U.S. Labor Department Publishes Overtime Regulations

The U.S. Labor Department announced overtime final regulations today that, when they go into effect on December 1, 2016, will mean that most employees earning less than $47,500 per year will be entitled to overtime compensation, regardless of whether they are currently classified as executive, administrative, or professional (white-collar) workers. The final rule applies to employers in all sectors, but in an effort to address longstanding confusion about how the Fair Labor Standards Act (FLSA) and the overtime regulations apply to nonprofit employers and employees, the Department of Labor (DOL) also published a special overview and guidance for nonprofit organizations.

Here are key details in the new rule and how it will apply to nonprofits:

  • Salary Level Threshold: The new regulations will raise the standard minimum level for salaried, exempt workers from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). The new level is pegged to the 40th percentile of weekly earnings for full-time salaried workers from the lowest wage Census Region in the country. The final rule also raises the compensation level for highly compensated employees(subject to less-detailed duties tests) from its previous amount of $100,000 to $134,004 annually. That rate was established to match the 90th percentile of annual earnings of full-time salaried workers nationally.
    It is important to remember that white-collar employees can be exempt from overtime only if their jobs meet all three tests for executive, administrative, or professional employees. In addition to receiving a salary at or above the new thresholds, each exempted employee must also exercise the job duties of those categories and be paid on a salaried basis. For more information, see the Background section (below) and Classifying Employees Correctly in the resource section of the National Council of Nonprofits’ website.
  • Effective Date: December 1, 2016. The new rule does not phase in the higher salary thresholds over a longer period of time, as had been requested by many commenters during the rulemaking process.
  • Automatic Increases: The final rule establishes a mechanism for automatically updating the salary and compensation levels every three years, with the first update to take place in 2020.
  • Does this Regulation Apply to My Nonprofit?This is a simple question with a complicated answer for each nonprofit, and depends on where your employees perform their duties, the nature of your revenues, and the work that individual employees perform.
    • Coverage Through State Law
      In at least 11 states, the changes to the federal rules will automatically apply to virtually all employees and employers. The reason is that these states expressly incorporate by reference the FLSA regulations into state law by way of statute, regulation, or administrative ruling. These states are Alaska, District of Columbia, Illinois, Maine, Maryland, Massachusetts, Missouri, New Jersey, New York, North Carolina, and Ohio. There may be more states in this category as the result of court decisions; nonprofits are advised to check with local legal counsel for more information.
    • Enterprise Coverage: All employees of an organization will be covered by the FLSA and overtime regulations if the entity has annual revenues of at least $500,000, measured by volume of sales made or business done. The DOL special guidance for nonprofitsstates that “non-profit organizations are not covered enterprises under the FLSA unless they engage in ordinary commercial activities,” which it explains “are activities such as operating a business, like a gift shop.” The guidance further provides that “income that a nonprofit organization uses in furtherance of charitable activities is not factored into the $500,000 threshold. Such income might include contributions, membership fees, monetary and non-monetary donations, and dues (except for any portion for which the payer receives a benefit of more than token value in return).”
    • Individual Coverage: Even if the employer does not meet the standard for “enterprise coverage,” an individual employee will be covered by the FLSA if he or she engages in interstate commerce or in the production of goods and services for interstate commerce. This can include such activities as regularly making out-of-state phone calls, receiving and sending mail or email, ordering goods from out-of-state suppliers (such as Amazon), and handling credit card transactions. The DOL special guidance for nonprofitsprovides three examples to help nonprofit employers understand their obligations.
  • Duties Tests:  The Labor Department asked during the rulemaking process whether the itemized changes were needed in the duties tests for executive, administrative, and professional employees. DOL decided not to make any changes in the new regulations.
  • Non-Enforcement Special Exception: The Labor Secretary announced that the Department will not enforce the higher salary thresholds until March 17, 2019 for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds. This means that those employers will have an additional 28-month grace period before being required to pay overtime for affected employees. See Non-Enforcement Policy statement.

Employers have various options to comply with these change in overtime rules, ranging from increasing exempt employees’ salaries to the new level, converting them to hourly employees and paying overtime, or making other changes to benefits or operations. See Part III of the DOL special guidance for nonprofits for more information.

Nonprofits with budget years ending on June 30 will need to develop new budgets for the fiscal year beginning in six weeks that take these new changes into account. Nonprofits with budget years ending on December 31 have more time to adjust and plan for 2017.

 In Focus:  Impact on Nonprofits with Government Grants and Contracts

Nonprofits with government grants and contracts at any level of government (local, state, tribal, or federal) will now be put in the position of having to comply with new federal requirements that impose new costs not known when those grants and contracts were signed. Unlike businesses that can raise prices, or governments that can raise taxes or curtail public services, nonprofits with government grants and contracts may find themselves contractually bound to maintain services at increased costs that may not be expressly covered by existing written agreements. Nonprofits with government grants and contracts at any level are invited to participate in a National Survey designed to develop data that support better policies and solutions to potential unanticipated adverse consequences of the DOL rule and a separate issue. Individuals with knowledge of your organization’s finances will best be able to compete the survey. Take the survey by Monday, May 23!

Congressional Efforts to Block the Overtime Regulations

Three tactics are available to Congress for attempting to prevent the new regulations from going into effect: 1) adopting a resolution of disapproval under the Congressional Review Act; 2) enacting specific legislation, such as the Protecting Workplace Advancement and Opportunity Act (S. 2707 and H.R. 4773), which would nullify the proposed rule, among other things; or 3) attaching a rider to an appropriations bill to block enforcement of the rule for a year. All three actions require either the President’s approval (which is unlikely, given that the proposed rules are coming from his Administration) or sufficient votes (two-thirds of both the House and Senate) to override his expected veto.

Background on Overtime Law

Under the Fair Labor Standards Act (FSLA) that was first enacted in 1938, employees are entitled to wages at or above the federal minimum wage and must be paid time and a half overtime for work after 40 hours in any work week. In enacting the federal wage and hour law, Congress exempted from these standards executive, administrative, and professional employees, and left it up to the Secretary of Labor to define the terms of the exemption.

Persons who are properly classified as executive, administrative, or professional employees are considered “exempt employees.” All others are “non-exempt” and must be paid at least the minimum wage and overtime after 40 hours worked in a week.

Generally, employers have the burden of demonstrating that a worker is exempt from the overtime provisions by satisfying three tests. The salary basis test requires that the employee be paid a predetermined salary, rather than on an hourly basis, and that the amount paid is not adjusted based on whether the person worked certain hours. The duties test requires that the individual’s job duties must primarily involve executive, administrative, and professional duties as defined by the Labor Department regulations. The salary level test — which is the subject of the new regulations — requires that an employee be paid at or above a minimum specified amount. That amount was last set in regulations in 2004 at $455 per week, or $23,660 per year. Changes to any of these tests require regulatory action by the Department of Labor.

There is a special category in the regulations that exempts “highly compensated employees” if their total annual compensation exceeds a certain amount ($100,000 until this rule change) and they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.

States have the power to set higher standards for non-exempt and exempt employees. Currently, 29 states have set minimum wage levels higher than the federal minimum wage of $7.25 per hour. Likewise, some states, such as California and New York, have set the salary level test at a higher amount than is set in current U.S. Department of Labor regulations.