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How the New FLSA Overtime Rule Will Impact Your Nonprofit Organization

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Millions of U.S. salaried workers are subject to receive a significant raise this year, and the impact to nonprofit organizations across the country will be huge!

On May 18, 2016, the United States Department of Labor (DOL) announced its final rule (Rule) concerning overtime pay for salaried employees under the Fair Labor Standards Act (FLSA). The new Rule, which will go into effect on December 1, 2016, will entitle most salaried white collar workers earning less than $47,476 a year to overtime pay. Neither the FLSA nor the DOL’s regulation provide an exemption for nonprofit organizations.

The rollout of the Rule creates several questions including: Does the FLSA apply to every employer? How about to individual employees? Does this mean I need to increase the salaries of all of my employees earning less than $47,476? What impact does the Rule have on my hourly workers? What about salaried employees who work less than 40 hours per week? Are we required to pay overtime to salaried employees earning more than $47,476 a year? What about highly compensated employees?

These questions and more are important to answer as you determine whether or not your organization needs to make any changes in paying your salaried employees.

WHO FALLS UNDER THE FLSA?

To determine whether the Rule will impact your organization requires several steps of analysis. First, coverage for the FLSA is determined in one of two ways: (1) enterprise coverage, or (2) individual coverage. Enterprise coverage occurs when the annual gross revenue of an organization is $500,000 or more, and the organization has at least two employees engaged in interstate commerce. Donations and membership fees are exempt from the threshold, but fees for services or goods, interest on investments, and unrelated business income will each likely be counted toward the revenue determination.

Some organizations, simply by nature of what they do, will automatically be considered under the FLSA enterprise coverage regardless of revenue such as hospitals, private and public schools and colleges, residential care facilities, and other government entities. Income for these types of organizations is irrelevant in the determination.

In addition to the revenue threshold, enterprise coverage requires at least two employees engaged in interstate commerce. Interstate commerce can be almost anything an employee does that in one way or another reaches across state lines. For example, sending and receiving out-of-state emails or phone calls are considered engaging in interstate commerce. Going online and placing orders from vendors outside of the organization’s home state will also likely be considered interstate commerce. Making deliveries to, or receiving products directly from, another state will also apply, and many more examples. Given that, this element of the analysis will be relatively easy to achieve.

Once these two elements are reached—meeting the revenue threshold and having at least two employees engaged in interstate commerce—the Rule applies to the entire organization, and all of the exempt salaried employees. However, if your organization does not meet the enterprise test, individual employees may still be covered.

The FLSA will apply to particular individuals in your organization if the employee is engaged in interstate commerce or in the production of goods for interstate commerce. And while it might create an accounting and payroll challenge, especially if it results in having to raise the pay of one individual above the pay of others simply because they engage in interstate commerce, the Rule will be applied to those individuals who meet the test.

WHICH EMPLOYEES ARE AFFECTED?

First of all, non-exempt employees are not covered under the Rule. Those employees are already subject to being paid overtime. The Rule specifically applies to exempt employees whose annual salary falls below the new threshold of $47,475 (versus the previous amount of $23,660). Interestingly, the Rule does not differentiate between full-time and part-time exempt employees. As a result, if you employ a part time employee who earns less than $47,475, the Rule will apply to them, assuming either enterprise or individual coverage applies as well.

The analysis does not end there. Another test to apply is whether the employee who meets the salary test also performs exempt job duties. Job title is irrelevant to the analysis. What is important is the actual job tasks the employee performs. In most cases, an exempt employee will fall into one of three categories: executive, professional, or administrative duties. The FLSA guidelines should be reviewed to determine whether or not a particular employee’s job duties will result in them being subject to the new Rule. Further, the Rule has additional guidelines for overtime pay in general, bonus pay, incentives, commissions, and also addresses overtime pay for highly compensated employees earning more than $134,004 per year.

WHAT OPTIONS DO YOU HAVE?

Once you determine that one or more of your employees is covered under the Rule, you have several options from which to choose in order to comply: (1) you can raise their salary to at least $47,475 and not be subject to paying the employee any overtime pay; (2) convert the employee to an hourly employee and pay overtime for hours worked over 40 hours per week; (3) leave the employee as an exempt employee earning less than the new threshold amount and either restrict any overtime hours, or maintain sufficient records to ensure they are paid overtime for actual hours worked over 40 per week; or (4) evaluate and realign the employee’s workload to ensure overtime is kept to a minimum.

If your organization would be financially crippled by raising salaries, another option might be to lower an employee’s base pay to compensate for the increased pay likely to be earned by paying overtime. And before you start sending me nasty emails or leaving negative comments for that suggestion, it came right out of a publication by the U.S Department of Labor.

However, because this article does not allow for a comprehensive understanding of some of the nuances of the law, but is simply an overview of the most salient aspects of the Rule, you should consult with an HR professional or an attorney to help you through the process.

THE BOTTOM LINE

With an estimated 4.2 million salaried U.S. workers expected to be directly affected by the Rule, and another 8.9 million indirectly affected, the Rule will undoubtedly have a significant impact on the nonprofit sector throughout the country. Some might perceive the new Rule as oppressive to nonprofit organizations that struggle to make ends meet, and are now subject to significantly increasing salaries. Others might see it as an opportunity for nonprofit staff to be paid more for their hard work.

Whether you agree with the new Rule or not, it is here to stay. In fact, the standard threshold will be automatically adjusted every three years beginning in 2020 in keeping with salary levels in the lowest-wage Census region.

The bottom line? While the Rule will hit many nonprofit organizations hard, the nonprofit sector has often been challenged to do more with less. And while it would be a tragedy to see a drop in services as a result of the Rule, perhaps it’s time to reevaluate nonprofit compensation to come in line with other segments of the business community. At a minimum, the Rule provides the opportunity for nonprofit organizations to reevaluate and develop new strategies for operations, finances, fund raising, compliance and employee relations. That alone will likely result in a significant increase to the mission of countless nonprofit corporations throughout the country.

For more information regarding your legal rights and options, please contact Johnston | Thomas Attorneys at Law today. Johnston | Thomas is a multidisciplinary law firm from Santa Rosa, California, that specialize in business, mortgage, construction, nonprofit, real estate, estate planning, and more.