The Fair Labor Standards Act (FLSA) has set the federal minimum wage and defined overtime pay (time and a half for any hours beyond 40 in a workweek) since 1938 and it is in relation to the FLSA that all minimum wage and overtime pay disputes and discussions refer, including some impending changes. Some salaried employees will soon see a minimum wage increase before the end of the year. What does that mean for 501(c)(3) nonprofit organizations? For some, it won’t mean much of anything but others might need to start preparing now to ensure all their ducks are in a row before the December 1, 2016 deadline.
What’s the New Rule?
The important thing to remember about the new overtime rule is that it will apply to “white collar, salaried employees,” which generally translates to management positions and higher. According to FLSA Section 13(a)(1), not everyone who fits that bill will qualify to receive overtime.
It ultimately comes down to three tests: the salary basis test (if the employee gets the same amount of money no matter how much the employee works), the salary level test (how much the employee makes) and the duties test (what the employee does). Starting December 1, the salary level test will set a minimum of $934 a week or $47,476 a year. Any employee that meets the duties test and draws a salary will need to make at least that much money.
If a salaried employee is not exempt from the overtime rule, an employer will need to decide if they can limit the employee to 40 hours a week, pay that employee overtime (time and a half, based on what their hourly pay rate would be at their salary level) to complete their work, or find a way to increase the employee’s salary to the requisite $47,476 (or the adjusted number in years to come).
“Imagining worst cases is not hard to do,” Martin Levine, a consultant specializing in strategic planning and change management, said in an email interview. “The organization has recognized that many of its key employees who have become overtime eligible have been regularly expected to work well beyond the 40 hours per week threshold. The organization does not have the funds needed to pay for these hours, either as overtime or by hiring additional staff. It’s only option is to bring their actual schedule back to 40 or less hours per week and, as a result, they cannot serve everyone they are committed to serve or perform all of the work they have committed to complete. Clients who depend on them are left unserved and at risk; the organization does not meet its projections and founders, private and public, see them as a failing organization and refuse to continue to fund them so they must retrench either further or go out of business.”
Even if the worst doesn’t come to pass, an employer might have to make a choice about whether or not the services of a professional on staff are necessary.
Gerard “Jerry” Panaro, Esq., of Howe & Hutton has more than 35 years of experience with employment law and representing nonprofit organizations in the District of Columbia and Maryland. He uses his own line of work as an example of this latter predicament.
“If I’m in house [counsel] to a nonprofit – and I’m exempt because I’m a professional – but I’m only getting $40,000 a year. Let’s say we’re going to court a lot, writing briefs; if I work 60 hours a week, that nonprofit is going to either have to increase my salary to $47,500 a year or I’m going to have to keep track of my time and the nonprofit is going to have to pay me overtime. If I work 60 a week, they’ll have to pay me 20 hours over time,” he explained.
A nonprofit facing that scenario might choose to divest themselves of in-house counsel and go to a law firm on an as-need basis.
The size and scope of each individual nonprofit would likely determine their legal needs, but Panaro indicated that his job is far from the only professional service employed by nonprofits. He pointed to accountants and meeting planners as exempt positions that, conceivably, could work as many as 60 hours a week. If a nonprofit employs someone in such a field and they do not meet the salary level or salary basis test, the nonprofit will need to make some choices: increase the salary, pay overtime or outsource the work.
What Does the New Rule Do?
“So in theory, you could have a truck driver or gardener who is making $100,000 a year and highly compensated but not qualified for exempt status because they don’t meet the duty test,” said Panaro.
But why is the new rule needed?
Panaro explained that the new overtime rule does four things:
- It raises the minimum salary for exempt employees;
- It raises the minimum salary for highly paid employees (“If you’re not making at least $134,000 you’re not going to qualify for the highly compensated employee,” he said)
- It creates salary levels that will be adjusted automatically every 3 years starting Jan. 2020; and
- It allows companies to count non-discretionary bonuses, commissions and incentive payments toward the salary test, but only up to 10 percent of the salary basis pay. This latter point is important if you have someone who has a base salary plus a bonus or commission, as it means only $90 of any given bonus or commission is going to count toward a $900 “salary.”
Providing a more easily understood example, Panaro described an administrative assistant in New York, Los Angeles or San Francisco; all cities where the cost of living is substantially higher than the national average, and where making $100,000 per year isn’t unheard of. If the position is not exempt – which is likely, if it doesn’t pass the duties test or the position isn’t salaried – then the employee would be entitled to overtime if they work more than 40 hours a week.
What Can Nonprofits Do?
Since the new rule don’t take effect until December (maybe; some in Congress are hoping to derail or delay the new rule), organizations have time to prepare.
“Before just managing the problem by finding a short term solution to manage the potential new costs, I think every 501(c)(3) Board and leadership staff team should take a step back and consider the larger question: can our service model be based on members of our staff being expected to work long hours without fair compensation? If the answer is that our organization is comfortable with that then moving on to the pragmatic steps of managing hours, looking at job responsibilities, etc., are the work of the next few months,” Levine said. “But if our people do matter then we need to more actively become advocates. Conversations with private funders about changing funding agreements to reflect the need to pay staff fairly come to the forefront. Joining with other nonprofits to ask federal and state contractors to reopen their Agreements to recognize these new costs is important. Thirdly, taking steps to educate the population at large about the important work being done by dedicated and expert staff who deserve to be fairly compensated becomes part of the agenda.”
Having a complete understanding of exactly what work is being done, by whom, and how long it takes are all important factors for making some of the decisions that will have an immediate effect on everyone involved. Panaro suggested assessing employee classifications early, to know which are truly exempt and which are not.
“I see it over and over again. A nonprofit seems to classify everyone as nonexempt and that’s not the case,” he said.
Those in command of a nonprofit can start by evaluating each employee’s role with the organization and asking three questions: Does the employee meet the duties test? If yes, is the employee salaried? If yes, does the employee make at least the minimum required by the new rule? If all three questions can be answered in the affirmative, then – and only then – is the employee exempt from the overtime rule. Otherwise, the employee is eligible for overtime pay.
(For more information about what qualifies as an exemption under the duties test, please see the Department of Labor Fact Sheet #17A.)
Panaro also encourages nonprofits to use the next few months to have all employees track their hours of work – actual work, he reminds us, not just what’s on the clock but the actual time spent working.
“That means, if … I’m at my desk at 8:30 but I’m fiddling around, checking the weather, or the scores, getting coffee, that’s not work. If I don’t physically, actually start working until 8:40, that’s the time I need to put down, not 8:30. Some people still need a smoke break. If I go outside at 11 for a smoke break and I don’t get back to my desk until 11:20, that’s 20 minutes I’m not working. It should be fairly accurate – not with a stopwatch in your hand, but it needs to be truthful,” he says.
To hear more on this topic and learn more about some of the options available to nonprofit organizations ahead of the new overtime rule, tune in to the webinar Nonprofit Options to New Overtime Rule with Jerry Panaro and Marty Levine today (July 25) at 12 Noon Eastern. (Did you miss it? No problem. Watch it on-demand.)