What Every Nonprofit Should Know about the New Federal Rules Likely to Cause a Significant Increase in Your Non-Exempt Workforce and Overtime Pay

5 min

After decades of relative inaction, the federal Fair Labor Standards Act (FLSA) has become an epicenter of change and litigation in recent years. That change continued yesterday when the U.S. Department of Labor (DOL) released its highly anticipated final regulations altering the overtime exemptions under the FLSA. Nonprofit employers need to understand the implications of these changes on their workforces, as the changes may have the effect of converting many "white-collar" exempt employees to overtime-eligible employees when the new rules take effect in December 2016, and may have a significant impact on many nonprofits' fiscal bottom line. There are steps, however, that your nonprofit can take to at least partially mitigate the adverse economic impact of the new rules on your organization.

In general, the FLSA requires that nonprofits pay non-exempt employees an hourly wage at least one-and-a-half times their regularly hourly rate for time worked in excess of 40 hours in a given workweek. However, workers employed in certain capacities, including a "bona fide executive, administrative, or professional capacity," may, under certain circumstances, be considered to be exempt from overtime. Under the current rule, an employee is exempt from overtime under the "white-collar" exemptions if (i) the employee is paid on a salary basis not subject to reduction based on the quality or quantity of work ("salary basis test"), (ii) the employee's salary meets a minimum salary level of at least $455 per week ($23,660 per year)("salary level test"), and (iii) the employee's primary job duties fall within the federal definition of one of the above-noted exemption categories ("standard duties test"). In other words, an employee must generally (lawyers, doctors, teachers, and computer professionals are excepted) meet the salary basis test, the salary level test, and the standard duties test in order to be exempt from being paid overtime; it is the salary level test that is being changed. There also is an exemption for highly compensated employees earning at least $100,000 per year (HCE exemption). The new changes to the law will restrict the number of employees eligible for these exemptions in the following ways.

First, the salary level threshold for overtime exemption doubles to $913 per week ($47,476 per year), and employees earning a weekly salary of less than $913 will be eligible for overtime pay. Second, the threshold for the HCE exemption increases from its previous threshold of $100,000 to $134,004. Third, the new salary level thresholds will increase every three years based on the salary level at the 40th percentile and 90th percentile, respectively, for full-time salaried workers of the lowest-wage Census region in the country (currently the Southeast). Fourth, subject to certain details, the new rules allow up to 10 percent of the salary level threshold for all non-highly compensated employees to be attributable to non-discretionary bonuses, incentive pay, or commissions, so long as such payments are made on a quarterly or more-frequent basis.

Importantly, the "standard duties test" has not changed under the new rule (as had been initially intimated by the DOL), so employers will be able to rely on prior guidance to determine whether employees who meet the salary requirements also perform primary duties which meet the definition of one of the exemptions. (Prudent nonprofit employers will use this opportunity to re-evaluate whether employees who meet the new salary level test also meet the standard duties test; this test has historically been an area of significant non-compliance in the nonprofit community.)

The FLSA sets the floor for the overtime exemption requirements and many states, such as New York and California, have salary thresholds that exceed the amounts set by the federal government. Consequently, nonprofits should educate themselves about the state and local laws governing their employees, as state laws often extend more rights to employees than provided under federal law.

The new rule takes effect on December 1, 2016, so nonprofits have less than 200 days to evaluate and implement any necessary changes to their pay and employee management practices. As the planning process for next year's budgets is already well underway in many, if not most, nonprofits, potential added overtime costs need to be taken into immediate consideration.

Nonprofits that contract with federal, state, or local governments for grants, cooperative agreements, and contracts may find themselves in the difficult position of having to absorb new overtime costs that were not accounted for at the time the federal, state or local awards were made. Unlike commercial enterprises that sink additional payroll expenses into advance pricing structures, nonprofits bound by existing government grants and contracts likely will be required to perform the same tasks and provide the same services despite the added and unforeseen costs that the new rules impose.

Like other nonprofit organizations, nonprofit colleges and universities also are vulnerable to the burdens of this rule change. While there are special regulations that exempt teachers, high-level academic administrators, and other inherently academic positions from the new rules, university employees whose duties are not unique to higher education will be subject to the increased threshold for overtime exemption. In a tacit acknowledgment of the significant impact the rule change will have on academic institutions, the DOL issued a guidance memorandum specifically tailored to higher-education institutions, which can be viewed here.

Nonprofits will have to make some difficult decisions to adapt to these new changes, which may include increasing the salaries of certain exempt employees to get them to the new threshold, paying overtime to employees not previously eligible, realigning now-non-exempt employees' workloads and responsibilities and otherwise managing their hours worked to avoid paying overtime, and/or altering the job duties of certain otherwise-non-exempt employees to bolster the likelihood that they will, in fact, be considered exempt.

The DOL has provided guidance specific to nonprofits on the new changes: overview and guidance.

For tips on the rules governing compensable time for non-exempt employees and managing overtime costs, click here.

Finally, for a comprehensive overview of all of the relevant FLSA rules in this area as they apply to nonprofits, our recorded webinar on the subject from earlier this year can be found here.

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For more information, contact the authors at BEStockman@Venable.com, JSTenenbaum@Venable.com, and RWTaylor@Venable.com.