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What the New DOL Overtime Rules Mean for Your Nonprofit

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The U.S. Department of Labor’s new overtime rules, which will make many more employees eligible for overtime pay under the Fair Labor Standards Act (FLSA), take effect December 1, 2016 — and nonprofits aren’t exempt. Even if an organization isn’t covered by the FLSA, its employees may be covered as individuals and thus eligible for overtime. Make no mistake: The new rules could have significant repercussions for the compensation of your white-collar workers — and, in turn, your ability to provide services.

The New Salary-level Tests for Exempt Workers

The final rule increases the salary-level threshold for white-collar exempt employees from $455 to $913 per week or $23,660 to $47,476 per year. White-collar employees now can only be exempt from overtime if their jobs meet certain tests for executive, administrative, or professional employees and they also are paid an annual salary of at least $47,476.

The new rule also increases the salary threshold for highly compensated employees (HCEs) from $100,000 per year to $134,004 per year. This threshold applies to non-executive, administrative, or professional (EAP) employees (i.e., white collar employees) whose primary duties involve performing office or non-manual work and include at least one of the duties of an EAP employee (e.g., directing the work of two or more employees). This group of employees, which includes secretaries and other office workers, is eligible for overtime so long as compensation is less than this maximum salary threshold. HCEs must receive at least the full standard salary amount — or $913 — per week on a salary or fee basis with only 10% of this amount coming from nondiscretionary bonuses and incentive payments paid at least quarterly. All such payments will count toward the total annual compensation maximum threshold. The standard salary and HCE annual compensation levels will automatically update every three years.

Why It Matters Even If You Aren’t Covered by the FLSA

The FLSA may apply to:

  1. businesses or similar entities (what’s known as enterprise coverage), or
  2. individuals (individual coverage).

Under enterprise coverage, the law applies to businesses with annual sales or business of at least $500,000. For nonprofits, this coverage applies only to activities performed for a business purpose (for example, operating a gift shop). Income from contributions, membership fees, many dues, and donations used for charitable activities don’t count toward the $500,000 threshold.

Under individual coverage, employees may be covered by the FLSA if they are engaged in interstate commerce or in the production of goods for interstate commerce — regardless of whether an employee is engaging in such activities for a business purpose. For example, an employee is covered if he makes or receives interstate phone calls, ships materials to another state, or regularly calls an out-of-state vendor and uses a credit card to buy food for a homeless shelter.

The Impact on Nonprofits

The new rule has obvious budget implications — the money to pay overtime to newly eligible employees will have to come from somewhere. Many have expressed concern that compliance with the rule will lead to the cutting of services.

In addition, according to the National Council of Nonprofits, organizations with government grants and contracts could find themselves in the position of having to cover higher labor costs than were contemplated at the time they entered into the agreements. They’ll be contractually bound to maintain services despite increased costs that might not be covered by the existing arrangements.

Some Exceptions

The new rule has some notable exceptions. The DOL has stated that teachers are exempt, as well as administrative personnel who help run higher education institutions. For example, academic counselors and advisors and intervention specialists aren’t subject to the FLSA’s overtime requirements if they are paid at least the entrance salary for teachers at their institution. However, other types of nonprofits won’t be so lucky with their white-collar employees.

The DOL has also indicated that it won’t enforce the higher salary thresholds until March 17, 2019, for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds. During the non-enforcement period, the DOL will engage in outreach and technical assistance efforts to these providers.

Four Options for Compliance with the New Rules

Nonprofits have at least four options available for complying with the new overtime rules:

  • Raising salaries. For employees who (i) meet the duties test, (ii) have salary near the new salary level of $913 per week or $47,476 per year, and (iii) regularly work overtime, an organization can increase their salaries to meet the new threshold and maintain their exempt status.
  • Paying overtime above a salary. An organization could continue to pay newly overtime-eligible employees a salary and pay overtime for any hours in excess of 40 in a week.
  • Redistributing workloads. An organization can redistribute workloads to ensure appropriate staffing levels while minimizing overtime.
  • Adjusting base pay and paying overtime. An organization could adjust an employee’s earnings to reallocate it between regular rate of pay and overtime compensation. The revised pay may be on a salaried or hourly basis, but must include overtime payment when the employee works more than 40 hours in a week.

The DOL doesn’t require or recommend any one approach.

Act Now

December 1 will be here before you know it. We can assist you in determining your best course of action for minimizing the negative repercussions associated with the new salary-level test if the FLSA applies.

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