Staffing shortages have become a serious issue for hospitals and other healthcare facilities across the country for several years now, but COVID-19 has made this issue even more apparent. With vacancies remaining open for months at a time, hospitals are left with a lack of coverage in critical areas such as the emergency room.

As a result, healthcare facilities have had to implement strategies to obtain the necessary minimum level of coverage with their existing workforce through extra shift incentive agreements, retention bonuses, shift differentials, and other methods.

While these may offer temporary solutions to the problem, healthcare facilities should proceed with caution and be cognizant of the federal Department of Labor’s (DOL) wage and hour rules, particularly the impact these arrangements may have on non-exempt employees' compensation.

Issued in conjunction with the DOL’s new 2020 final rule, Fact Sheet 56(c) sheds some light on how bonuses can impact calculating an employee’s regular rate of pay for overtime compensation.

Regular Rate of Pay

According to the DOL, “a common error in overtime pay by healthcare employers involves the failure to include bonuses, shift differentials, and other types of compensation in the regular rate of pay.” The main highlights for healthcare facilities include:

• Non-exempt employees must be paid at least time-and-one-half their “regular rate” of pay for all hours worked over 40 in a workweek. The “regular rate” includes an employee’s hourly rate plus the value of other types of compensation such as bonuses and shift differentials.

• Bonuses fall into two categories: discretionary or non-discretionary.

• Discretionary bonuses are excluded from the “regular rate” when calculating overtime compensation. To qualify, a bonus must meet all 3 requirements:

• The employer has sole discretion, until at or near the end of the period corresponding to the bonus to determine (1) whether to pay the bonus and (2) the amount of the bonus, and (3) the bonus payment is not made according to any prior contract, agreement, or promise causing an employee to expect the bonus payments on a regular basis.

• Non-discretionary bonuses must be included in the regular rate when calculating overtime compensation. If the bonus does not meet the criteria above, it is likely a non-discretionary bonus (because employees know about and expect the bonus) unless it falls under another statutory exclusion.

Additional Compensation Types Excludable from the Regular Rate

Compensation paid as gifts and payments, like gifts made around holidays or other special occasions as a reward for service, can be excluded from the regular rate as long as the amount paid is not measured by or dependent on hours worked, production, or efficiency.

• Longevity bonuses may qualify as gifts when: (1) provided as a reward for service/tenure (rather than hours worked, production, or efficiency) and (2) are not paid pursuant to a collective bargaining agreement, employer policy, or city ordinance.

• Sign-on bonuses with or without clawback provisions may qualify as gifts unless paid pursuant to a collective bargaining agreement, employer policy, or city ordinance (with a clawback provision).

Extra compensation paid at a “premium rate” under various arrangements may also be excluded from the regular rate of pay when calculating overtime compensation. Fact Sheet 56A’s section on “Premium Payments for Non-FLSA Overtime” serves as a good starting point for qualifying arrangements.

Bottom Line

The DOL’s wage and hour rules are complex and often leave people more confused than before they started doing research, especially when a certain arrangement does not neatly fit into the parameters or examples provided. Healthcare facilities should keep this information in mind going forward and consult an attorney when necessary. With compensation arrangements increasing in both variety and frequency, the DOL is likely to keep a watchful eye to ensure compliance.