The Department of Labor (DOL) is about to release a final rule that will require overtime pay for millions of salaried employees who currently can be required to work long hours for no more pay than they receive for a 40-hour week. This will give them either more money or more time with their families or for themselves.

But the overtime rule naturally makes some employers unhappy, since they can currently get 60 hours of work from many employees for only 40 hours of pay. Even some non-profit human service providers, many of which are not even covered by the Fair Labor Standards Act (FLSA), oppose DOL’s updated rule.

An association of community providers serving people with intellectual and developmental disabilities (the American Network of Community Options and Resources, or ANCOR) commissioned a “Cost Impact Scoring Memo” by a company called Avalere to estimate the impact of the proposed overtime rule on its member agencies. Neither the survey questions, the actual responses, nor the response rate were included in Avalere’s report. But it is clear that the cost estimates are deeply flawed.

Problems with Avalere’s assumptions:

1. “Majority of those full-time salaried employees (95 percent or ~230,000) are currently exempt from the overtime pay.”

It is unlikely that even half of the employees at ANCOR earning less than $50,000 a year are bona fide professionals, administrators, or executives. No basis is given for this assumption. Moreover, an examination of jobs offered in this salary range by employers that have officials on ANCOR’s board of directors shows that professional employees such as social workers with Master’s degrees or psychologists are generally paid more than $50,000, while job descriptions for employees paid less than $35,000 do not indicate the kind of independent decision-making required for exempt status and do not require a specialized course of study beyond a Baccalaureate degree.

The discrepancy apparently derives from ANCOR’s practice of hiring hourly “direct support professionals,” paying them less than a $23,660 salary, and routinely converting them to salaried positions paying more than the current threshold salary as part of a career ladder, and treating them as exempt even though their educational background remains insufficient to qualify them as exempt professionals. In its comment letter on the NPRM, ANCOR claims, “Salaried workers are recognized by society as professionals, a recognition that Congress shared in creating the exemptions at issue in this rule. Many workers see a salary, rather than hourly wages, as the mark of a professional career as opposed to a job. In our field, providers have strived to “professionalize” direct care work, creating a career path and encouraging entry-level, hourly DSPs to progress in their careers to mid-level management, program manager, and front-line supervisor positions.”

Calling a low-level care worker a “professional” is not enough to convert her into a bona fide professional for purposes of the overtime exemption. Nor does paying her more than $23,660 make her exempt.

2. “We assumed the majority (90 percent or ~139,000) work overtime; 35 employees per provider. This will be the number of employees directly affected by the DOL proposed rule.”

Surveys by the Bureau of Labor Statistics show that a minority of salaried workers currently work more than 40 hours each week.

3. “An ANCOR survey indicates that 34 percent of providers might increase salaries to meet the new exemption threshold and 76 percent of providers might turn the currently exempt employees into hourly workers to continue employee exemption status.”

Besides the fact that the results exceed 100 percent of the providers, what employers “might” do is only speculation. But assume Avalere is right that 76 percent of providers will “turn the currently exempt employees into hourly workers.” What follows necessarily is a much lower cost estimate. To quote Avalere’s memo, “The latter strategy might prove to be cost-neutral or possibly introduce savings due to lower or no benefits offered to hourly employees.” Far from raising costs, it might lower costs for three-quarters of providers. Assuming that 76 percent of providers keep costs from rising, the impact will come from the remaining 24 percent.

Even if we accept the flawed assumptions regarding the number of exempt employees affected and the number of overtime hours they work, the cost will be only one-quarter Avalere’s estimate. But Avalere’s estimate of how many employees will be affected is probably at least twice as high as it should be because it misidentifies the affected employees. Their cost estimate would therefore be at least 8 times too high.

4. Avalere “assumed weekly overtime worked by an exempt employee to be 5 hours. Surveyed providers reported an average of 14 percent of hours worked by exempt employees in excess of the 40-hour week.”

Because Avalere misidentifies the exempt employees, it cannot determine accurately how much overtime they worked.

5. It is interesting to note that in ANCOR’s comment on the NPRM it stated that operating costs would rise an average of 3 percent because of the rule. Yet Avalere says it “assumed a 10 percent reduction in the number of individuals who will be able to access services from the community providers.” It’s hard to imagine how this makes sense.

Because ANCOR’s survey found that only “21 percent of providers might reduce services in response to DOL’s rule,” it suggests they would have to reduce their services by about half to attain a 10 percent overall reduction in services. There is no reasonable scenario in which the rule’s overtime requirements would reduce a provider’s services by 50 percent. These numbers are one more indication of the unreliability of Avalere’s analysis.

FLSA Coverage

In an earlier blog post I opined that “most of the non-profit entities in ANCOR are probably not enterprises covered by the Fair Labor Standards Act.” After discussions with ANCOR officials, I believe that was an overstatement, though even ANCOR’s legal counsel does not claim that all non-providers will be covered. I am not a community mental health services expert, but in light of Probert v. Family Centered Services of Alaska, it appears that many residential care facilities that have considered themselves to be FLSA-covered institutions are not, in fact, covered and will be little impacted by the new DOL rule.

For the most part, non-profit 501(c)(3) charitable organizations providing human services to disabled individuals are not subject to the FLSA unless they are in substantial competition with private for-profit businesses because they are not commercial business enterprises with $500,000 of business revenue.1 One exception is institutions “primarily engaged in providing care,” to groups including (in the unfortunate words of the FLSA) “the sick, the aged, the mentally ill or defective.”

The court in Probert interpreted this language to exclude residential homes unless they provide treatment, much as a hospital does. Residents of homes for emotionally disabled clients who “received most of their medical and psychological treatment from medical and mental health professionals outside the Homes” were not covered by the FLSA. It made no difference that the homes received Medicaid funding or that the severely emotionally disabled clients had each received a diagnosis of mental disorder. It remains to be seen to what extent other courts will follow this decision, but it is noteworthy that the U.S. Court of Appeals for the Ninth Circuit is perhaps the most liberal federal appeals court.

Without a provider-by-provider examination of the services provided, it is difficult to determine how many community service providers will be in substantial competition with for-profit businesses and how many provide the extent of in-house treatment that will qualify under Probert to make them a covered institution. But even if we assume, for the sake of argument, as Avalere does, that all 4000 community service providers are covered enterprises, Avalere’s cost impact analysis is still clearly flawed and the impact is far less than claimed.

Having said that, it is clear that labor costs will rise for some of ANCOR’s members, as they should. Because they are so reliant on Medicaid funding, it is imperative that Congress and the administration take these increased costs into account when setting Medicaid reimbursement rates. There is no reason that sound labor policy should impact the provision of services to the disabled, other than to ensure that the employees who deliver those services are fairly paid and have a healthy work-life balance.

1. The FLSA’s overtime rules can also apply on the basis of individual coverage, affecting a small minority of employees engaged in interstate commerce.