Cutting overtime compensation

By Judith A. Mackarey, Esq.

One of the most commonly misunderstood areas of employment law, both in the health care industry and elsewhere, is compliance with the Fair Labor Standards Act (FLSA) and similar state wage and hour laws. In particular, overtime laws have historically caused many employers problems—ranging from determining hours worked, calculating overtime compensation payable or classifying employees as exempt or non-exempt under the FLSA. With the advent of health care reform, many medical practices and health care institutions are seeking ways to decrease expenses.

Cutting the cost of overtime compensation can reduce expenses significantly. Before doing so, however, employers need to understand the rules regarding overtime. For example, some professional employees, such as registered nurses, who may otherwise qualify for exemption under the overtime pay requirements of the FLSA, nevertheless have traditionally been treated as non-exempt by hospitals and medical practices, and accordingly paid overtime. This is one area that is changing with the new cost-conscious health care environment. But employers must be careful when re-classifying employees from non-exempt to exempt status.

Mistakes are often made by employers when dealing with an employee’s status as exempt from overtime pay. One such issue relates to whether the employee is properly classified as exempt from the overtime requirements under the definition of an “executive, professional or administrative” employee. Another troublesome area that is getting more attention today concerns what is called the “partial day docking rule.” This rule applies to otherwise exempt employees and requires that they be paid as though they were non-exempt. The employer may unknowingly err in calling an employee exempt, but the employer usually doesn’t realize it until faced with a Department of Labor audit—one that in fact may well have been reported by a disgruntled former employee.

All employees generally must be paid overtime compensation for hours worked in excess of 40 hours in a work week, unless they meet the criteria for an exemption under the FLSA. The “white collar” classification, which exempts “executive, administrative, or professional” employees from overtime pay requirements, requires both that the employee must have the duties of an executive, professional or administrative employee, and also be paid on a salary basis. Thus, employees who are paid a salary are not automatically exempt if they do not perform exempt duties. That is, administrative, professional and executive employees, such as office managers, administrators, and registered nurses, are not exempt if they spend more than 20 percent of their time working on non-exempt duties. Because they are generally smaller employers, physicians’ offices often require employees to handle a variety of duties as part of the employee’s overall job. In so doing, however, the employer may cause the employee to lose his or her exempt status, since the employee is not devoting sufficient time to the professional or administrative responsibilities that qualify the individual for exempt status.

Similarly, with certain limited exemptions for doctors, lawyers, teachers, and computer professionals, in order to meet Department of Labor regulations, the employee must also be paid on a salary (or fee) basis to be exempt. Under these regulations, there are strict guidelines that must be adhered to so as to avoid having the employee considered non-exempt. For example, there are various deductions from compensation that are prohibited for such employees. In this regard, an employer cannot make deductions from an employee’s salary for absences caused by a lack of available work. Likewise, an employer may not deduct from an employee’s pay for absences due to jury duty, testimony as a witness or temporary military leave (although the employer is allowed to deduct from salary any amounts paid to the employee). By deducting these amounts from salary, the employer is essentially treating the employee as an hourly worker, and may result in negating the employee’s exempt status.

Another little known prohibition is the restriction against partial-day pay deductions for salaried, exempt employees. For example, an administrator wants to take a half day without pay for personal reasons. Under recent interpretations of the “partial day docking” rule, both by the Department of Labor and the courts, if an employer “docks” that employee’s pay for less than a full day, the employee is to be treated as non-exempt and therefore eligible for overtime pay. In addition, this rule applies to all employees in the same classification, even highly paid administrators or executives. Finally, the rule applies if the employer has adopted a policy permitting such a deduction when the employee’s vacation leave is exhausted. An unwitting employer can in effect convert his or her whole workforce into an hourly-based one, which entitles all the employees to be paid for all overtime worked.

At present, bills have been introduced in the House and Senate to permit employers to make such deductions from the salaries of exempt employees, but no action has been forthcoming so far. Congress did provide some relief under the Family and Medical Leave Act of 1993, which allows partial day unpaid leave without affecting the employee’s exempt status. Other than this limited exception, however, employers must be very cautious about deductions from the pay of salaried employees.

Judith A. Mackarey, Esq., is a partner in the health law firm of Wade, Goldstein, Landau, Abruzzo, Mackarey & Davidson, P.C., located in King of Prussia, Pennsylvania.