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Labor and Employment Alert: Wage and hour compliance necessary to avoid litigation commonplace in healthcare industry

In 2010, the U.S. Department of Labor (DOL) announced that it was launching a mass wage and hour probe of the broadly-defined “healthcare” industry. The “healthcare” industry was not, however, limited to large hospital systems or nursing homes. It includes independent physician practices, as well as home health agencies.

The DOL’s focus on the healthcare industry has steadily increased since 2010. The DOL filed a lawsuit in December 2011 against an Ohio-based home health services agency seeking more than $84,000 in back wages and liquidated damages for 10 workers due to employee misclassification. 

In addition to increased government enforcement, the healthcare industry has become an attractive target for private wage and hour litigants, in part because employee pay is generally higher in healthcare than other industries. Wage and hour litigation continued in 2011 to out-pace other types of workplace class actions and surged by more than 325 percent since the early 2000s. See Seyfarth Shaw LLP’s Annual Workplace Class Action Litigation Report: 2012 Edition. This trend is expected to continue in 2012 making wage and hour compliance essential for an employer to avoid becoming a defendant in the current surge of payroll practice litigation.

Wage and hour law

The DOL administers and enforces the Fair Labor Standards Act (FLSA), the federal law that regulates the payment of minimum wage and overtime to non-exempt employees. In addition to the FLSA, many states have enacted statutes that provide greater protection to workers. Accordingly, employers must be aware of both federal and state overtime and minimum wage requirements.

The FLSA provides various exemptions to the general rule that employers must pay employees overtime rates of time and one-half the regular rate of pay for all hours worked in excess of 40 hours per workweek. Pursuant to the FLSA, employees are generally exempt from overtime laws if they fall into one of the following “white-collar worker” exemptions:

  • Executive
  • Administrative
  • Professional
  • Computer
  • Outside sales

The FLSA regulations set forth three specific requirements for determining whether employees qualify for a white-collar worker exemption. The first criterion is a “salary-level” test, which requires an employer to pay an exempt employee a minimum of $455 per week. The second criterion, the “salary basis” test, requires that an exempt employee receive his or her full salary for any week in which he or she performs work, without reduction because of variations in the quality or quantity of work performed. The final criterion is a “duties” test, which requires that the job must have as its primary duty the job functions described under one of the exemptions (usually related to management, supervision, or authority).

Employees who do not meet the exemption classifications are deemed “non-exempt” and must be properly paid for all hours worked in a workweek. The failure to properly count and compensate an employee for all hours worked will likely result in an overtime violation because employers have not fully accounted for hours worked in excess of 40 hours during the workweek.

Common wage and hour violations

Wage and hour violations that plague many employers also occur in the healthcare industry, such as: misclassification of workers (as exempt from overtime pay), “off-the-clock” work, improper wage deductions, and failure to properly calculate overtime pay.

  • Misclassification:
    Employees alleging misclassification are usually challenging an employer’s decision to classify them as “exempt” and assert that they were improperly denied overtime compensation due to such misclassification. When the FLSA was first enacted, an employer could fairly easily distinguish who in its workforce was a “manager” and who was a “worker,” such that it was clear which employees were exempt from the overtime regulations. However, as the economy has shifted from manufacturing to service industries and a more efficient economy eliminated multiple levels of middle management, the lines between exempt and non-exempt employees have been blurred.

    Traditional misclassification of workers is a frequent problem in the healthcare industry and employers must avoid making classification decisions based on “exempt-sounding” job titles, such as coordinator, administrator, analyst, or specialist. Likewise, employers routinely misapply the learned professional exemption to questionable categories of workers, such as nurses and respiratory therapists. Moreover, some healthcare employees are misclassified under an executive exemption when their primary duties are really patient care, not management. Accordingly, proper determination of exempt or non-exempt status requires a close examination of each employee’s job duties measured against applicable regulations and case law.

    Additionally, the healthcare industry is susceptible to misclassification claims based on an employer’s designation of an employee as an “independent contractor” rather than an “employee.” See McDonald Hopkins LLC, Worker Classification is Back in the IRS Spotlight, March 2010.

  • Calculation of “hours worked”:
    For years, among the most publicized and costly areas of wage and hour litigation for healthcare employers has concerned claims for failure to pay employees for off-schedule hours worked. In general, “hours worked” includes all time an employee must be on duty, on the employer premises or at any other prescribed place of work. Also included is any additional time the employee is “suffered” or “permitted” to work, even if the employer does not specifically authorize the work. If the employer knows or has reason to believe that the employee is continuing to work, the time is considered hours worked and must be compensated. For example, nurses who stay beyond their scheduled shift to work on patients’ charts (or take such work home to complete) must be compensated for the additional time worked, even if that additional time was not formally authorized.

    Likewise, the employee who works through lunch due to a patient emergency must be compensated for the work performed even though it occurred during a designated meal period. “Bona fide” meal or break periods that are more than 20 minutes do not count towards hours worked under the FLSA, provided employees actually take the break and are completely relieved from duty during that time. Such breaks do have to be counted to the extent that the meal period is used predominantly for the benefit of the employer. Accordingly, employers choosing to automatically deduct 30 minutes per shift must ensure that the employees are actually receiving the full meal break or the employer may be liable for a FLSA violation.

    Another common “hours worked” issue concerns travel time, which often arises with healthcare employees who are required to travel to different facilities within the same network during the workday or workweek. While ordinary travel to and from work is not compensable, time spent by an employee in travel as part of his or her principal activity must be considered hours worked. For example, if a licensed practical nurse who works at an assisted living facility, which has a sister facility 20 miles away, is asked to fill in for someone at the sister facility after she has begun her shift at her normal work site, her travel time must be paid.

  • Calculation of overtime:
  • A common error made by healthcare employers is the failure to include non-discretionary bonuses in calculating an employee’s regular rate of pay for purposes of calculating overtime. The FLSA requires that non-discretionary bonuses, such as bonuses announced to employees to encourage attendance or to sign-up for additional shifts, must be included in the regular rate of pay. Discretionary bonuses, however, that are determined at the sole discretion of the employer and are not made pursuant to any prior contract, agreement, policy, or promise which caused the employee to expect such payments regularly, may be properly excluded from the regular rate of pay.

    Another potentially costly error may occur in an employer’s mathematical calculation of employee hours. Though the FLSA permits an employer to round employee time to the nearest quarter hour, a violation of minimum wage and overtime provisions may occur if the rounding is done in the employer’s favor. Rounding is acceptable where the practices average out so that the employees are fully compensated for all the time actually worked. Thus, employee time from one to seven minutes of the quarter hour may be rounded down, and not counted as hours worked, but employee time from eight to 14 minutes must be rounded up and counted as a quarter hour of work time.
    Another increasingly litigated topic concerns the aggregation of hours worked at separate facilities for purposes of calculating overtime. The DOL may view time worked at two or three hospitals as time that should be aggregated if it believes that the hospitals function as “joint employers.” The DOL generally employs a fact-intensive approach to determining whether to aggregate work hours that primarily focuses on employee control issues.

Conclusion

The potential risks to employers for improper payroll practices are severe, and given the scope of the damages, a class action suit on FLSA grounds could be crippling for many employers. To ensure compliance with both federal and state wage and hour laws, particularly as wage and hour lawsuits continue to be an attractive target for both governmental audit and private litigation, employers should conduct periodic audits of employee classifications, review internal payroll practices and educate managers about wage and hour policies. Employers are best served by proactive planning to determine their wage and hour vulnerabilities and prepare strategies to avert future litigation.

McDonald Hopkins counsels and advocates on behalf of clients in labor and employment matters. If you have any questions regarding wage and hour compliance under the FLSA or state laws, please contact:

James J. Boutrous II
248.220.1355
jboutrous@mcdonaldhopkins.com

Nicole J. Gray
216.348.5418
ngray@mcdonaldhopkins.com

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© 2012 McDonald Hopkins LLC All Rights Reserved. This Alert is designed to provide current information for our clients, friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before using this discussion as a basis for a specific action.