On May 18, 2016, the Department of Labor (DOL) announced the Overtime Final Rule. Since then, volumes have been written about the ramifications of the final rule, which is effective December 1, 2016. While you may be aware of the new salary thresholds required by the final rule, what you may not realize is that there is special guidance provided for nonprofits that clarifies when the salary thresholds apply. This guidance may impact your organization.
The DOL regulations exempt executive, administrative and professional (“EAP”) employees (the “white collar” exemption) from the minimum wage and overtime pay protections of the Fair Labor Standards Act (“FLSA”) when all three of the following tests are met:
1. Salary basis test
The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
2. Salary level test
The amount of salary paid must meet a minimum specified amount. The final rule increases the salary threshold from $455 weekly ($23,660 annualized) to $913 weekly ($47,476 annualized) effective December 1, 2016.
3. Duties test
The employee’s job duties must primarily involve executive, administrative, or professional duties. Generally, executive, administrative, or professional duties are defined as management, performance of office or non-manual work related to management, or work requiring knowledge acquired by a prolonged course of specialized (intellectual) instruction.
The salary thresholds do not apply to nonprofits unless employees are covered by either Enterprise or Individual coverage:
1. Enterprise coverage
The FLSA applies to nonprofits with annual sales or business income of $500,000 or more. Enterprise coverage applies only to activities performed for a business purpose (services for a fee); it does not apply to income from contributions. Certain types of nonprofit entities are covered by the FLSA regardless of annual sales or business income or their nonprofit status: Hospitals, schools and pre-schools, government agencies, providers of medical or nursing care for residents. But nonprofits with activities that are charitable in nature, such as providing temporary shelter, clothing or food to the homeless; social services; disaster-relief, etc., are not subject to the FLSA and DOL regulations because these activities are not considered commercial activities and therefore are not subject to the enterprise coverage.
2. Individual coverage
The FLSA applies when nonprofit employees engage in interstate commerce or in the production of goods for interstate commerce, regardless if the activity is not for a business purpose, and is triggered when an employee sends emails to out-of-state vendors to purchase supplies. Individual coverage is also triggered when an employee coordinates receipt of non-cash donations from corporate donors located out-of-state. Activities such as regularly making out-of-state phone calls, receiving and sending mail or email, ordering goods from out-of-state vendors and handling credit card transactions all trigger individual coverage.
Individuals that volunteer time to religious, charitable, civic, humanitarian or similar nonprofit organizations are not covered by the FLSA; however, paid employees of nonprofit organizations may not volunteer the same type of services to the nonprofit that they are otherwise typically employed to provide.
Other employees of nonprofit organizations are not affected by the DOL Overtime Final Rule:
- Hourly workers – generally, hourly workers who work more than 40 hours per week are entitled to overtime regardless of how much they earn.
- Employees with regular workweeks of 40 or fewer hours.
- Employees who fail the duties test (see item 3 above). Salaried employees who do not primarily perform executive, administrative, or professional duties are not eligible for the EAP exemption and should be receiving paid overtime if they work more than 40 hours per week.
- Highly compensated employees are ineligible for overtime under the highly compensated employee exemption.
- Employees at nonprofits that don’t meet the enterprise coverage threshold.
Options for complying with the new salary threshold
Nonprofit employers may want to consider the following strategies for complying with the new salary threshold for non-exempt employees:
- Raise salaries for employees whose salaries are close to the new threshold, meet the duties test and regularly work overtime to maintain the employees’ exempt status.
- As an option for seasonal or occasional spikes requiring overtime consider paying newly overtime-eligible employees a salary for hours up to 40 per week and overtime for hours in excess of 40 per week.
- Distribute workloads to minimize the need for overtime.
- Adjust employees’ base pay and pay overtime to reallocate; however, hourly rates cannot be reduced below the highest applicable minimum wage.
Nonprofit employers may use any method for tracking hours worked by non-exempt employees, as long as the records are complete and accurate. Employers are not required to have employees sign in and out, or to track hours for employees that work a fixed schedule.
Note that there is a special exception for providers of Medicaid-funded services to individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds. The DOL will not enforce the higher salary thresholds for these providers until March 17, 2019, giving these employers a 28-month grace period before being required to pay overtime for affected employees.
One final consideration is that many in the nonprofit industry are concerned that pre-existing government grants and contracts won’t cover potential increases in salaries. See the National Council of Nonprofits report: The Nonprofit Overtime Implementation Conundrum.
Furthermore, some states have set the salary level test at a higher amount than the current DOL thresholds. Consult the guidance in your particular state to be sure of local guidelines.
Friedman’s Not-for-Profit professionals can help you comply with the DOL Final Rule and understand how it may affect budget considerations. To address your particular situation and any questions you may have, contact me at email@example.com or reach out to your Friedman advisor.