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Update on DOL's Regulations for Employee Exemption

August 1, 2006
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Avoid misclassifying employees-and paying the consequences for such a mistake by John E. Lyncheski and Lisa L. Garrett
BY JOHN E. LYNCHESKI AND LISA L. GARRETT 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.

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.