Legal danger zone No. 4: New overtime rules and FLSA compliance
5 steps to FLSA compliance while controlling costs
Minimizing overtime costs is an ongoing battle for many dentists and practice managers. But this year, changes to the Fair Labor Standards Act (FLSA) mean that four million additional US employees who were previously “exempt” will become eligible for overtime pay on December 1, 2016—whether employers are ready for this change or not.
As a dental employer you are facing a difficult choice, and it’s never been more important to make sure you are handling overtime pay 100% correctly.
Here are five critical to-dos for achieving full FLSA compliance with maximum cost efficiency:
1. Understand the new FLSA overtime rules.
Among other rules that govern employee compensation, the FLSA regulates which employees may be considered “exempt” from overtime pay. And in spring of 2016, the Department of Labor released an FLSA update that reset the minimum salary threshold for exemption to $47,476. That’s more than double its previous level!
In determining whether an employee qualifies as exempt, he or she must also meet a set of other (duties-related) exemption criteria designed to verify that the employee holds a position involving some authority and autonomy. Those criteria have not changed.
What about previously exempt employees who earn less than the new minimum? Unless you raise their salaries, they must be considered nonexempt and subject to the FLSA—including timekeeping requirements and overtime pay.
So, with a compliance date of December 1, 2016, if you have any previously exempt employees earning less than the new threshold, you have tough choices ahead. Should you raise the affected employees’ salaries so they can maintain exempt status? Or is it better to reclassify one or more employees as nonexempt, paying overtime when necessary?
(If you don’t have any affected employees, skip to point No. 3—you've still got a critical compliance to-do.)
2. Self-audit any exempt employees with annual salaries under $47,476.
For each affected employee, making the best decision for your practice depends on how far from the threshold the employee’s salary is, andhow much overtime they work. For employees earning $46,000 and working about five hours of overtime each week, a raise to bump them over the threshold makes a lot of sense. For those earning $30,000 and rarely working overtime, changing their status to nonexempt might be cheaper. To determine your most economical choice for each employee, try our overtime calculator.
Then there are the “balancing act” employees—those for whom you may need to change their status to nonexempt and find a way to limit their overtime. Whether you reassign duties, hire more staff, or simply decide everyone must “work smarter, not harder,” this can be a tricky proposition.
To complicate matters, some employees are proud of reaching exempt status or enjoy the added schedule flexibility, so they may not be happy about a change back to nonexempt. So if you do need to change anyone’s status, you will want to bring the issue up carefully and find a way to frame it in a positive light.
3. Self-audit all employees to ensure they are classified correctly.
Dilemmas and inconveniences aside, one good side effect of these changes is that they offer a chance to make sure everyone in your office is classified correctly, without raising the usual red “audit” flags caused by switching an employee’s status out of the blue.
Take advantage of this opportunity! Employee misclassifications in dental offices are incredibly common, and many classify at least one person “exempt” who shouldn’t be. Even if all salaries in your office are higher than $47,476 per year and no one is affected by this change, this is your chance to review your books and get everything right.
Why? Although the duties test required for exemption hasn’t changed, it’s often misapplied, especially when it comes to office managers and dental hygienists. In general, hygienists should almost never be categorized as exempt, and this new rule presents an excellent chance to fix any errors.
Among office managers and team leaders, only some meet the duties criteria. It depends on how much of their time they spend being a manager, how many employees they manage, and how much authority and autonomy they have.
Note: The salary level test is not required for dentists and any associate doctors who are exempt by default.
4. Know how overtime pay really works.
Overtime pay itself isn’t as simple as many dentists and practice managers think it is. Although it’s commonly thought of as “time and a half,” overtime pay is actually one-and-a-half times an employee’s regular rate of pay. This “regular rate” is notjust the hourly wage you pay that employee.
Instead, an employee’s regular rate of pay is their total compensation received divided by total hours worked, within each seven-day workweek. This means that paying outcome-based bonuses or commissions to nonexempt employees will affect their regular rate of pay, and therefore their overtime rate, for that week!
If you’ve been paying overtime without factoring in bonus or commission pay, it’s critical to mend your ways beforean employee notices and alerts an attorney familiar with wage and hour laws. It can even spark an audit by the IRS.
5. Find legal ways to limit overtime.
Next, keep in mind that, for nonexempt employees, all time worked must be paid. This means policies such as “Overtime hours will not be paid if not approved in advance” are downright illegal, as are most policies that try to use equal measures of so-called “comp” time as a work-around for paying overtime. Once overtime hours are worked by nonexempt employees, overtime rates must be paid.
Not only that, but no nonexempt employee may ever waive his or her legal right to overtime pay, nor work off the clock.
Don’t despair—the need to pay for time worked doesn’t leave you without options. You can and should have a legally compliant employee policy in writing that states employees must obtain authorization before working overtime. This helps to transfer some responsibility. If employees break this policy (especially willfully or repeatedly), they can expect to receive corrective actions up to and including termination. As is the case with all of your policies, this policy needs to be written by an attorney or human resources expert like those here at CEDR.
If you need to find additional ways to limit overtime worked by nonexempt employees, don’t neglect the options of removing or reassigning duties in your office, hiring other employees strategically, and improving your employee retention game plan.
Your best path around this legal danger zone: Careful choices
As you determine which employees you may need to change to nonexempt status, or who may have been misclassified in the past, your decisions are all about costs versus benefits—not just now, but down the road. Think about how much you’re likely to pay out in overtime initially, and how you can reduce that figure over time.
Think of it this way: The passing of this FLSA update presents not just a compliance challenge but a window of opportunity for fixing errors quietly. Bringing your practice into full FLSA compliance before a classification problem is found is critical to avoid audits, penalties, or expensive settlements to employee claims down the line.