DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
 
CMCS Informational Bulletin 
 
 
DATE:  July 3, 2014 
 
FROM:  Cindy Mann, Director 
Center for Medicaid and CHIP Services 
 
SUBJECT:    Self-Direction Program Options for Medicaid Payments in the Implementation of       
the Fair Labor Standards Act Regulation Changes 
 
 
This informational bulletin is intended to assist states in understanding Medicaid reimbursement 
options that will enable them to account for the cost of overtime and travel time that may be 
compensable as the result of the changes to the Department of Labors regulations regarding 
domestic service employment under the Fair Labor Standards Act (FLSA). 
In the Final Rule, Application of the Fair Labor Standards Act to Domestic Service, 78 FR 60454 
(Oct. 1, 2013), the Department of Labor (DOL) revised its 1975 regulations pertaining to the 
FLSAs companionship services exemption from minimum wage and overtime, and the live-in 
domestic service worker exemption from overtime.  These regulatory revisions, which will 
become effective on January 1, 2015, have implications for Medicaid home and community-
based programs, including the fact that they may contribute toward a more stable personal care 
workforce.  Notably, DOL modified the third party employment regulation, 29 C.F.R. 552.109, 
to prohibit employers, other than the individuals receiving services or their families or 
households, from claiming the companionship services exemption from minimum wage and 
overtime or the live-in domestic service employee exemption from overtime (78 FR 60480-85). 1   
The Medicaid program provides states with the ability to offer individuals receiving home and 
community based services the choice to direct their own services through several options under 
the State Medicaid Plan and waivers found at http://www.medicaid.gov/Medicaid-CHIP-
Program-Information/By-Topics/Delivery-Systems/Self-Directed-Services.html.  These models 
represent an important option for individuals and have helped Medicaid long term services and 
supports (LTSS) programs better meet the needs and preferences of individuals served.  Based 
on the law described in new DOL guidance, referenced below, it is anticipated that many states 
will determine that, for purposes of the FLSA, home care workers in self-direction programs 
have joint third party employer(s) in addition to being employed by the beneficiary.  In self-
direction models where there is a third party joint employer, the DOL regulation states that all 
work is subject to minimum wage and overtime requirements.   
 
 
                                                           
1 Descriptions of these FLSA domestic service employment exemptions can be found at : 
http://www.dol.gov/whd/homecare/factsheets.htm  Page 2- CMCS Informational Bulletin 
 
Economic Realities Test 
In order for states to know whether their self-directed2 programs are impacted by the regulatory 
changes of the FLSA, they will need to, among other things, determine whether these programs 
have a third party employer.  New DOL guidance, Administrators Interpretation No. 2014-2 
(AI),3 explains that courts apply an economic realities analysis to determine whether an entity 
is an employer for purposes of FLSA.  This economic realities test examines a number of 
factors to determine whether a worker is economically dependent on a purported employer, thus 
creating an employment relationship.  As the DOL guidance describes, the factors considered by 
the courts include, but are not limited to, whether the potential employer has the power to hire 
and fire the employees, supervise and control the employees work, determine the rate of 
payment, maintain employment records, and control where the work is performed.  The DOL 
guidance describes that no one factor is controlling, and whether a particular entity is an 
employer for FLSA purposes is based on the totality of the circumstances.   
CMS strongly encourages state officials and other potential joint employers to carefully review 
and develop a working knowledge of the DOL AI, which includes several hypothetical situations 
that illustrate when there may be a consumer as sole employer, or where there may be one or 
more third party employers.  Each state will need to seek guidance from its own legal counsel, 
with clarification from DOL, if needed, to determine where the FLSA rules apply in its Medicaid 
program.    
When the DOL regulations become effective on January 1, 2015, the third party employer 
(whether the state, another public entity, and/or a private entity), may no longer avail itself of the 
companionship services exemption from minimum wage and overtime compensation, or the live-
in domestic service employee exemption from overtime compensation.  With the implementation 
of these regulatory changes regarding the FLSA, many states will need to develop policies and 
consider programmatic changes in order to address the costs related to overtime and/or worker 
time spent traveling between worksites (i.e., individuals homes), to avoid or minimize negative 
impacts to individual budgets, and to preserve the ability of individuals to self-direct services and 
supports effectively.  
CMS offers technical assistance to states seeking to make adjustments to current or future home 
and community-based services (HCBS) or other home care programs to accommodate FLSA 
related costs in Medicaid reimbursement design. 
The Intersection of the FLSA with Medicaid Self-Direction Program Requirements 
After states and other entities evaluate their status as potential third-party employers, states will 
need to evaluate their self-directed (and other) program structures and policies to ensure 
compliance with FLSA requirements, and to continue to assure individual access to necessary 
services identified in the person-centered plan of care as required under Medicaid authorities.  
We expect that many states will incorporate the new provisions for overtime and travel in order 
to ensure that individuals are able to remain in their homes with their preferred workers.  
However, we understand that some states, due to budgetary constraints, may determine the need 
                                                           
2 The FLSA guidance references consumer-direction.  We use the terminology self-direction in this bulletin to be 
consistent with CMS regulations at 42 CFR 441.301 and 42 CFR 441.740.  Both terms hold the same meaning. 
3 The AI is available at http://www.dol.gov/whd/homecare/joint_employment.htm.  Page 3- CMCS Informational Bulletin 
 
to implement policies to limit the use of overtime or to minimize the need for compensable travel 
time between beneficiaries.   
When states impose limitations on overtime or the use of compensable travel time, they will need 
to develop strategies that continue to protect individuals access to the services and supports 
authorized in his/her person-centered plan.  For example, as identified in the 1915(c) Waiver 
Technical Guide,4 these strategies may need to include exceptions made in the event of state-
defined circumstances, such as worker shortages or when requiring additional caregivers would 
place an individual at risk of harm due to specialized needs of the individual or in an emergency 
situation.  As always, states should not only consider Medicaid requirements, but also those 
under the Americans with Disabilities Act and the Supreme Courts decision in Olmstead v. L.C., 
527 U.S. 581 (1999).  
States that establish an individual budget for each person in self-direction will need to consider 
how their programs address situations when a worker employed by the third party employer 
provides services to more than one beneficiary in a given week.  States may need to make 
adjustments to the reimbursement made to the Financial Management Services (FMS) or other 
third parties to account for the FLSA requirements.  The two major issues are: 
1.  Situations in which the cumulative hours worked for all beneficiaries result in overtime 
costs that are not attributable to any one persons use of services, but must be paid by 
the third party employer, and 
2.  Compensable worker time associated with travel between beneficiaries (e.g., from one 
persons home to another) that is owed to the worker by the third party employer, but 
which is not a direct Medicaid service attributable to any one beneficiary.  
Through long-standing Medicaid policy, overtime costs and compensable travel time costs that 
are incurred by a direct care worker cannot be considered administrative costs in the Medicaid 
program.  To be reimbursable under Medicaid, these costs must be allocated as reasonable costs 
of delivering a covered Medicaid service.  The cost of compensable travel time under FLSA may 
be considered a reasonable cost of delivering a unit of Medicaid service.  
In 1915(c) waivers, costs beyond an individuals control would not be considered part of a self-
directed budget5 and CMS strongly urges states to ensure that overtime or travel costs beyond an 
individuals control not be deducted from the individuals self-directed budget under any other 
HCBS Medicaid authority as well.  Costs that result from a provider working for multiple 
beneficiaries may be distributed across all the individuals served by a joint employer without 
being deducted from the individually controlled self-direction budget.    
 
 
                                                           
4 2008. Instructions, Technical Guide and Review Criteria for 1915(c) Home and Community-Based Waivers. Page 
252.  Retrieved from http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-
Topics/Waivers/Downloads/Technical-Guidance.pdf on June 25, 2014. 
5 2008. Instructions, Technical Guide and Review Criteria for 1915(c) Home and Community-Based Waivers.  Page 
215.  Retrieved from http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-
Topics/Waivers/Downloads/Technical-Guidance.pdf on June 25, 2014.   Page 4- CMCS Informational Bulletin 
 
Potential Reimbursement Options When Self Direction Programs Involve Direct Service 
Workers who Provide Services to More than one Individual per Week 
The following two options are examples of approaches states may use in self-direction programs 
where there is a third party joint employer and an individual beneficiary controls a service 
budget.  We note some benefits and deficits of each option that states might consider in deciding 
how to approach reimbursement design: 
Option 1. The state designs a new reimbursement option under which a financial management 
services agency would submit claims for each self-directed consumer to the Medicaid agency 
that includes: 1) the actual service costs incurred from each individual (to be deducted from 
his/her authorized self-directed budget, which could include, if authorized, overtime costs 
incurred just for that individual beneficiary); and 2) a per member/per month service fee 
negotiated with the state to cover expected overtime and travel costs across the FMS book of 
business. 
Considerations: 
a.  Individuals would still be able to control a budget for individually controllable 
costs and the rate development would be similar to that of agency-based care.    
b.  In order to keep actual costs of overtime and compensable travel time at or below 
the per member/per month fee, the FMS may have an incentive to restrict some 
individuals preference for workers.  
c.  This will also necessitate the ability to create PMPM rate setting that will be new 
to implement and review.  
Option 2. The state/program operating agency/FMS allocates the actual compensable overtime 
and travel costs that workers accrue across all of the beneficiaries that received Medicaid 
reimbursable services from the third party employer.6  Medicaid would reimburse actual 
overtime and travel costs as a cost of providing service, divided amongst beneficiaries, but the 
costs would not be deducted from individual self-directed budgets.  Under Medicaid, as noted 
above, the compensable travel and/or overtime costs cannot be billed as an administrative cost.  
Therefore, the payments for shared overtime and travel will be factored into service cost across 
all beneficiaries.  The overtime and travel time becomes a FFS reimbursement from Medicaid to 
the operating agency.     
Considerations: 
a.  A formula-based system may be easier than attempting to more discretely allocate 
shared costs to specific individuals who share a worker. 
b.  As a fee for service reimbursement from the Medicaid program to the agency, 
budgeting for the program would be less predictable.  
 
 
                                                           
6 When a third party employer (such as a state or operating agency) has multiple entities who process payroll, the 
employer will need to have a mechanism to track whether employees are receiving pay from more than one entity and 
thus possibly should be paid overtime and/or compensable travel between beneficiaries.    Page 5- CMCS Informational Bulletin 
 
Potential Options When the State Sets the Rates and Authorizes the Number of Hours or 
Other Units an Individual Receives 
The following are examples of reimbursement approaches a state Medicaid program could use 
when the state sets the rates and authorizes the number of hours or other units of service a 
beneficiary can receive.  They are based on use of an hourly or other unit reimbursement rate 
rather than an overall service budget controlled by the beneficiary. 
Option 1. The FMS or other designated entity, through an employment agreement, receives a 
unit service rate, which includes reimbursement developed to reflect both the FMS activities and 
the workers pay (including overtime and travel compensation).  This would be a flat unit rate 
across all beneficiaries.    
Considerations: 
a.  Would be consistent with other community based unit payment methods. 
b.  The FMS may restrict some beneficiary preference for workers, where the FMS 
would be at risk for high overtime costs.   
 
Option 2. The state develops tiered payment rates or modifiers to a base rate, which may include 
multiple factors such as: incremental compensable overtime, distance from town or county 
center, acuity factors, and provider availability (to account for overtime and travel if needed).  A 
state may choose to implement this as modifiers to procedure codes.  This is essentially risk 
adjustment to Option 1, above, to account for individuals where factors that would increase cost 
are present. 
Considerations: 
a.  States may already have such systems in place for shift differentials or other 
added cost. 
b.  May be administratively complex to monitor appropriate use of modifiers and to 
control costs to valid use.  The state will need to develop documentation standards 
to properly account for the additional payments.  
c.  May be administratively complex to determine which individuals qualify for each 
separate modifier, who can authorize each modifier, and develop and monitor 
these processes. 
 
Payment When the Individual is the Sole Employer 
When a beneficiary is considered a sole employer under the economic realities test as described 
in the DOL AI, s/he may have new obligations to pay minimum wage and/or overtime 
compensation due to the new rules narrowed definition of companionship services.7  If the 
services provided by the worker do not meet this new definition, the DOL guidance clarifies that 
the beneficiary must now pay minimum wage and overtime compensation for all hours worked, 
                                                           
7 Descriptions of FLSA domestic service employment exemptions can be found at: 
http://www.dol.gov/whd/homecare/factsheets.htm.  Page 6- CMCS Informational Bulletin 
 
unless the worker is live-in, in which case there may still be an overtime exemption.8  Additional 
cost considerations for overtime must meet state program rules and should be factored into the 
individuals self-directed budget.   
Currently, states have different policies on overtime.  Some allow beneficiary discretion within a 
self-directed budget, and others allow beneficiary discretion only in exceptions where needed for 
health and welfare.  The state will have to consider and account for new FLSA policies in 
determining the beneficiary budgets for self-directed care when overtime will be a factor.  A 
worker may incur overtime working for just one beneficiary who is considered the sole 
employer, and, in that situation, treatment of overtime could be rightfully allocated to the 
beneficiary incurring the cost.  It should be noted that transportation to and from the employer at 
the beginning and end of the work day (i.e., commuting time) is never required to be paid.  
*  *  *  *  * 
In conclusion, CMS reminds states that they should consult DOLs guidance and seek legal 
counsel in determining where and how FLSA impacts direct care programs operating under 
Medicaid.  CMS is available to offer technical assistance to states seeking to adjust Medicaid 
reimbursement and other program policies to appropriately support FLSA compliance in home 
and community based LTSS.  
If you have any questions in regard to this bulletin, please contact Dianne Kayala at 
Dianne.kayala@cms.hhs.gov.  
 
 
                                                           
8 The live-in domestic service employee exemption fact sheet is located at: 
http://www.dol.gov/whd/homecare/factsheets.htm.