How Nonprofits Can Tackle the FLSA Overtime Regulations
Update 11/23/2016: The Final Overtime Rule has been suspended and changes will NOT likely take effect on December 1, 2016. More
Nonprofit employees who have never received overtime pay may soon fall under a new threshold set by the Department of Labor (DOL) and be eligible for extra pay when they work extra hours. Some may be so close to the annual earnings threshold that a small upward wage adjustment would be all that is needed to maintain the exemption after the December 1, 2016, implementation date.
In both cases, the nonprofit personnel who wrangle with compensation questions — and in fact, the entire management team — are on the spot to analyze the impact of the DOL’s new overtime rules and develop a plan of action.
On the surface it may seem that your organization is in for higher payroll cost as the overtime regulations kick in, but that doesn’t have to be the case. With smart analysis, open communication, and careful implementation, it may still be possible for covered entities to meet the new rules, keep employees happy, and have little or no impact on the bottom line.
The “covered enterprise” test
Nonprofits are generally not considered “covered enterprises” under the Fair Labor Standards Act of 1938 (FLSA), which would exclude their employees from the new overtime rules. The organization is covered if it engages in ordinary commercial activities that result in sales made or business done in excess of $500,000. Ordinary commercial activities include operating a business, like a gift shop or fee-based veterinary services.
Activities that are charitable in nature and normally provided free of charge are not considered ordinary commercial activities, and do not establish enterprise coverage. These may include: providing temporary shelter, clothing, or food to homeless persons; counseling services for sexual assault, domestic violence, or other hotline counseling services; and disaster relief.
It should also be pointed out that employees of nonprofits that are not covered by FLSA on an enterprise basis may still be entitled to its protections. If a person is individually engaged in interstate commerce or in the production of goods for interstate commerce, or in any closely-related process or occupation, he or she may be entitled to FLSA protections. Examples include making and receiving interstate telephone calls, shipping materials to another state, and transporting persons or property to another state.
Salary thresholds are going up
The changes to federal overtime regulations released on May 18, 2016, are modifications of the FLSA, which (among other things) established our familiar 40-hour work week. But the number that everyone is talking about is the annual earnings threshold for exempt employees. In December the salary level will be raised from the current $23,660 in annual wages ($455 per week) to $47,476 ($913 per week). It’s a significant increase that might put millions of new workers in a position to be paid time-and-a-half for clocking in more than a standard 40 hour week.
How to determine who is eligible for an exemption from overtime
In order to qualify as exempt from required overtime pay, employees must meet three tests:
- Salary basis test — The individual’s salary must be fixed and predetermined, and cannot fluctuate with quantity or quality of work.
- Salary level test — The salary must exceed a minimum threshold (currently $23,660 in annual wages or $455 per week, with the transition in December to $47,476 in annual wages or $913 per week).
- Job duties test — Duties must meet the executive, administrative, or professional duties tests as defined in the regulations. This is commonly known as the “white-collar” exemption. Certain computer employees, an outside sales force, and highly compensated individuals may also be exempt.
While an increase in the maximum annual earnings level means more employees will be eligible for overtime, the basis test is unchanged. The job duties test remains the most subjective of the three. It is also the most scrutinized when interpreting terminology significant to classifying whether an employee would be exempt under FLSA. Because the law is designed to protect employees, its exemptions are meant to be narrowly defined to prevent employers from (intentionally or unintentionally) misclassifying employees in such a way that they avoid overtime pay.
In the past, so-called white collar employees (executives, administrators, professionals, and others) have often been exempt from receiving overtime pay due to their job duties. In a nonprofit, these individuals might include the executive director, program managers, fundraising and development managers, retail managers, internal accounting personnel, and support/administrative functions such as finance, marketing, and human resources. Some professional employees, including doctors, lawyers, and teachers, will not be impacted by salary level requirements that generally apply to other white-collar employees. To qualify for the professional exemption as a teacher, the employee must be employed in an "educational establishment" and have a primary duty of teaching.
Small organizations may have only a handful of employees affected by the new rules, while larger nonprofits could have hundreds. The DOL estimates that 4.2 million exempt employees in all industries will become non-exempt, and that as much as $1.2 billion will be paid to employees either as overtime or increases in wages to meet the salary threshold.
As an employer, you are faced with footing the bill for payroll system changes (including software and hardware updates), training costs, communication materials, and the time spent getting everything into compliance. Some proactive moves might include:
- Analyzing how vital overtime is to the operation
- Considering how employee location impacts overtime requirements
- Looking at the organization’s overall cost structure and position to market
- Reviewing hours worked and the organization’s ability to control and predict future hours
There is no one-size-fits-all strategy for nonprofit employers to comply with these new regulations. Every employer will have different needs, but among the options are:
- Maintaining current salary levels and paying overtime
- Bumping salaries over the threshold to prevent paying overtime
- Changing staffing levels to reduce overtime needs
Preparing for change
If you get started well ahead of the December 1 implementation date, you should have time to thoroughly analyze your options, open a dialogue with employees, and develop new policies and processes. Consider these actions before, during, and after the transition:
- Review all currently exempt positions to see if any will be impacted
- Create or reinforce a well-defined work week, pay cycles, and policies
- Begin requiring all employees to complete time sheets, even if they are not eligible for overtime
- Ensure that written job descriptions and duties reflect the duties tests, and make plans to review duties annually
- Establish training for employees on recordkeeping and time recording
- Analyze all labor cost implications
- Study the potential costs of transitioning some employee benefits from exempt to non-exempt employees
- Examine unintended consequences of change, such as increasing salaries and adding duties, or eliminating part-time positions
- Consider moving your compensation review and adjustment period from January to November or early December this year
- Conduct individual and group meetings to review what will be changing, the reasons for the change, and the impact
- Open lines of communication with employees; be upfront, open, and honest about the reasons for change and how it impacts them personally
How we can help
Nonprofit employers should not automatically assume that payroll costs will skyrocket in the next year as new overtime guidelines are implemented. A number of strategies are available to reduce the financial burden; CLA’s experienced professionals can help you discover a path that includes meeting your DOL requirements and paying your employees what they are worth.