NFPs: Deadline for new overtime rules coming soon
Posted On: 9-29-2016 | Posted By: Kari Dowell, Director of Marketing and HR
As we reported to you a few months ago, the US Department of Labor published a final rule amending the Fair Labor Standards Act to extend overtime protections to approximately 4 million workers nationally. Unfortunately, there is no blanket exemption for not-for-profit organizations, so you’ll need to consider the impact of the revised rules and develop a plan to address them prior to the December 1, 2016, effective date.
The primary focus of the new rules was to update the salary thresholds at which executive, administrative and professional (EAP) workers can be exempt from overtime pay for working more than 40 hours per week. This change extends eligibility for overtime to many workers who were previously exempt from overtime because of their compensation level, as the new threshold is slightly more than double the previous threshold.
Employees are generally entitled to overtime pay unless they: (1) are paid a fixed salary not subject to reduction due to variations of hours worked during the day; (2) pass the job duties test demonstrating that they primarily perform bona fide EAP duties; and (3) receive more compensation than the dollar threshold set by the DOL.
The full regulations are more than 500 pages long. To help you get in compliance before the December 1 deadline, we’re offering a summary of key provisions and some implementation tips for not-for-profit leaders to consider.
- Standard compensation level increases: The wage threshold increases from $455/week to $913/week (that is, $47,476 annually) under which most workers are eligible for overtime pay. This doubling of the threshold means organizations will either have to track hours and pay overtime or raise employee salaries to the new threshold if they currently make less than $913 per week.
- Changes to Highly Compensated Employee (HCE) threshold: The minimum total annual compensation level for HCEs increases from $100,000 annually to $134,004 annually. To be eligible for the HCE exception, an employee must customarily and regularly perform one or more of the exempt duties of an EAP employee.
- Applicability to incentive pay, bonuses, and commissions: Discretionary bonuses (for example, an unannounced holiday bonus) cannot be used to satisfy any portion of the standard weekly salary level. However, employers may include nondiscretionary bonuses, including commission payments based on a fixed formula, to satisfy up to 10 percent of the standard salary level, but not the HCE’s compensation level.
- Any bonus or commission used to satisfy the 10 percent must be paid no less frequently than on a quarterly basis. If any employee does not earn enough during a given quarter to meet the standard salary level, an employer may make a “catch-up” payment within one pay period of the end of the quarter to make up for the shortfall. Any such “catch-up” payment will count only toward the prior quarter’s salary amount and not toward the salary amount in the quarter in which it was paid.
- Provision for automatic increases: The standard salary threshold and highly compensated employee thresholds will automatically be increased every three years beginning January 1, 2020.
- Computation of employee pay: Employers may compute compensation on an hourly, daily, shift or fee basis as long as an exempt employee’s pay includes a guarantee of the minimum compensation level.
With only a couple months to come into compliance, NFP leaders and financial managers will need to consider how the new regulations could affect their operations. The following are a few steps to get you started.
- Determine whether employees of your organization are covered under the FLSA on an enterprise or individual basis. Employees may be covered by the FLSA on an enterprise or individual basis. Organizations that generate less than $500,000 in annual revenue from commercial activities are not covered on an enterprise basis but they may likely still have some employees who are covered on an individual basis, regardless of the amount of revenue generated from commercial activities.
- Employees are covered on an individual basis if they are engaged in interstate commerce. That would include an employee that processes credit card donations from other states over the phone or an employee who purchases goods from an out-of-state vendor.
- Perform an internal review of personnel records, job descriptions and worker classifications. Remember, simply paying an employee on a salary basis does not indicate that the employee is exempt from overtime and minimum wage protection. Ensure all of your organization’s employees are classified appropriately, keeping in mind that job duties, not job titles, determine exempt status. After you have determined that your employees are classified appropriately, identify employees that could become newly eligible for overtime under the new expanded rules.
- Evaluate your staff capacity and organizational structure. Review employee workloads to ensure you know who is working how many hours, and when. Don’t forget to include weekend work or seasonal fluctuations in your documentation! For example, fundraising organizations frequently hold special events in evenings or on weekends, and staff work extra hours during the holiday giving season. By looking at the “big picture,” you can reveal potential opportunities to redistribute workload, trim activities not adding sufficient value, or even shift the standard workweek to minimize employee overtime.
- Review terms and conditions of grants and contracts. Recipients of state, federal or local government funding or project-specific grants may be contractually obligated to maintain services at a predetermined level. The new overtime regulations could result in increased costs not covered under existing grants or cost-reimbursement contracts. Review the terms and conditions of these contracts carefully to understand, identify and proactively address potential compliance issues and budget implications.
- Prepare “what if” scenarios to estimate budget impacts. One scenario is to pay the additional cost of overtime for those who earn it. Another option is to increase the pay of employees whose compensation is already close to the new threshold to avoid these new compliance issues and minimize budget surprises. Organizations relying on restricted or limited budgets might need to consider cost containment strategies, which could include hiring additional part-time workers or contractors, recruiting and training volunteers to fill gaps, restructuring positions within the organization to balance workloads, and/or scaling back services. As you perform your analysis, estimate monetary costs of each “what if” scenario.
- Review and clarify organizational policies and procedures regarding timekeeping, compensation practices and overtime. For example, some organizations may forbid employees from working overtime or require prior authorization. Such policies do not absolve organizations of the obligation to pay time-and-one-half for overtime hours worked, nor do they protect an organization from employee claims for unreported overtime. If new policies, procedures or timekeeping systems will need to be implemented, create a timeline to train organizational managers and communicate to affected employees.
- Work with your organization’s leadership team to create an implementation plan. Once you have an understanding of the requirements, potential solutions, and costs, weigh the options carefully to finalize your implementation plan. Of course, you will have to consider non-monetary, intangible costs of any proposed changes such as the effect on your organizational culture, employee morale over newly imposed timekeeping requirements and mission alignment.
When in doubt, ask for help
Penalties for non-compliance with DOL wage laws can be steep, so organizations should take the necessary steps to ensure they meet the new overtime requirements. Check with an attorney specializing in employment law for guidance if you need assistance.