixon@constangy.com.
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