Managing Your Practice New Overtime Law Could Be a Land Mine

Editor’s note: This article was originally published in the 2016 Summer Issue of Alabama Medicine magazine.

This is the time of year when many physician groups are evaluating their employees’ performances for the purpose of giving raises or bonuses. For most groups, the majority of their employees are not exempt from the overtime law. The Department of Labor’s (DOL) Fair Labor Standard’s Act (FLSA or Overtime Law) requires a business to pay its employees at an hourly rate of time-and-a-half if that employee worked more than 40 hours per week. The new law does not affect this group of employees. It’s those employees who are “exempt” from the overtime requirement that could trip a practice up and subject the owners to penalties by DOL and the IRS.

On May 18, 2016, the DOL released new regulations related to employees who are “exempt” from the Overtime Law. The new law is effective Dec. 1, 2016. A practice still has time to determine if the new law applies to any of its employees and what changes should be made to avoid penalties.

The new law changed the wage threshold amount from $23,660 ($455 per week) to $47,476 ($913 per week). This threshold has been frozen since 1975 but will now be adjusted every three years beginning Jan. 1, 2020. Any employee earning less than these thresholds are considered non-exempt; thus, entitled to overtime pay.

Generally, an employee is exempt from the “time-and-a-half” pay if both of these tests are met:

First: Their pay exceeds the new wage threshold amount of $47,476 ($913 per week).

Second: Their duties are primarily executive, administrative, or professional. The regulations have specific criteria that should be reviewed with your CPA or tax advisor to be sure this test is met. The duties test did not change with the new regulations.

Many office managers and nurses are paid by salary rather than an hourly rate. Oftentimes, these individuals work more than 40 hours per week. Until now, it was not important to track their time to know when their hours exceeded 40 in a workweek. Beginning Dec. 1, 2016, if any salaried employee is paid less than $47,476 per year, including the office manager and nurse, their time must be tracked and receive overtime pay. Their overtime pay must be calculated based on their salary converted to an hourly basis for a 40-hour workweek. You can still pay them on a salary basis, but you will need to be sure their hours do not exceed 40 hours in a workweek.

For example, suppose your practice manager is expected to be paid $50,000 this year, which includes a base salary of $46,000 plus a Christmas bonus of $500 and expecting a year-end performance bonus of $3,500 (if the practice has a good collection year; this was the bonus last year). Because the total salary of $50,000 exceeds $47,476, no overtime is required to be paid if the manager worked more than 40 hours per workweek.

However, suppose the practice’s collections are not so good and the performance bonus is not paid. This practice manager’s total salary of $46,500 is less than the threshold of $47,476. If this manager routinely worked more than 40 hours, he/she would be entitled to overtime pay. The problem is that the physician owner would not know until year-end how much the performance bonus will be. It is likely that the practice manager has already worked 250 hours over the 40-hour workweek. Just one extra hour per day for 50 weeks would result in 250 overtime hours. At a salary of $46,500 translated to $894 per week, divided by a 40-hour workweek results in the hourly rate of $22.35. The practice manager would be entitled to overtime pay of $5,587. Because of the changes in the law, this manager would be paid more in a bad year than in a good year simply by working an extra hour per day. (The law requires nondiscretionary bonuses to be included in the calculation of the rate per hour. Consult your tax advisor to determine if this provision affects your situation.)

There are some immediate actions needed by all practices to be sure there are no landmines after Dec. 1. Remember, the new regulation only impacts the exempt employees in your practice.

• Using last year’s W-2 wages, assess whether any of your exempt employees were paid less than the threshold of $47,476; be sure to evaluate the employee classification as exempt or non-exempt.
• Do your exempt employees generally work more than 40 hours per week? If you are not sure, this is a conversation you should have right away with your exempt employees: they should begin tracking their time, and all overtime must be pre-approved by you.
• Compute the amount of overtime pay to which they could be entitled if they continue to work more than 40 hours per week.
• Determine if the exempt employees earning less than the threshold should be given a raise to avoid having to track their hours and avoid potential penalties.
• Another consideration is the exempt employee whose overtime hours cannot be avoided. A potential solution might include reducing their salary for the amount expected to be paid by the overtime hours. This is a more difficult conversation to have with your employee and would require careful calculations by your tax advisor.
• How will hours be tracked for your salaries employees? Discuss with your tax advisor for the best method for an accurate and complete method that will meet the DOL regulation.
• Determine if you need to meet with your exempt employees to discuss any potential changes. Exempt employees who work from home will have to assist in tracking their own hours. Flexible work schedules must be reviewed as well.
• It’s important to communicate the reason for this salary change if you do not typically adjust it every year. By doing so, employees’ expectations for a raise next year and disappointment for not getting it will be avoided.

The new law also included an adjustment to the class of highly compensated employees. The threshold for this group also increased from $100,000 to $134,004. Employees whose salary or pay is above those amounts will be deemed as exempt and not entitled to overtime pay. The duties test does not apply to the highly compensated class of employees.

Avoid any landmines for your practice. Start looking at these law changes before Dec. 1.

The information in this article is not intended as tax or legal advice. Please consult your tax advisor for specific information regarding your individual situation.

Contributed by Patti G. Perdue, CPA.CITP, Jackson Thornton. Jackson Thornton is a Certified Public Accounting and Consulting Firm and an official partner with the Medical Association.