The Department of Labor (DOL) recently finalized rules that will have a significant effect on which employees are due overtime for working more than 40 hours in a workweek. Most not-for-profit organizations must comply with the changes by December 1, 2016.

Rules released May 18, 2016, make several changes to the Fair Labor Standards Act (FLSA)’s executive, administrative and professional exemption. The new rules increase the minimum salary test for an employee to be exempt from overtime from $23,660 per year to $47,476 for full-time salaried workers in 2016. Employers will be able to include nondiscretionary bonuses to satisfy up to 10 percent of the new salary threshold. The “highly compensated employee” salary test for overtime exemption will increase from $100,000 per year to $134,004 per year. Both tests will increase every three years going forward. 

No changes were made to the duties tests (i.e. professional, administrative, executive, outside sales, etc.), which employers use to determine whether the employee performs work meeting the stringent requirements for exemption.

How the New Overtime Provisions Affect Not-for-Profits

Most not-for-profits are subject to the overtime rules because they qualify for one of the two types of FLSA coverage. The coverage types are highly nuanced, and so careful consideration of their parameters is essential for compliance.

Enterprise Coverage

Income from contributions and donations used for the tax-exempt purpose of the organization do not count toward the $500,000 limit. Neither do activities that are considered charitable in nature, such as providing temporary shelter, providing food or clothing to the homeless or providing disaster relief provisions.

Organizations also qualify for enterprise coverage if they are considered named enterprises. Hospitals, schools and preschools, government agencies and organizations providing medical or nursing care are types of named enterprises and automatically qualify for enterprise coverage regardless of whether they meet the $500,000 per year threshold.

It is recommended that not-for-profit organizations consult their legal team to ascertain whether they would be subject to the enterprise coverage or if they are considered a named enterprise.

Individual Coverage

The individual coverage provision affects not-for-profit employees that are engaged in interstate commerce, such as making or receiving telephone calls from other states or transporting materials, people or property across state lines. Interstate commerce activities can take a number of different forms. For example, an individual who works for a not-for-profit that feeds the homeless and purchases food from out-of-state stores on behalf of the organization qualifies for protection under the FLSA even if the organization does not qualify for enterprise FLSA coverage. Emails to out-of-state suppliers are also considered interstate commerce.

Out-of-state activity is a key determinant of whether the individual would be covered by FLSA. For example, if an employee works for a domestic violence shelter that serves a population in a specific state and does not use the telephone or email for interstate activities, that employee would not qualify for the individual coverage.

Again, a legal provider could help your organization clarify which activities are considered interstate commerce and which employees may be covered by the FLSA on an individual basis.

It is recommended that most not-for-profits comply with the FLSA provisions.  Definition and calculation of “commercial activities” can be difficult and the level of commercial activities can fluctuate. In addition, individual FLSA coverage can still apply to many employees based upon job responsibilities (i.e. interstate travel, accepting/mailing packages across state lines, making phone calls to other states, etc.).  

Getting into Compliance

To prepare for this change, it is important to understand the new rules and the impact this change will have on your organization’s budget and employees. Consider the following:

• Who Will be Affected - Collect and analyze current job and FLSA status, employee compensation (including salary, non-discretionary bonuses, incentive pay and commission) for employees that now fall beneath the new salary threshold.
• Alternatives - The number of individuals and positions affected by the rule change may present several different implementation scenarios. Developing an hourly rate, increasing salary, job responsibility evaluation, productivity and long-term projection should all be analyzed to determine the factors that will affect you organization’s optimal implementation strategy.
• Correct Past Mistakes - As you examine your records, you may discover employees were inaccurately classified as exempt from overtime. The change will bring renewed scrutiny to overtime exemption rules, so be sure that any past errors are remedied before December 1, 2016.
• Pick a Path and Communicate Changes - Once your organization has identified how it will meet its new requirements, be sure to communicate with those affected about how their pay and policies for tracking time may be impacted.

Employers will have time to come into compliance, but it is best to consider now what changes might be necessary to be compliant with the new regulations. The DOL’s not-for-profit and overtime rules fact sheet and other guidance provide information and examples not-for-profits should review. The DOL has also released additional guidance for higher education institutions.

Given the complexity involved, it is recommended that you enlist a third-party provider to help with implementing the changes.

For More Information

If you have any specific comments, questions or concerns about how the overtime rules will affect your not-for-profit, please contact us.

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