I’ll be on Nonprofit Radio this Friday at 10:30 am PT / 1:30 pm ET discussing the new overtime rules and their impact on nonprofits with host Tony Martignetti. Catch us live on Talking Alternative or a few days later on iTunes.
The Department of Labor’s final overtime rule updates the salary level required for the executive, administrative, and professional (“white collar”) exemption to ensure that the Fair Labor Standards Act’s (FLSA) intended overtime protections are fully implemented, and it provides greater clarity for white collar workers and their employers, including non-profit organizations. The final rule will also lead to better work-life balance for many workers, and it can benefit employers by increasing productivity and reducing turnover. – U.S. Department of Labor
The FLSA requires that most employees in the United States be paid at least the federal minimum wage (currently, $7.25) for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.
A common set of exemptions from the overtime rule, referred to as the white-collar exemptions, applies to employees employed as executive, administrative, or professional (EAP) employees*, generally only if (1) they are paid on a salary, not hourly, basis (the salary basis test); (2) their duties primarily involve executive, administrative, or professional duties as defined by the Labor Department regulations (the duties test); and (3) their salary meets the minimum threshold (salary level test). Note, however, that the minimum salary threshold does not apply to teachers, lawyers, or doctors.
There is another exemption from the minimum wage and overtime rules for highly compensated employees* if their total annual compensation meets or exceeds the minimum threshold.
* As of the posting date, these links do not have updated thresholds resulting from the new rules described below.
New Overtime Rules
Most employees earning a salary of less than $47,476 per year ($913 per week) will be entitled to overtime compensation. This approximately doubles the previous threshold of $23,660 (unchanged since 2004), effectively requiring employers to pay overtime for most salaried employees receiving between $23,660 and $47,476 per year, which they were previously not required to do under the FLSA. Further, the threshold will be automatically be updated every three years, starting on January 1, 2020. Note that the salary level does not include payments for medical, disability, or life insurance, or contributions to retirement plans or other fringe benefits. Nondiscretionary bonuses and incentive payments (including commissions) may be used to satisfy up to 10 percent of the standard salary test requirement so long as such payments are paid on a quarterly or more frequent basis.
The highly compensated employee minimum compensation threshold is now $134,004 (previously, $100,000).
December 1, 2016
What Employees (and Nonprofits) are Covered by the New Rule:
The overtime rules generally apply to employees covered by the FLSA. These include:
- Employees of organizations considered a “covered enterprise” – generally organizations that engage in ordinary commercial activities that result in sales made or business done that of at least $500,000. Most charitable nonprofits that do not engage in ordinary commercial activities will not be subject to the new overtime rules except employees of the following named enterprises: hospitals; institutions primarily engaged in the care of older adults and people with disabilities who reside on the premises; schools for children who are mentally or physically disabled or gifted; federal, state, and local governments; and preschools, elementary and secondary schools, and institutions of higher education. Note that the term ordinary commercial activities is similar to, but not synonymous with, the term unrelated business activities (as such term is used for purposes of determining unrelated business income tax liability).
- Employees who engage in interstate commerce (including through the phone or the internet) or in the production of goods for interstate commerce and employees whose work involves or relates to the movement of persons or things (including donated items) across state lines.
- Employees who are covered by operation of specific state laws. According to the National Council of Nonprofits: “In at least 11 states [or jurisdictions], the changes to the federal rules will automatically apply to virtually all employees and employers.”
See the excellent flowchart on National Council of Nonprofits site: Is Our Nonprofit Organization Covered by the FLSA?
What Nonprofit Employers Can Do:
According to the Department of Labor:
Non-profit organizations may ensure compliance for those employees affected by the Final Rule in a number of ways, including providing pay raises that increase workers’ salaries to the new threshold, spreading employment by reducing or eliminating work hours of individual employees working over 40 hours per week for which no overtime is being paid, or paying overtime.
In 2014, President Obama directed the Department of Labor to update its regulations regarding minimum wage and overtime standards to ensure “workers are paid a fair day’s pay for a hard day’s work.” The new $47,476 threshold represents the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (the South). According to the Department of Labor Q&A site:
The Department has concluded that the standard salary level of $455 weekly ($23,660 annually for a full-year employee) set in 2004 was too low to adequately account for the elimination of the former “long” duties test that ensured that employers could not avoid paying overtime by assigning lower-paid employees a minimal amount of exempt work. Furthermore, the real value of the salary level has fallen significantly since it was set 12 years ago. Today, the annualized equivalent of the standard salary level is below the 2015 poverty threshold for a family of four, making it inconsistent with Congress’ intent to exempt only “bona fide” EAP workers, who typically earn salaries well above those of workers they supervise and presumably enjoy other privileges of employment such as above average fringe benefits, greater job security, and better opportunities for advancement.
The Department considered several alternatives for setting the standard salary level to determine which method would work most effectively with the current duties test to effectively distinguish between overtime-eligible white collar employees and those who are bona fide EAP employees. Because the Department decided not to revise the current standard duties test, it set a salary threshold at a level reflective of employees who historically have received overtime protections from those who have not. Specifically, because the current standard duties test is substantially similar to the former “short” duties test, which before 2004 had been associated with a higher salary threshold, the Department looked at the historical ratios between the short and long test salary levels in order to assure that we restored the historical relationship between having a less rigorous duties test and an appropriately high salary threshold. The Department set the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage Census Region (currently the South), because it was at the low end of the historical range of short test salary ratios and would be appropriate across all areas and industries. The new salary amount will be $913 per week (which is $47,476 annually for a full-year worker) when this Final Rule takes effect on December 1, 2016.
Reaction from the Nonprofit Community
According to The Nonprofit Quarterly:
Among the more than 270,000 comments the DOL received to the proposed rule were many voices speaking for the nonprofit community, and they seemed to see only the negative impact on their operations; mission seemed to take a backseat to the difficulty of meeting a higher standard. Rick Cohen’s “brief review of one third of the posted comments found there was not one positive comment from a nonprofit.” The comments he saw predicted dire outcomes, staff reductions, service cuts, and even agency closings. No one seemed to see the increased pay for those earning low salaries as an important benefit to be supported. – Nonprofit Reactions to New Overtime Rules Run the Gamut
Independent Sector commented:
While IS believes that employees should be paid a living wage and similarly supports an increase in the salary threshold for eligibility to receive overtime compensation, there are many concerns that IS and others in the nonprofit sector have regarding this rule. As expressed in the submitted comments, IS is troubled by the agency’s lack of engagement with nonprofit organizations in developing its proposed new overtime rule, and urged four specific revisions to the plan before it is implemented: moving to a phased-in implementation; revising the terms of federal grants and contracts with nonprofit organizations; allowing for regional market differences to the proposed salary threshold; and implementing an open process for any changes to the duties tests.
Resources (updated 7/6/16)
Overtime Regulations and the Impact on Nonprofits (National Council of Nonprofits)
Breaking down your nonprofit’s obligation to pay overtime under the new federal rules (National Council of Nonprofits)
Overtime Final Rule and the Non-Profit Sector (Department of Labor)
Overtime Rules for Nonprofits – videos (Independent Sector)
What’s different in California: Although the federal threshold for exempt status has been $23,660, in California the threshold for exempt status is set as twice minimum wage. So with the current minimum wage of $10/hour, the minimum for exempt status is $41,600/year, and as of January 1, 2017 when the minimum wage goes up to $10.50/hour, the minimum salary for exempt employees will be $43,680/year. So the gap between the old and new thresholds is narrower in California.
New Report: The Nonprofit Overtime Implementation Conundrum (National Council of Nonprofits)
Nonprofits Already Subsidizing Governments: The National Survey confirmed that seven out of eight nonprofits with government grants and contracts currently subsidize governments by providing services for which they are not fully compensated. Only 13 percent expressed the view that government grants contracts pay the full cost of the services provided on behalf of governments.