Update on DOL's regulations for employee exemption: are you in compliance with definitions of exempt and nonexempt employees? The U.S. Department of Labor is watching.

Beware, long-term care providers: The U.S. Department of Labor's (DOL) final regulations concerning the so-called "white collar" exemptions under the Fair Labor Standards Act (FLSA) became effective August 23, 2004, and DOL has been targeting long-term care as a persistent FLSA violator.

Why? At the turn of the 21st century, the DOL Wage and Hour Division conducted unprecedented audits of long-term care employers. It did so because of the number of calls it was receiving from long-term care employees complaining of alleged FLSA violations. As a result of these audits, DOL concluded that long-term care employers were failing to comply with FLSA at an alarming rate and, in particular, were misclassifying as exempt from overtime pay thousands of employees who did not meet the exemption requirements.

Along with this, DOL has a new set of regulations that it is intent on implementing to measure compliance to the fullest extent. We in long-term care, or associated with it, are in DOL's crosshairs, and the regulators are going to aggressively pursue enforcement of the final regulations.

A Little History

The final regulations, which affect millions of employees and their eligibility for overtime pay under FLSA, sought to clarify and simplify the tests that employers must use to determine which employees must be paid overtime compensation. The first two years have been far from conclusive, so whether DOL's goals will be achieved remains to be seen. Certainly the implementation of the final regulations has not been without controversy. Organized labor and employee advocates still continue to oppose the overhaul, and some members of Congress have attempted to derail the regulations.

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FLSA requires that employers pay hourly, nonexempt employees at the rate of time and one-half of their regular rate for all hours worked in excess of 40 in a defined workweek. A special FLSA provision is applicable to healthcare employers, which recognizes the need to accommodate 24/7/365 staffing. The rule permits the payment of overtime to be determined on the basis of 80 hours over a 14-day period--provided the employer also pays daily overtime for all hours worked in excess of 8 in a workday (often referred to as an "8 and 80" overtime program).

By regulation, DOL has allowed employers to "exempt" from overtime pay employees in certain higher-level positions who have guaranteed salaries. The expectation is that these employees won't (and shouldn't) "watch the clock" during the performance of their assigned tasks. These regulations are an exception to general intent and requirements of the law and are limited in scope. Among the "exemptions" relevant to the long-term care field are "executive," "administrative," "professional," and certain "computer" employees.

A three-prong test is strictly applied to determine whether an employee classification qualifies for exemption from overtime pay. The employee's terms of employment must satisfy a "salary level" test, a "salary basis" test, and a "duties" test. For an employee to be classified as exempt from the overtime pay requirement, all three tests must be satisfied. That is, the employee must be paid a weekly salary of at least $455 or its biweekly, monthly, or annual equivalent. The full salary must be "guaranteed" for any workweek in which the employee performs any work, with very limited exceptions. And the employee's duties and responsibilities must be such that they satisfy the "duties" test for the specific exemption that is sought. That is, the requirements of the job must rise to the level of the job attributes DOL regulations specify for the exemption, and the employee must exercise them with some regularity.

The consequences of misclassifying an employee as exempt are severe. The employer is obligated to calculate and pay back wages to not only that employee but potentially to all others in the same classification--for all hours worked in excess of 40 (or 8 and 80) for a minimum of two years and, more likely, for three years. That is because employers are required to record all hours worked by nonexempt employees. Misclassification of them as exempt eliminates that record--recording hours is not in keeping with exempt status--hence the severe consequences for misclassifying nonexempt employees as exempt. Moreover, the employees' claim as to the hours worked, even if embellished, will be credited because the employer will not have tracked that time.

Steps for Compliance

Long-term care employers should immediately conduct an audit to ensure proper employee classification and appropriate pay practices. The audit should begin with a review of written job descriptions, including a review by the manager directly responsible for the position in question. Keep in mind that job descriptions often do not accurately portray employees' actual job functions. If the job duties are not accurately described, the job descriptions need to be revised.

The job description should then be compared with the revised duties tests of the white-collar exemptions in the final regulations. DOL stresses that the determination of whether the job description satisfied those duties tests will be made on a case-by-case basis upon review of the actual duties performed. Titles and job descriptions will not be determinative if they do not reflect the job's realities. If the job and its description do not clearly satisfy DOL's requirements, the employer should consider beefing up the employee's responsibilities and including them in the job description to reduce the potential for liability for misclassifying the employee as exempt or having to pay the employee overtime as nonexempt.

Consultation with experienced outside labor counsel is highly recommended in conducting the review and audit. In addition to reviewing job descriptions and job duties, employers should also review handbooks, postings, and other policies and procedures to ensure conformity with appropriate definitions. Job descriptions for "administrative" and "professional" employees should specifically address the exercise of discretion and judgment in the performance of duties.

The final regulations create, among other things, a single duties test for each of the exemptions. Under the prior regulations, "long" and "short" tests existed for executive, administrative, and professional exemptions. In the case of the executive exemption, the new regulations eliminate the requirement that executive employees exercise discretion or independent judgment and devote certain percentages of time to exempt versus nonexempt work. To qualify for exemption as an executive, the employee must have management of the enterprise or a recognized subdivision as his or her primary duty, with authority to hire and fire or to effectively recommend same or other significant aspects of employment, and "supervision" of two or more employees.

The revised duties test for the administrative exemption covers employees whose primary duty is: (1) performing office or nonmanual work directly related to management or general business operations of the employer or its customers, and (2) exercising discretion and independent judgment with respect to "matters of significance." (The new term "matters of significance" is defined by DOL in the regulations, and DOL has also provided guidance on the effect of using manuals on dealing with the "exercise of discretion and judgment.")

The regulations (Section 541.203) also discuss specific occupations, including team leaders, executive assistants, and human resources managers, in the context of qualifying for the administrative exemption. Employees who primarily perform clerical-type duties or who are salaried but do not regularly exercise discretion or judgment will not qualify for exemption and must be paid overtime. As with the executive exemption, the regulations substantially eliminate the percentage restrictions on the performance of nonexempt work--so long as the primary duty remains the exempt functions of the job.

In terms of the professional exemption, DOL streamlined the "learned professional" duties tests into a single test. This test requires that the employee's primary duty be performing work that requires "advanced knowledge" in a "field of science or learning" customarily acquired through a prolonged course of specialized intellectual instruction.

The final regulations no longer list discretion and independent judgment as a "primary duty." Rather, they define the phrase "work requiring advanced knowledge" to include work that requires "the consistent exercise of discretion and judgment." Under the new test, in a major departure from the old regulations, the possession of a bachelor's degree or equivalent academic degree is no longer an absolute requirement for the exemption.

As with the administrative exemption, DOL added language (Section 541.301 [e]) that discusses the exempt status of several healthcare occupations in the context of the professional exemption, including registered or certified medical technologists, nurses, and physician's assistants. For example, DOL has indicated that registered or certified medical technologists generally satisfy the professional exemption, in that they have successfully completed at least three academic years of preprofessional study at an accredited college or university, plus a fourth year of professional course work in a school of medical technology approved by the American Medical Association's Council on Medical Education.

With respect to RNs, DOL has made it clear that they generally meet the professional exemption duties test when they are registered by a state examining board. DOL distinguishes LPNs as generally not exempt as professionals because no specialized, advanced academic degree is required for entry into that level of the profession. However, an LPN may be classified as exempt if he/she meets the executive or administrative test.

DOL has said that physician's assistants who have successfully completed four academic years of preprofessional and professional study, graduated from a physician's assistant program accredited by the Accreditation Review Commission on Education for the Physician Assistant, and been certified by the National Commission on Certification of Physician Assistants generally satisfy the professional exemption duties test.

After reviewing job functions against the revised duties tests under the final regulations, it must then be determined whether the salary level and salary basis tests are satisfied. As already indicated, the final regulations revised the threshold salary level required for exempt status to a minimum guaranteed weekly salary of $455 for most exempt executive, administrative, and professional employees. There are special provisions relating to persons having an ownership interest in the business, "highly compensated" employees making more than $100,000 per year, and exempt information technology employees who may still be paid on an hourly basis.

With respect to the salary basis prong of the tests, the employee must be paid his/her predetermined salary for any week in which he/she performs any work--no matter the quantity or quality of that work. However, DOL, in the regulations, expanded the list of exceptions in which an employer can make deductions from an exempt employee's salary without "destroying" the salary basis. The salary basis test still requires that an employee regularly receive a predetermined amount each pay period constituting all or part of the employee's compensation and not subject to reductions because of variations in the quality or quantity of the work. However, under the final regulations, an employer may now deduct for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace rules, if imposed pursuant to a written policy applicable to all employees. According to DOL, examples include violations of workplace violence, harassment, and drug and alcohol policies, as well as violations of federal and state laws. Previously, only suspensions for "major safety violations" could be deducted from the weekly salary.

Another employer-friendly provision of the regulations addresses and confirms the ability of employers to provide extra compensation, including overtime pay, to exempt employees without calling into question whether it satisfies the salary basis test.

Flex staffing without pay has always been, and remains, a problem in terms of satisfying the salary basis requirement. While employers cannot reduce salary for time off during a workweek, provisions in the regulations permit deductions for absences of more than one day or more for personal reasons. In certain cases, deductions may also be made for partial day absences, when the employee is otherwise compensated pursuant to a paid time-off bank or policy, such as sick leave, vacation, or personal time off.

In addition to conducting an audit, long-term care employers should implement a "safe harbor" policy that will offer added protection in case of improper deductions from exempt employees' salaries. Under the revised safe-harbor provision in the regulations--perhaps the most employer-friendly provision of DOL's changes--an employer that makes improper deductions from salary will lose the exemption only for the time period during which the improper deductions were made. This applies only to employees in the same job classification who worked for the same managers responsible for making the improper deductions. Under the old regulations, the safe harbor was much narrower and, for even a single violation, the exemption could be lost for all employees in the same classification company-wide.

Note, however, that for an employer to take advantage of the more generous safe harbor provisions, it must have certain specific policies and practices in place. The employer must have a clearly communicated policy that prohibits improper pay deductions, includes a complaint mechanism for reporting improper deductions, and contains a good faith commitment to comply with the regulations in the future. Also, there must be a policy that states that the employer reimburses employees for improper deductions.

Finally, long-term care employers should train their supervisors, human resources staff, and payroll personnel regarding the changes in the regulations so they are not making improper deductions from exempt employees' salaries in the first place. Experience teaches that most violations are attributable to the actions (and inactions) of frontline supervisors. Act now to ensure compliance with the regulations by putting in place the requisite policies and job descriptions. Putting off compliance could prove costly if a DOL Wage and Hour Division investigator shows up before you do to get things in order.

John E. Lyncheski and Lisa L. Garrett are attorneys for Cohen & Grigsby, PC, a full-service national law firm with offices in Pittsburgh, and Naples, Florida. Lyncheski chairs the firm's Healthcare Practice Group and is a Senior Director in the Labor & Employment Group, while Garrett is a Director in the Labor & Employment Law Group. Lyncheski is a member of the boards of directors of the American Health Lawyers Association (AHLA) and ACHCA and was recently named as ACHCA Educator of the Year. For more information, call [phone] or [phone].

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