1 Information I n f o r m a t i o n Bulletin B u l l e t i #1 n # 5 HR National Association of Community Health Centers, Inc HUMAN RESOURCES SERIES For more information please contact Jacqueline C. Leifer, Esq. or Grace B. Culley, Esq. or Feldesman Tucker Leifer Fidell LLP 2001 L Street N.W. Washington DC (202) Fax: (202) or Malvise A. Scott Vice President, Programs and Planning National Association of Community Health Centers, Inc Wisconsin Avenue, Suite 210 Bethesda, Maryland Telephone: (301) Fax: (301) This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is published with the understanding that the publisher is not engaged in rendering legal, financial or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Update On The Fair Labor Standards Act The Fair Labor Standards Act1 ( FLSA ) is a federal law that applies to virtually every health center 2 and establishes, among other provisions, minimum wage, overtime pay, recordkeeping, and child labor standards. Under the FLSA: Non-exempt employees are entitled to a minimum wage of at least $5.15 per hour and payment for time and one-half the employee s regular hourly rate for any hours worked over forty hours in any workweek. Exempt employees generally are salaried employees who, among other exceptions discussed below, are not entitled to overtime pay. For the first time in over fifty years, the Department of Labor ( DOL ), the federal agency charged with enforcing the FLSA, issued revised overtime regulations (which were effective August 23, 2004) clarifying exempt versus non-exempt employee classifications. DOL publicly announced that enforcement of these new overtime regulations is a top priority, and that it intends to focus enforcement on certain industries, including the healthcare industry. Accordingly, if it has not already done so: A health center should audit and, if necessary, revise payroll practices to ensure full compliance with the new regulations. Undergoing this review process also provides an excellent opportunity for health centers to review their compliance with other aspects of the FLSA not covered by the revised regulations. Cooperative Agreement Number U30CS00209 from the Health Resources and Services Administration, Bureau of Primary Health Care (HRSA/BPHC) supported this publication. Its contents are solely the responsibility of the authors and do not necessarily represent the official views of HRSA/BPHC U.S.C. 201 et seq. 2 Generally, the FLSA applies to employers engaged in interstate commerce with a business volume of $500,000 or more. 1 October 2005 National Association of Community Health Centers, Inc.
2 Human Resources Information Bulletin #5 This Information Bulletin provides an overview and analysis of the revised FLSA overtime regulations and their potential impact on health centers. This Bulletin focuses on the new regulations only and is not intended to cover other provisions of the FLSA applicable to a health center, such as recordkeeping requirements. Nor does this Bulletin discuss a health center s obligations under state wage and hour laws (which are often more restrictive than the FLSA) or situations where employees are covered by a collective bargaining agreement. Consequently, health centers with specific questions regarding the FLSA or state wage and hour laws should contact qualified legal counsel. Being paid on a salary basis means that the employee is paid a fixed salary each pay period that does not change based WHICH EMPLOYEES ARE EXEMPT FROM OVERTIME PROTECTION? To be an exempt employee and therefore not entitled to overtime pay, the employee must be paid on a salary basis in the amount of at least $455 each workweek, and fall within one of the exempt categories. Paid on a Salary Basis Being paid on a salary basis means that the employee is paid a fixed salary each pay period that does not change based on the number of hours the employee works or on the quality of the employee s work. 3 The revised regulations changed the minimum salary level for exempt employees by raising it from $250 to $455 per week. 4 As discussed in more detail below, an employer may lose the benefit of the overtime exemption by making improper deductions from the salaries of exempt employees. Exempt Categories of Employees Under the FLSA, there are six categories of exempt employees: Executive 5 Administrative 6 Learned Professional 7 Outside Salesperson 8 Computer Personnel 9 Highly Compensated. 10 The first three exemptions are commonly referred to as the whitecollar exemptions. The highlycompensated exemption is a new category added by the revised overtime regulations. The revised regulations set forth relatively narrow tests for determining whether employees fall within one of the six exemptions. The revised regulations eliminate the 20% limit on an employee performing nonexempt work that previously restricted the employer s ability to maintain a white-collar exemption. Now, in order to fall within one of the white-collar exemptions, an employee must have a primary duty of performing certain kinds of exempt work. Under the rules, on the number of hours the employee works or on the quality of the employee s work C.F.R Being paid on a salary basis cannot be applied pro-rata. In other words, part-time employees must still earn $455 per week on a salary basis to qualify for exempt status C.F.R C.F.R C.F.R C.F.R C.F.R C.F.R National Association of Community Health Centers, Inc. 2 October 2005
3 H uman Resources Information Bulletin #5 the learned-professional, computer personnel, and highly-compensated employee exemptions also adopt primary duty tests. Primary duty = the principal, main, major or most important duty that the employee performs. 11 Determining an employee s primary duty requires an examination of all of the facts in a particular case, with an emphasis on the character of the employee s job as a whole. 12 In making this determination, the revised regulations suggest that an employer consider, among other factors: The relative importance of the employee s exempt duties as compared with non-exempt duties; The amount of time spent performing exempt work; and The employee s relative freedom from direct supervision. As discussed below, title and job description alone should never guide a health center s determination as to whether an employee falls within one of the exempt categories. For example, giving an employee the title of administrative assistant or executive or computer assistant would not alone qualify an employee for exempt status. The employee s salary, job description, and the duties actually performed by the employee must carefully be assessed when determining an employee s exempt status. With the exception of outside salespersons (a category not likely to apply to health centers), each specific exemption is discussed in turn below: Executive Employees To qualify for the executive exemption, an employee must: 1. Be paid at least $455 per week on a salary basis; 2. Have a primary duty of managing the enterprise in which the employee is employed or a customarily recognized department or subdivision thereof ; 3. Customarily and regularly direct the work of two or more other employees (or the equivalent thereof, such as two halftime employees and one fulltime employee); and 4. Have the authority to hire or fire other employees or his/her suggestions and recommendations regarding hiring, firing, advancement, etc. must be given particular weight title and job description alone should never guide a health center s determination as to whether an employee falls within one of the exempt categories C.F.R Id C.F.R October 2005 National Association of Community Health Centers, Inc.
4 Human Resources Information Bulletin #5 Health center employees that are likely to fall within the executive exemption include a health center s Chief Executive Officer, the Chief Financial Officer, Outreach Department Manager and the Human Resource Manager. Managing = for purposes of the executive exemption includes, but is not limited to, activities such as: Interviewing, selecting, and training employees. Setting and adjusting employees rates of pay and hours of work. Directing the work of employees. Appraising employees productivity and efficiency for purposes of recommending promotions or other changes in employment status. Handling employee complaints and grievances. Disciplining employees. Planning and controlling the budget. Monitoring or implementing legal compliance measures. 14 Customarily recognized department, division, or subdivision = having a permanent status and continuous function not merely a collection of employees assigned from time to time to a specific job. A health center s human resources department or payroll department likely would be considered to have a permanent status and function. However, a health center s community services program might not be so considered as that program would likely be comprised of a collection of various, and perhaps interchangeable, health-center employees assigned to carry out the goals of the program for only so long as the program exists. Examples Health center employees that are likely to fall within the executive exemption include a health center s Chief Executive Officer, the Chief Financial Officer, Outreach Department Manager and the Human Resource Manager. Remember, however, that title alone should not guide a health center s determination as to whether an employee is exempt. It is always important to carefully assess whether the employee: (i) earns the required minimum salary and (ii) has a primary duty of managing, directs at least two employees, and generally has the authority to hire or fire. Administrative Employees To be exempt as an administrative employee, the employee must earn $455 per week on a salary basis and his/her primary duty must: 1. Be the performance of office or non-manual work directly related to the management or general business operations of the employer; and 2. Include the exercise of discretion and independent judgment with respect to matters of significance C.F.R National Association of Community Health Centers, Inc. 4 October 2005
5 H uman Resources Information Bulletin #5 Management or general business operations of an employer = includes, but is not limited to, work in functional areas such as: financing; budgeting; quality control; purchasing; procurement; marketing; research; human resources; public relations; and computer network. 15 Factors to consider when determining whether an employee exercises discretion and independent judgment include, but are not limited to, whether the employee: Has authority to formulate, affect, interpret, or implement management policies or operating practices. Carries out major assignments. Performs work which affects business operations to a substantial degree. Has the authority to commit the employer in matters that have significant financial impact. Has the authority to waive or deviate from established policies and procedures without prior approval. Has the authority to negotiate and bind the employer on significant matters. Is involved in planning longterm or short-term business objectives. Investigates and resolves matters of significance on behalf of management. Represents the employer in handling complaints, arbitrating disputes, or resolving grievances. 16 A common mistake made by employers is to automatically classify employees as exempt merely due to the administrative title. However, many administrative assistants, actually perform primarily clerical or secretarial work, and do not meet the duties test necessary for this exemption. A person with the title of administrative assistant should not be classified as exempt unless his/her primary duty truly is the exercise of discretion and judgment with respect to matters of significance that are related to management or general business operations. (S)he, of course, must also satisfy the salary basis test. Examples Health center employees who might qualify for the administrative exemption include Human Resource Managers and Chief Operating Officers, because those individuals formulate, interpret, and carry out major policy decisions. 17 A common mistake made by employers is to automatically classify employees as exempt merely due to the administrative title. However, many administrative assistants, actually perform primarily clerical or secretarial work, and do not meet the duties test necessary for this exemption C.F.R (b) C.F.R (b) 17 Note that it is possible for an employee to fall within one or more exempt categories. For example, a Human Resource Manager and Chief Operating Officer also could probably be categorized as Executive employees so long as they meet the proper duties test for that exemption. 5 October 2005 National Association of Community Health Centers, Inc.
6 Human Resources Information Bulletin #5 The revised regulations specifically clarify the exemption for certain categories of health care practitioners... Learned Professional Employees In order to qualify for learned-professional status, the employee must be paid $455 per week on a salary basis and his/her primary duty must: 1. Involve work requiring advanced knowledge that must be in a field of science or learning ; and 2. Involve advanced knowledge that must be customarily acquired by a prolonged course of specialized intellectual instruction. 18 Advanced knowledge = work that is intellectual in character and requires consistent exercise of discretion and judgment, as opposed to routine manual, mechanical or physical work. Field of science and learning = traditional professions of medicine, pharmacy, law, accounting, actuarial computation, and various types of physical, chemical, and biological sciences, as well as other similar professional occupations. Customarily acquired by a prolonged course of specialized intellectual instruction = a specialized academic degree (e.g., Medical Degree, Masters, Juris Doctorate) is ordinarily required as a prerequisite to entering the profession. The revised regulations specifically clarify the exemption for certain categories of health care practitioners: Examples Registered or certified medical technologists generally meet the primary duty requirements for the learned professional exemption if they: Have successfully completed three academic years of pre-professional study in an accredited college or university; and Completed a fourth year of professional course work in a school of medical technology approved by the Council of Medical Education of the American Medical Association. Registered nurses (RN) generally meet the primary duty requirements for the learned professional exemption if they are registered by the appropriate state examining Board. Licensed practical nurses (LPN) and other similar health care employees generally do not qualify as exempt learned professionals because entry into their occupations typically does require possession of a specialized degree. 19 Dental hygienists generally meet the primary duty requirements for the 18 Note that there are also Creative Professional employees and professional exemptions for certain teachers, but those categories are beyond the scope of this Bulletin as they rarely, if ever, would apply to health center employees. 19 Although not mentioned in the regulations, Medical Assistants, like LPNs, usually do not qualify for the learned professional exemption because typically, although it may vary depending on State law, a specialized degree is not required to enter that profession. National Association of Community Health Centers, Inc. 6 October 2005
7 H uman Resources Information Bulletin #5 learned professional exemption if they Have successfully completed four academic years of pre-professional and professional study in an accredited college or university approved by the Commission on Accreditation of Dental and Dental Auxiliary Educational Programs of the American Dental Association. Physician Assistants generally meet the primary duty requirements for the learned professional exemption if they: Have successfully completed four years of pre-professional and professional study, including graduation from a physician assistant program accredited by the Accreditation Review Commission on Education for the Physician Assistant, and Are certified by the National Commission on Certification of Physician Assistants. The new regulations further clarify that employees engaged in the practice of medicine qualify for the professional exemption. To be engaged in the practice of medicine generally means that the employee is a licensed, practicing physician. Specifically, the physician must: Have the requisite academic degree for the general practice of medicine; Hold a valid license or certificate permitting the practice of medicine; and Actually be engaged in the practice of medicine. Physicians generally include medical doctors, general practitioners, and specialists (including osteopathic physicians, podiatrists, dentists, and optometrists). However, residents also qualify for the exemption so long as they hold the required academic degree and are participating in a residency program. The regulations exempt both residents and physicians from meeting the salary basis test that is, as long as they meet the professional exemption test, they need not be paid $455 on a weekly basis. Computer-Related Personnel Computer-related personnel qualify for exempt status if they earn at least $455 weekly or $27.63 per hour and their primary duty: 1. Consists of the design, development, documentation, analysis, creation, testing or modification of computer systems or programs; or 2. Involves the design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or 3. Combines the above duties, the performance of which requires the same level of skills. If a health center employs an individual who is very knowledgeable about computers and often assists by fixing computer problems around the center (sometimes referred to as an IT person), the center should be very cautious about using this exemption unless Physicians generally include medical doctors, general practitioners, and specialists (including osteopathic physicians, podiatrists, dentists, and optometrists). However, residents also qualify for the exemption so long as they hold the required academic degree and are participating in a residency program. 7 October 2005 National Association of Community Health Centers, Inc.
8 H uman Resources Information Bulletin #4... an LPN manager at a health center who qualifies for the administration exemption may cover a shift for a fellow LPN and maintain his/her exempt status so long as his/her primary duty continues to meet the duties test for the administrative exemption (s)he earns the minimum salary required for the exemption and actually has a primary duty involving computer design, development, analysis, etc. of computer systems or programs, and/or design, creation or modification, etc. of computer programs or operating systems. There is a vast difference between a computer repair employee or an employee who merely fixes computer problems around the workplace and an individual whose primary duty involves the complex, specialized skills required to qualify for this exemption. Highly-Compensated Employees The new regulations add an exempt category for highly-compensated employees. To qualify for this exemption, the employee must: 1. Be compensated at least $100,000 per year, 2. Perform non-manual work, and 3. Perform any one or more of the duties required to qualify for the executive, administrative, or professional exemptions. For example, if a manager supervises two full-time employees (a required duty for the executive exemption) and earns at least $100,000 per year, that employee would qualify for the highlycompensated employee exemption. For purposes of this exemption, compensation includes commissions and non-discretionary bonuses, but does not include board, lodging, payments for medical insurance, payments for life insurance, contributions to retirement plans and the cost of other fringe benefits. The exemption may apply even if the employee works part-time so long as the employee earns a pro-rata share of $100,000. CAN AN EXEMPT EMPLOYEE ENGAGE IN NON-EXEMPT WORK WITHOUT LOSING THE EXEMPTION? An exempt employee can perform non-exempt work so long as his/her primary duty remains exempt work. For example, an LPN manager at a health center who qualifies for the administration exemption may cover a shift for a fellow LPN and maintain his/her exempt status so long as his/her primary duty continues to meet the duties test for the administrative exemption. Or, a health center CEO can answer phones for one afternoon and not lose his/her exempt status. In contrast, if in the above example, the LPN manager s primary duty evolved into covering nursing shifts, (s)he would lose his/her exempt status and therefore qualify for overtime pay. National Association of Community Health Centers, Inc. 8 October 2005
9 H uman Resources Information Bulletin #5 WHAT TYPES OF DEDUCTIONS IN PAY ARE APPROPRIATE FOR EXEMPT EMPLOYEES? An exempt employee must be paid a full salary for any week in which the employee performs work, regardless of the number of hours worked. Thus, employers may not dock (meaning, make deductions from) the pay of an exempt employee for partial-day absences. For example, a health center cannot dock an exempt employee s pay for arriving at work a few hours late to work or leaving early. 20 Health centers also may not dock an exempt employee s salary for absences caused by jury-duty and military obligations, or if the employee is required to be a witness in a trial. However, an employee need not be paid for any workweek in which he/she performs no work, e.g., when an employee is on temporary leave for military duty for the entire workweek. Impermissible deductions in an exempt employee s pay can result in the loss of the FLSA exemption during the time period in which the improper deductions were made. The regulations provide several exceptions to the general no-docking rule. Examples of permissible deductions include: Deductions from pay when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability. 21 Docking a whole-day s pay for disciplinary infractions, if the discipline is for violation of a written workplace policy that applies to all employees. 22 If an exempt health center employee violates the health center s written sexual harassment policy, the health center may take disciplinary action against that employee. If the discipline involves, for example, a three-day suspension, that exempt employee s pay may be docked. Deductions from pay as a penalty for a violation of safety rules of major significance. Safety rules of major significance encompass rules relating to the prevention of serious danger in the workplace. If an exempt health center employee grossly violates the health center s policy for disposing of needles or medical waste, that conduct likely constitutes a violation of a safety Impermissible deductions in an exempt employee s pay can result in the loss of the FLSA exemption during the time period in which the improper deductions were made. 20 If an exempt employee is chronically late to work on a regular basis (or systematically leaving work early), the health center is not without recourse. Health centers can confront tardiness and non-performance issues by addressing it through the employee s performance reviews or take appropriate disciplinary action. 21 If the employee is absent for one and one-half days, the health center can only deduct for the one full-day absence. 22 Health centers should publish in their disciplinary policies that violations can result in suspensions without pay. 9 October 2005 National Association of Community Health Centers, Inc.
10 Human Resources Information Bulletin #5... health centers do not have to pay an exempt employee any portion of their salary for full-day absences for which the employee is already being compensated under the health center s sick leave plan. If the exempt employee exhausts his/her sick leave allowance, deductions in pay for full-day absences are permissible. rule of major significance, and the health center would be warranted in docking the employee s pay. Although not required by the FLSA regulations, a health center should publish safety rules of major significance, and the consequences of a violation, in its personnel manual so as to provide employees with ample notice. Deductions from pay for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy, or practice (e.g., a written, sick leave plan) which provides compensation for loss of salary occasioned by such sickness or disability. In other words, health centers do not have to pay an exempt employee any portion of their salary for full-day absences for which the employee is already being compensated under the health center s sick leave plan. If the exempt employee exhausts his/her sick leave allowance, deductions in pay for full-day absences are permissible. Health centers are also not required to pay the full salary of an exempt employee who takes unpaid leave under the Family and Medical Leave Act In calculating deductions, health centers may use the hourly or daily equivalent of the employee s full weekly salary or any other amount that is proportional to the time missed by the employee. Deductions in pay for violations of safety rules of major significance, however, may be any amount the health center deems appropriate, e.g., a two-day suspension without pay. WHAT IF YOUR HEALTH CENTER MAKES AN IMPROPER DEDUCTION? Improper deductions from an exempt employee s pay can result in the loss of exemption for the time period during which the improper deductions were made. If a health center has an actual practice 23 of making impermissible deductions, it will lose the exemption for: The time period during which the improper deductions were made; and for Employees in the same job classifications who were working for the same managers responsible for the actual improper deductions. The financial consequences of losing the exemption for a set of employees in one job classification, 23 Factors to consider in determining whether there is an actual practice include: the number of improper deductions; the time period over which the improper deductions were made; the number and geographic location of the employees affected by the deductions and the managers responsible; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions. National Association of Community Health Centers, Inc. 10 October 2005
11 H uman Resources Information Bulletin #5 or even just one employee, can be very serious because it means that the health center is liable for overtime pay during the time in which the improper deductions were made. Nevertheless, improper deductions that are either isolated or inadvertent will not result in the loss of FLSA exemption if the health center reimburses the employee for the amount improperly deducted. Furthermore, the new regulations create an additional safe harbor for employers. Specifically, the exemption will not be lost for improper deductions if the employer has a clearly communicated policy which prohibits improper deductions. This policy must include a complaint mechanism and must require that employees be reimbursed for improper deductions. Moreover, if improper deductions were made, the employer must additionally make a good-faith commitment to comply with the FLSA in the future. DOL provides a model policy on its website that satisfies the requirements for safe harbor under the new regulations. 24 Don t forget, however, that the policy must be clearly communicated to employees. Thus, health centers should consider publishing the policy in their personnel manuals, posting it in a visible area, and training supervisors and managers how to carry out the policy. CONDUCTING AN AUDIT OF YOUR HEALTH CENTER S PAYROLL PRACTICES AND JOB DESCRIPTIONS If a health center has not already done so, NOW is the time to determine whether the center is in compliance with the new overtime regulations. To determine if any employees need to be re-classified in light of the regulatory changes: Thoroughly review all employees salaries, job descriptions, and actual job duties. Remember that it s the job description and the work the employee actually performs that matters for qualifying employees as exempt or non-exempt. For each job category, carefully assess whether the employees duties fall within one of the exempt categories or whether their education and professional status qualifies them for the learned professional exemption. A helpful way to accomplish this assessment is to create a duties checklist for each exemption, matching the checklist with the employees job description. If the health center s job descriptions are not accurate or up-to-date, this is a good opportunity to revise them so that they accurately reflect current job duties and, if applicable, generally track the duties set forth within one of the exempt categories. Before beginning this process, however, each health center should seriously consider retaining legal counsel knowledgeable in the FLSA, as well as its State s wage and hour law. CONCLUSION Considering that DOL has publicly announced its intent to aggressively enforce the new overtime regulations within the healthcare industry, health centers would be welladvised to ensure that their payroll practices are FLSA-compliant. It is important to: Pay careful attention to the revised regulations guidance on the exempt status of certain categories of health care professionals; Re-classify those professionals in the health center where appropriate and necessary; Adopt an appropriate policy which prohibits improper deductions; Communicate that policy effectively to employees; and Train managers and supervisors how to carry out the policy. 24 See 11 October 2005 National Association of Community Health Centers, Inc.
12 Human Resources Information Bulletin #5 National Association of Community Health Centers, Inc Wisconsin Avenue, Suite 210 Bethesda, MD Telephone: Fax: 301/ Website: 12 National Association of Community Health Centers, Inc. October 2005