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 not-for-profit organizations are not exempt. Even if an organization is not 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. The HCE threshold is used to evaluate the fairness of contributions to an organization’s retirement plan. HCEs must receive at least the full standard salary amount (or $913) per week on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments. But such payments will count toward the total annual compensation. The standard salary and HCE annual compensation levels will automatically update every three years.
Why it Matters Even if You Are Not Covered by the FLSA
The FLSA may apply to 1) businesses or similar entities (what is 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 not-for-profit organizations, 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 do not 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.
Even if your organization falls under the threshold, you also need to consider whether state law requires you to pay overtime.
The Impact on Not-For-Profit Organizations
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 will be contractually bound to maintain services despite increased costs that might not be covered by the existing arrangements.
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’re paid at least the entrance salary for teachers at their institution. However, other types of not-for-profit organizations will not be so lucky with their white-collar employees.
The DOL has also indicated that it will not 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 nonenforcement period, the DOL will engage in outreach and technical assistance efforts to these providers.
December 1 will be here before you know it. Consult with your financial advisor to determine your best course of action for minimizing the negative repercussions associated with the new salary-level test if the FLSA applies.
Sidebar: Four Options for Compliance with the New Rules
Not-for-profit organizations have several options available for complying with the new overtime rules. Your options include:
- Raising Salaries
For employees who meet the duties test, have salary near the new salary level of $913 per week or $47,476 per year and regularly work overtime, you can increase their salaries to meet the new threshold and maintain their exempt status.
- Paying Overtime Above a Salary
You 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
You can redistribute workloads to ensure appropriate staffing levels while minimizing overtime.
- Adjusting Base Pay and Paying Overtime
You 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 does not require or recommend any one approach outlined above.
For more information, contact Larry Sophian at 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.