Nonprofits React to New OT Regulations

by Linda M. Lampkin, Senior Nonprofit Compensation Specialist 8. June 2016 14:03

 

The new regulation from the Department of Labor that expands overtime (OT) benefits to full-time, salaried employees who make up to $47,476 a year has sparked lots of discussion in the nonprofit sector.  As of December 1, 2016, those who work more than 40 hours per week must be paid 1.5 times their hourly rate unless they meet all of the following criteria:

  • Must be white-collar professionals as opposed to manual laborers, administrative support staff, or service workers.

  • Must be paid a salary, not an hourly wage.

  • Must earn at least $47,476 annually, up from the current federal salary threshold of $23,660.

Thus, to avoid paying overtime wages, a nonprofit covered by the Fair Labor Standards Act (FLSA) will have to either limit salaried employees who make less than the threshold to 40-hour work weeks or raise their pay above $47,476 per year.  The rule also raises the salary ceiling for so-called “Highly Compensated Employees” -- those exempt from overtime pay -- from $100,000 to $134,000 annually. Many high-level managers at nonprofits fall into this category, according to the Department of Labor and ERI’s data, as reported on the Forms 990.

The new rules don't affect hourly employees, who remain eligible for overtime pay if they work more than 40 hours a week.

Not All Charities Included

The Department of Labor prepared information to help charities impacted by the new regulations. In general, the organization must have annual revenues of at least $500,000 from "commercial activities" (income used for charitable activities does not count) to be covered by FLSA.  However, even if a nonprofit is not covered by the law, an individual employee may be covered if he or she engages in interstate commerce on the job.  That includes making out-of-state phone calls, sending interstate mail and email, and processing credit card transactions, duties that are included in most jobs these days. 

Not only will nonprofits need to keep more accurate time records, they will also have to deal with potential increases in personnel expense which may not be budgeted in ongoing contracts.  In fact, the Department of Labor noted in a fact sheet that it is encouraging government and private grant makers to consider how the new rules will affect nonprofit grantees.

Nonprofit Reaction

Some have hailed the new regulation as great news for the very people the sector is supposed to help -- for example, that assistant manager at the fast food restaurant will either receive a higher salary or be able to go home sooner. It could lead to more regular schedules because there is an incentive to avoid making a worker stay a little late.

On the other hand, many charity leaders have expressed concern about being able to maintain their programs – hours might be limited and waiting lists longer, as grant and contract money might need to be used for employee wages and salaries as the new regulations are implemented.

First, ERI’s Salary Assessor is used to show the impact of the new $47,476 threshold.  For example, a job typically considered professional, such as social worker, which meets the duties tests for exemption from overtime, must also earn a salary above the salary threshold. The table below lists the average salary for social workers in Human Services (many working for nonprofit organizations).  This is a job, particularly at the entry level, which might be impacted by the new regulation.

Second, ERI’s Nonprofit Comparables Assessor is based on data reported on the Form 990 and used to review annual salaries that may be affected by the new rule raising the salary ceiling for so-called “Highly Compensated Employees” -- those exempt from overtime pay -- from $100,000 to $134,000 annually. The table below lists the average salaries for the third highest paid employee in data submitted on Form 990 by all US tax-exempt organizations.  Typically, these would be considered highly compensated and thus exempt from overtime.  It is clear, however, that many of these salaries are way below $134,000, particularly in smaller organizations.

The bottom line – nonprofits should now review current salaries and the job responsibilities in light of the official guidance on FLSA prepared by the DOL (see information).  There may be some hard decisions ahead about the available options -- increasing salaries, reclassifying jobs as nonexempt, paying more overtime, or just limiting the use of overtime to remain in compliance and within budget.