What the New DOL Overtime Rules Will Mean for Your Nonprofit

The U.S. Department of Labor’s (“DOL”) new overtime rules that become effective on December 1, 2016 will result in increasing the number of employees eligible for overtime pay under the Fair Labor Standards Act (“FLSA”). Nonprofits aren’t exempt. A nonprofit’s employees may be covered as individuals, even if an organization isn’t covered by the FLSA, and thus be eligible for overtime pay. Without a doubt, the new overtime rules have the potential to significantly impact the compensation of your nonprofit’s white-collar workers — and, as a result, its ability to provide services.

The New Salary-level Tests for Exempt Workers

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

For highly compensated employees (“HCEs”), the salary threshold increases from $100,000 per year to $134,004 per year. The HCE threshold is used to determine if contributions to an organization’s retirement plan are made on a fair basis. HCEs must earn at least the full standard salary amount — or $913 — per week, on a salary or fee basis, not including nondiscretionary bonuses and incentive payments. However, such payments count toward the total annual compensation. The standard salary and HCE annual compensation levels 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 (“enterprise coverage”), or (2) individuals (“individual coverage”). Under enterprise coverage, the law applies to businesses with annual sales totaling at least $500,000. For nonprofits, enterprise coverage applies only to activities performed for a business purpose (for example, operating a gift shop). Types of income that do not count toward the $500,000 threshold include contributions, membership fees, and many dues and donations used for charitable activities.

Under individual coverage, if employees are engaged in interstate commerce, or in the production of goods for interstate commerce, they may be covered by the FLSA — whether or not the employee engages in these activities for a business purpose. For example, an employee would be covered if he or she makes or receives interstate phone calls, ships materials out of state, or calls an out-of-state vendor on a regular basis and also buys food for a homeless shelter using a credit card.

The Impact on Nonprofits

For nonprofits, the new rule could have significant budget implications — organizations will have to come up with the money to pay overtime to newly eligible employees. There is concern among many that the additional funds needed to comply with the rule will result in the cutting of a nonprofit’s services.

Furthermore, according to the National Council of Nonprofits, organizations that receive funds from government grants and contracts could be in the position of having to cover much higher labor costs than were anticipated at the time when the agreements were executed. The nonprofit will be contractually obligated to maintain services while being burdened with increased costs that may not be covered by the existing arrangements.

Some Exceptions

There are some notable exceptions to the new rule. Teachers are exempt, as well as administrative personnel that help run institutions of higher education. For instance, academic counselors, advisors and intervention specialists are exempt from the FLSA’s overtime requirements if they earn at least the entrance salary for teachers at their institution. However, other types of nonprofits won’t be as fortunate with their white-collar employees.

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

Act Now

December 1 will arrive before you know it. Consult with your financial advisor to discuss the best course of action to take in order to minimize the negative impact that could result if the FLSA’s new salary-level test applies to your nonprofit.

Sidebar: Four Options for Compliance with the New Rules

Nonprofits have several options for complying with the new overtime rules. Note that the DOL does not require, nor recommend, any one of the following options:

Raising salaries. For employees that meet the duties test or whose salary is near the new threshold of $913 per week, or $47,476 per year and regularly work overtime, you could increase their salaries to meet the new threshold so they maintain their exempt status.

Paying overtime above a salary. Continue to pay overtime-eligible employees a salary and pay overtime for any hours worked exceeding 40 in a week.

Redistributing workloads. Distribute workloads to ensure sufficient staffing levels while minimizing overtime.

Adjusting base pay and paying overtime. Reallocate an employee’s earnings between regular pay and overtime compensation. The revised pay could be on either a salaried or hourly basis, however, it must include overtime payment if the employee works more than 40 hours in a week.


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