As small business owners, orthopaedic surgeons are well aware of the many state and federal laws governing business practices. Although the Fair Labor Standards Act (FLSA) is often overlooked, small and large businesses can find that violations of this act can result in substantial expenditures of time, energy, and money.
Since 2004, the number of FLSA lawsuits tied to wage-and-hour disputes has increased 77 percent, according to the National Employment Lawyers’ Association. High-profile lawsuits against major corporations have increased employee awareness of the rules.
An FLSA complaint—whether it becomes a suit or is settled out of court—is guaranteed to divert practice physicians away from seeing patients, resulting in less revenue. In addition, although the costs of defending an FLSA claim may be covered by a general liability insurance policy (usually under the Directors and Officers or Employment Practices Liability umbrellas), the costs of settlement associated with back wages and fines are almost universally excluded from insurance coverage. They must be paid by the practice.
The FLSA is administered by the federal DoL and by individual state DoL offices. Although many states simply follow the federal statutes, others have their own, usually more restrictive, rules in this area. This article focuses on the federal requirements; a practice that is compliant in these areas has taken a substantial step toward full compliance regardless of the state in which it does business.
What’s the risk?
The risk to even a small practice can be onerous. In addition to the costs associated with defending the suit, employers may be liable for the following:
- up to 2 years of unpaid back wages
- additional monetary damages assessed by the court of two times or, if the violation is found to be willful, three times the unpaid wages
- fines of up to $1,100 per violation for willful violations
- up to 6 months in jail for repeat offenders
A practice with gross annual sales of at least $500,000 is subject to the FLSA. However, the law’s provisions do not apply to practices that only employ the owners’ immediate family members.
Six steps to avoid problems
The following six steps should help orthopaedic practices avoid employee claims of wage and hour violations.
1: Determine which employees are entitled to overtime pay and pay them accordingly.
The FLSA requires that employees receive overtime pay (1.5 times the regular hourly rate) for all hours worked over 40 hours in a work week unless the employees’ job duties make them exempt from overtime provisions. Several states, including California, have even more stringent requirements.
Job duties—not job titles—are key to determining whether an employee is exempt from receiving overtime pay. The three-part test for exemption requires the following:
- The employee must be paid a set and fixed salary that is not subject to variations because of the number of hours worked or quality of work performance (the salary basis test).
- The amount of salary must meet a minimum level (the salary test).
- The employee’s duties must be primarily in the executive, administrative, or professional duties of the business (the duties test).
Any employee who does not meet all three of these tests is entitled to overtime compensation. In a medical practice, most employees would typically be classified as nonexempt and therefore eligible for overtime pay.
2: Keep accurate payroll and time worked records.
The FLSA requires employers to keep records on each employee including, but not limited to, the following:
- hour and day that the work week begins
- total hours worked each work day and each work week
- total daily or weekly straight-time earnings
- total overtime pay for the work week
- deductions from or additions to wages
- total wages paid each pay period
- date of payment and pay period covered
Remember, if the employer doesn’t keep accurate records of time worked, employees now have an app to do it themselves.
3: Create and enforce stringent policies prohibiting employees from working “off the clock” and have employees sign their time worked records.
FLSA suits commonly include complaints that employees worked through lunch breaks, came in early, or stayed late—all without receiving compensation. The practice’s employee handbook should reflect a strong commitment to paying nonexempt employees for all hours worked and prohibiting employees from working “off the clock.” An important defensive tactic is to have employees sign their time records every pay period, acknowledging that the records are accurate and that they did not work any hours not reflected in the record.
When nonexempt employees are working, they must be paid, even if they were instructed to “take a lunch break” or “not to stay late tonight.” Employees may be disciplined for failing to follow instructions, but they must be paid for time worked even if they were instructed not to work.
4: Compensate employees for short breaks and short meal periods.
The FLSA considers breaks of less than 20 minutes to be “hours worked” and therefore compensable. Additionally, meal periods of less than 30 minutes of uninterrupted time are also considered time worked. A common, yet dangerous, practice involves automatically deducting 30 minutes for lunch periods. A safer approach is to require employees to record their hours worked—either through formal recordkeeping methods such as time-keeping software or by simply writing their hours worked on a paper log. Requiring employees to sign off on their time records goes a long way to successfully defending an FLSA claim.
5: Be sure that all appropriate personnel know and understand applicable state wage and hour laws.
The DoL has numerous interactive tools geared toward small businesses. The DoL website (www.dol.gov/whd/) contains links to each state’s DoL office. Because several states have enacted wage-and-hour legislation, practice managers (and principals) should be familiar with the laws in their state.
6: When in doubt, err on the side of the employees.
Small business owners frequently have questions about how to proceed in situations in which they are uncertain about whether an employee worked through a lunch period or meets the exemption tests. Until a qualified employment attorney can weigh in on the issue, it’s safer to err on the side of the employees. The DoL never sued an employer for paying extra wages and employees will appreciate the effort to be fair.
Terri Casey, JD, serves as corporate counsel and director of human resources for Resurgens Orthopaedics in Atlanta.
Meeting the test for exempt employees
Under the Fair Labor Standards Act (FLSA), employees must receive overtime pay (1.5 times the regular hourly rate) for all hours worked in excess of 40 hours in a work week unless their job duties qualify them as “exempt” from overtime provisions. To be considered “exempt,” an employee must meet the following three tests:
The salary basis test—The employee must be paid a set sum of money for each week or shorter time period (each day, for example), regardless of whether the employee worked fewer-than-expected hours or performed a less-than-desired quality of work. The salary basis test has several exceptions that allow an employer to pay an employee a lesser sum of money; these include full-day absences due to personal reasons such as illness.
The salary test—To meet the salary test, the employee must be paid a minimum of $23,660 annually.
The duties test—The following three classifications of employees qualify for exemption for overtime payments under the duties test: executive, administrative, and professional.
- Executive employees are those whose primary duties are managing at least two employees and who have hiring and firing authority (or whose recommendations on hire/fire decisions are given substantial weight).
- Administrative professionals are those who perform office work related to the management or policies of the business and exercise independent judgment on matters of significance to the business.
- Professional employees are those whose duties require advanced types of work in a field of science or learning.
The U.S. Department of Labor expressly provides that licensed practical nurses, x-ray technicians, and other similar healthcare employees do not meet the professional employees test and are therefore subject to overtime provisions. However, registered nurses, physician assistants, and physical therapists are generally considered exempt and accordingly, no overtime wages are due them.