On September 24, 2019, the U.S. Department of Labor announced its Overtime Final Rule that adjusts the salary level test, part of a three-part test for determining when white-collar workers are exempt or must be paid overtime for working more than 40 hours in a week. Effective January 1, 2020, the salary threshold for the white-collar exemption from overtime pay will rise to $684 per week ($35,568 per year). The Final Rule also raises the salary threshold for highly compensated employees who are exempt from FLSA overtime pay requirements from $100,000 per year to $107,432 per year and allows employers to satisfy up to 10 percent of the standard salary level by using nondiscretionary bonuses and incentive payments. The Labor Department announced further that it intends to propose updates to the salary and compensation levels on a regular basis, to ensure that these levels provide useful tests for exemption. The Final Rule goes into effect on January 1, 2020.
AnnouncingNONPROFIT OVERTIME WEBINARNovember 5, 3:00 pm Eastern (12pm Pacific) Join officials from the U.S. Department of Labor and experts from groups representing workers and employers for an exploration of what the Overtime Final Rule means to nonprofit operations and missions – and what nonprofits should be doing now to prepare.
|
Under the Fair Labor Standards Act (FSLA), 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. 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, or professional duties as defined by the Labor Department regulations. The salary level test — which is the subject of the Final Rule — requires that an employee be paid at or above a minimum specified amount. That amount is currently set in regulations at $455 per week, or $23,660 per year, and requires regulatory action by the Department of Labor to change it.
There is a special category in the regulations that exempts “highly compensated employees” if their total annual compensation exceeds $100,000 and they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.
In 2016, the Obama Administration issued regulations to raise the salary threshold to $913 per week ($47,476 per year) and the minimum threshold for highly compensated employees to $134,004 per year. A federal district court in Texas struck down those regulations, ruling that the Labor Department exceeded its authority. Many nonprofits expressed concern that the Obama Administration’s 2016 overtime rule would have created significant new costs for their organizations. Other nonprofits appreciated that the DOL’s 2016 overtime rule would have raised pay and reduced working hours for many nonprofit employees, and helped lift out of poverty many individuals that the nonprofits served.
The Labor Department estimates that about seven percent of nonprofit and government employees nationally will be affected by the higher salary threshold (compared to five percent of for-profit employees). It acknowledges, “To the extent that employers respond to this rule by restricting employee work hours, this rulemaking could negatively affect the quality of public services provided by local governments and nonprofits.”
News of the overtime regulatory reform efforts a few years ago caused many nonprofit executives to recognize (perhaps for the first time) that a web of federal and state wage and hour laws did indeed apply to their organizations and employees, and that they might not be in full compliance. Read the report, The Nonprofit Overtime Implementation Conundrum, for background on the 2015-16 rulemaking and the views of nonprofits.
In particular, many nonprofits were surprised to learn that there is not an exemption in the law for charitable organizations and that there isn’t a coverage threshold based on the number of employees. Actually, that law applies based on a confusing overlay of revenue from “sales” and whether employees engage in “interstate commerce.” While it may be tempting for those who don’t want the law to cover their operations to interpret the quoted terms narrowly, the truth is that just about every nonprofit employee is protected by the law either directly or indirectly.
This is true for several reasons. First, the U.S. Department of Labor treats employees as covered if their job duties somehow connect them with interstate commerce. Use the internet; send and receive email and mail; purchase goods online; accept donations via credit card? All of these functions trigger coverage, according to the people who enforce the law. Second, at least 10 states automatically extend coverage of the federal law to employers in their states with one or more employees. So even if there were a hole in coverage under the federal law, individuals are covered by way of state law. Finally, most employers that fall into the coverage gray area apply the law to their employees because it’s cheaper to comply than taking the risk of being wrong (attorneys fees, time lost due litigation, potential penalties, and low morale of employees), and it’s needed to compete for the best talent. Job seekers offered lower salaries generally are not interested when told the prospective employer doesn’t feel it has to pay overtime when other employers hiring at the same time do pay overtime.
As of January 1, 2020, the effective date of the Overtime Final Rule, nonprofits with government grants and contracts at any level of government (local, state, tribal, or federal) will be put in the position of having to comply with new federal requirements that impose new costs that likely were 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. Federal for-profit contractors are entitled to seek “labor standards adjustments” or “equitable adjustments” to protect them from government-mandated labor cost increases, but that right is not currently available to nonprofits performing work under government grants. Nonprofits with government grants and contracts are encouraged to alert their cognizant agencies of the impact of the Overtime Final Rule on costs and to ensure that future contract and grant negotiations incorporate changes to reflect the new labor standards. Learn more about the interplay between labor regulations and grants rules by reading the Nonprofit Joint Comments to Overtime Proposed Rule. See also, The Nonprofit Overtime Implementation Conundrum.
