Judge's overtime ruling creates uncertainty for hospitals

Topics: Finance, Providers, Hospitals, Politics and Policy, Federal Government, Regulatory

By: Rachel Schulze, senior staff writer

A new federal rule that would affect which staffers are eligible for overtime pay has created challenging staffing decisions for some hospitals, and experts say a recent court ruling temporarily halting the law's implementation has added an additional layer of uncertainty.

What the rule would do

The Fair Labor Standards Act (FLSA) requires employers to pay overtime, at a rate of at least 1.5 times an employee's pay rate, when an employee works more than 40 hours a week. Salaried employees do not receive the protection if they mainly perform certain types of executive, professional, or administrative duties and are paid above a certain salary threshold.

Under existing regulations, those employees were exempt from overtime pay protections if their annual salary was at least $23,660, or $455 weekly. The new rule, issued by the Department of Labor (DOL), would move that floor up to an annual salary of at least $47,476, or $913 weekly. The new rule also would call for the salary threshold to be updated every three years.

The rule had been scheduled to take effect Dec. 1. However, Judge Amos Mazzant of the Eastern District of Texas on Nov. 22 issued the preliminary injunction against the rule in response to a case that consolidated separate lawsuits from a coalition of business groups and about two dozen states. The challengers have alleged that DOL had overstepped its authority.

The injunction temporarily suspends the law's implementation until the judge rules on the merits of the case.

Who would be affected

Overtime rules under FLSA apply to many workers across the economy, including at hospitals and other institutions "primarily engaged in the care of the sick, the aged, or the mentally ill," including assisted living facilities, skilled nursing facilities, and care facilities for individuals with mental illnesses and developmental disabilities. 

DOL estimates that the new rule would, if implemented, affect about 200,000 hospital workers and 300,000 non-hospital health care workers. According to Modern Healthcare, the rule is most likely to affect medical and physical therapist assistants, medical and pharmacy technicians, nurses, and paramedics—health care professionals whose median annual wages range from $25,710 to $47,010. Henry Perlowski, a partner in litigation and leader in employment practice at the law firm Arnall Golden Gregory, told American Health Line that the rule also would affect hospitals' lower-level administrative and supervisory positions such as accounting and finance employees, human resources employees, and  IT staff who are not in higher management roles.

Experts also say the rule's effects would vary geographically.

"I wouldn't think that this problem would be significant in metropolitan areas where wages may be higher," Perlowski said.

Alan Benson, an assistant professor in the Department of Work & Organizations at the University of Minnesota's Carlson School of Management, agreed, telling American Health Line, "I think major urban hospitals might have relatively few people who would be affected by the salary test, whereas I think in rural areas they're going to face these changes head-up."

Further, Perlowski noted that the rural hospitals that most likely would be affected by the rule also "are the hospitals that in large part have been struggling … to stay open."

Complying with the rule

To comply with the rule—if it takes effect—employers would need to take stock of their financial situation. Perlowski said that cost is an "immediate concern" that hospitals and other employers face in implementing the rule. He added hospitals are "really having to do a cost analysis and a management analysis" to figure out how to comply with the potential implementation of the rule.

Across the country, many employers have struggled to determine how they could accommodate the possible rule change, Benson told American Health Line.

According to experts, there are several courses of actions employers could take—or may have taken already—to come into compliance.  

Raise employees' salaries

When it comes to employees making a salary near the new threshold, the easiest course of action for employers might be to raise those employees' salaries, which Benson notes was one of the purposes behind the rule.

However, while employees could see their salaries increase, Benson added that employers might offset those increases with benefit cuts.

In addition, employees might see additional responsibilities accompany any pay raise, Jonathan Kozak, an employment litigator and principal in the White Plains, N.Y., office of Jackson Lewis, told American Health Line.

Keep pay at current levels and pay workers overtime

But raising employees' salaries might not work across pay levels or across institutions. "I think one of the real changes facing hospitals is going to be that a lot of the people who are affected might not even be at the line," Benson said.

In those cases, employers would have to pay overtime to employees whose annual salary would fall below $47,476.

Restructure workloads or shifts

Meanwhile, Kozak noted that to prevent employees who would become eligible for overtime pay from working more than 40 hours per week, "hospitals may push additional work up to those in positions remaining exempt" from overtime pay.

However, Perlowski said that it could be hard for affected hospitals to control hours for certain positions. He cited nurse supervisors as an example, explaining that if nurse supervisors work 12-hour shifts and work three days one week but four days another week, they will wind up working eight hours of overtime in the latter week.

Further, Perlowski said, "What happens if something acute comes in at the very end of the shift? Can somebody really just leave? Issues will arise."

Adjust the number of employees

In some cases, Perlowski suggested that it might be less costly for employers to hire additional employees—and have them work fewer hours—to avoid having to pay the overtime rate.

Or, Perlowski said employers could take the opposite approach and reduce their labor force to offset the growth in labor costs. He said, "I think what you [would] wind up seeing is some belt tightening and reductions in force to offset those increased labor costs." He added, "Any non-revenue-generating position [would] be, I would think, the first target."

Dealing with uncertainty

The judge's injunction has resurrected a lot of the uncertainty employers faced when the rule was proposed, Benson said.

Kerry Chou, a senior practice leader at WorldatWork, a human resources association, told American Health Line that employers currently are in varying stages of implementation. He cited an October survey of organizations across various industries that found that 37 percent of employers said they would implement changes to comply with the rule before Dec. 1, 46 percent said they would implement changes for the full pay period that included Dec. 1, and 17 percent said they would implement changes effective Dec. 1.

"I think for many employers, the news [of the injunction] is a double-edged sword," Chou said. "On the one hand, while they may be happy that the rule has been delayed, many employers have already communicated the changes to affected employees and have loaded the changes in their payroll systems." He said reversing course at this point could present an "administrative challenge" as well as "result in significant frustration for employees." He predicted that some employers might implement the rule despite the injunction.