Providers’ Labor Costs to Soar Under New Overtime Rule

The U.S. Department of Labor (DOL) has dramatically increased the number of salaried workers eligible for overtime, sending senior housing executives—and business leaders in other sectors—crunching numbers and considering how to cope with labor costs that could skyrocket.

Specifically, employers now may have to pay overtime to salaried workers making $47,476 a year ($913 a week) or less. Previously, that overtime eligibility threshold was set much lower—in fact, it was only about half as much, at $23,660 per year ($455 per week). And that had been the level since 2004.

Under the rule, overtime is defined as 1.5 times workers’ regular rates for hours they work beyond 40 within a workweek.

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The ruleissued in final form on Wednesday—will raise Americans’ wages by an estimated $12 billion over the next 10 years, according to the White House. For senior living providers, the added costs could be dire.

‘Number-Crunching Meetings’

Senior living CEOs are already hot on how best to respond to the rule, which will “no doubt be impacting senior living organizations,” Lisa McCracken, senior vice president of senior living research and development with investment bank Ziegler, told Senior Housing News. Industry executives were going into “number-crunching meetings” on Wednesday to work on the best strategies for their organizations and assess how much the change will cost, according to McCracken.

“For many organizations, this has the potential to equate to hundreds of thousands of dollars more a year in wage costs,” she said.

Staffing issues—including a shortage of health care workers and increasing wage pressures from rising minimum wage levels—are already among the top concerns of senior housing providers. When the new rule was first proposed last year, providers began preparing for a hit to their bottom line.

“This is one more pressure point with the labor issue,” McCracken said. “We know that senior living providers are already feeling the impact of the minimum wage increases and a shrinking labor pool as well as the threat of immigration reform. You could say this is additional salt on the wound of the labor issue.”

Industry groups such as Argentum, formerly the Assisted Living Federation of America (ALFA), have spoken out against the new salary threshold, noting that the rule will only compound existing labor strains.

“Argentum fully expected that the draft rule would become final,” Argentum COO Maribeth Bersani told Senior Housing News. “Our members have been preparing for how to address the new requirements for a while. Labor is one of the top three costs in senior living, along with food and energy costs, so the new rule will have a major impact on our providers.”

Providers are already being impacted by increases in minimum wage rates within individual markets, though those rules generally apply to hourly workers. With this impact, it is possible that any increase in labor costs could be passed on to the consumer in the form of rent hikes.

Cutting hours to avoid paying eligible staffers’ overtime comes with another issue if it means additional part-time workers are required. Providers may also have to begin tracking hours on newly-eligible employees, which they likely weren’t doing prior to the issuance this week.

“Labor related costs are generally the largest major expense category for seniors housing communities—ranging from 45%-50% of total expenses—and rises as the needs of the resident increases,” David Schless, president of industry group American Seniors Housing Association (ASHA), told SHN. “Providers will have to evaluate existing employee job descriptions, classifications and labor needs and develop a plan to absorb the added labor, regulatory and legal costs associated with compliance.”

Senior living organizations with home-based services could be particularly hard hit, as many providers tend to pay workers on a fee-per-visit basis, rather than hourly or on a salary classification, and are not well equipped to begin tracking hours.

An Opportunity to Evaluate

While some employers may consider cutting hours to avoid paying overtime wages, Oregon-based Anthem Memory Care is using the change to look at how it classifies workers as an organization.

With limited exposure under the new rule—only four to five positions within each of Anthem’s communities will be eligible for overtime as a result—Anthem is still using the change as an opportunity to evaluate its existing classifications.

The timing of the issuance this week coincides with Anthem’s recent acquisition of two Kansas-based communities, where some of the professional staff is classified differently and paid hourly, contrary to Anthem’s existing salary classifications for some professional staff, according to Lewis McCoy, principal at the company.

“We assumed their staff, and many of those staff members are being paid hourly,” McCoy said of the newly-added Kansas staff. “We are going to look at those existing job descriptions and our exisiting descriptions to see if it would make sense to reconsider the classification process. I don’t think the rule is a compelling enough reason to see employees differently, but it does give us an opportunity to squint our eyes and evaluate.”

It’s likely that other providers will follow suit on these evaluations, particularly those with higher exposure.

“The unfortunate byproduct of essentially doubling the income limit will be that organizations may very well look at the number of salaried versus hourly staff and explore changes to those ratios,” McCracken said. “In the end, this dramatic change can end up hurting both the organization and the employee.”

Senior living providers have until December 1, 2016—when the rule goes into effect—to comply.

Written by Amy Baxter

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