5 THINGS NONPROFITS NEED TO KNOW ABOUT THE NEW OVERTIME RULE
The information in this blog post is based on research and not the opinion of Houston Arts Alliance.
It’s not easy managing a nonprofit. In today’s increasingly for-profit world, many nonprofits struggle to balance their dedication to the mission with smart business tactics, a conflict that can often leave employees overworked and undercompensated. When every dollar of funding counts, and resources are limited, it’s tempting to stretch them to the utmost. That’s why the passing of new labor laws under the Obama administration, set to take effect this December, can seem a daunting prospect for nonprofit employers.
The new regulations will affect the Fair Labor Standards Act (FLSA), which, among other things, set out to protect employees’ right to a 40-hour work week. This protection has declined significantly since its introduction in the 1940’s, however, due to a provision of the law affectionately termed the “white collar exemption,” wherein employees with sufficient salaries and responsibilities, or “white collar” workers, who don’t need overtime protection can be forced to work extra hours without the customary “time and a half” payment usually mandated by overtime work. The white collar salary cap was last adjusted in the 1970’s to a now outdated $23,440 a year, according to the National Employment Law Project, allowing for widespread misclassification of workers as managers to avoid overtime pay. The updated salary cap will cover workers who earn up to $47,476 annually according to The Department of Labor, expanding protection under the law to 12.5 million new workers.
Nonprofit organizations, and their employees, are no strangers to working overtime, both in the legal sense and otherwise. When you’re in the business of helping others, managing your passion to get the job done with limited resources can be a tough balancing act. While the new overtime law as well as an Executive Order tightening government funding restrictions might seem like insurmountable odds to nonprofits with already stretched resources, the real world effects they will have on everyday business practices are limited at best.
Here are five things you need to know about the new overtime laws:
1. Know your employees: Come December, many employers might find it convenient to contract out time-consuming jobs that would otherwise require overtime pay. While independent contractors are paid a set fee and save employers money come payroll tax time, the criteria to classify employees in this category is strict at best. The designation of contractor applies to a specific subset of workers who perform services unsupervised, with only the result controlled by the payer. This is not, however, a subjective distinction. The IRS has specific guidelines about who is or is not eligible for Self-Employment Tax. Though it seems like an attractive loophole, misclassifying regular employees as independent contractors can lead to trouble down the line.
2. Know your coverage: The new overtime rule is a provision of the Free Labor Standards Act (FLSA), which in turn applies to specific types of businesses, or those that generate $500,000 a year or more in sales or business. For this reason, many nonprofits, especially in the arts and cultural sector, find themselves not covered by the FLSA and therefore exempted from the new overtime laws. Employees of nonprofits that are strictly charitable or make less than the stipulated $500,000 a year cannot claim coverage on an “enterprise” basis (the basis of their place of work). However, exemptions always exist. Some businesses are impacted based on their operations as “named enterprises,” regardless of total revenue. These include hospitals, schools and preschools, government agencies, and nursing facilities to name a few. Exemptions and special conditions also apply to some individuals, which brings us to our next tip.
3. Know the loopholes: There are special circumstances under which the FLSA would still apply to an organization or individual employee regardless of the business’s profits, or lack thereof. For individual employees, specific job requirements that result in interstate commerce or the employer’s significant involvement in interstate activity could trigger coverage under the new laws. This could include secretaries making regular interstate phone calls (to donors for example) or even a janitor at a plant that ships goods across state lines. For nonprofits only, volunteer labor can be utilized without counting as specific overtime under the new laws. However, this must be documented and an employee’s volunteer activity must differ from the work they are employed to do. In short, they can’t work for free, even if they want to. This Department of Labor (DoL) blog entry on coverage under the updated FLSA includes more specific examples, as well as a host of other, less common exemptions for individuals.
4. Know your options: Once you know how the Overtime Final Rule affects your organization and your employees, you can come up with a plan for the future based on your organization’s specific needs. One option for employers whose businesses are impacted by the FLSA is, of course, salary adjustment. Since the new law covers a baseline salary, raising or lowering an employee's salary to compensate for new overtime pay or to re-designate new employees as managers based on their duties can help in the transition to documented overtime pay. Though it is not necessary to document hours for individuals who regularly work overtime under the new law, it helps with the overall transition process and could highlight areas where time management or even staff number could be adjusted. In the nonprofit sector especially, where the job often has goals outside of improving the bottom line, managing overtime work without taking advantage of employees is key. Through a combination of volunteer work, proper staff designation, and recognition of higher, managerial positions, nonprofit organizations can use the FLSA to their advantage and maintain a strong and impactful commitment to their missions.
5. Know everything: Education is an employer’s best tool when it comes to dealing with new legislation, especially in a sector where doing business and serving the community are intrinsically tied. While the mission of most nonprofit organizations is enriching their community through charity, art, or cultural awareness, the execution of that mission relies on hard-working employees and good business practices to carry it out. The DoL has many resources to educate nonprofit employers on best practices for maximum efficiency—all while maintaining a satisfied workforce willing to go the extra mile for your cause.
Though it might seem daunting at first, the new Overtime Final Rule taking effect this winter should be embraced, not feared, by nonprofit employers. Supporting legislation for fairer pay forces savvier organization and tighter management for nonprofits that don’t necessarily focus on business, allowing resources to go farther and a deeper impact to be made. Recognizing the need for this legislation and supporting dedicated nonprofit employees are key to maintaining a healthy nonprofit sector and, ultimately, maybe even improving your bottom line, too.
Learn more about the Final Overtime Rule here.
The National Employment Law Project. “On The Labor Department’s Final Overtime Rule.” Posted May 17, 2016. http://www.nelp.org/news-releases/on-the-labor-departments-final-overtime-rule/
Economic Policy Institute. “Estimating the Number of Workers Directly Benefiting from the Proposed Increase in the Overtime Salary Threshold.” Posted August 3, 2015. http://www.epi.org/publication/overtime-estimates-technical-memo/
The Los Angeles Times. “Obama's latest executive order aimed at labor law violations.” Posted July 31, 2014. http://www.latimes.com/nation/la-na-obama-labor-20140731-story.html
Internal Revenue Service. “Independent Contractor (Self-Employed) or Employee?” Updated July 7, 2016. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
U.S. Department of Labor Wage and Hour Division. “Fact Sheet #14: Coverage Under the Fair Labor Standards Act (FLSA).” Revised 2009. https://www.dol.gov/whd/regs/compliance/whdfs14.pdf
U.S. Department of Labor Wage and Hour Division. “Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA).” Revised 2008. https://www.dol.gov/whd/overtime/fs17a_overview.htm
U.S. Department of Labor. “Overtime Final Rule and the Non-Profit Sector.” https://www.dol.gov/sites/default/files/overtime-nonprofit.pdf
U.S. Department of Labor Wage and Hour Division. “Guidance for Non-Profit Organizations on Paying Overtime under the Fair Labor Standards Act.” https://www.dol.gov/whd/overtime/final2016/nonprofit-guidance.pdf
U.S. Department of Labor Wage and Hour Division. "Final Rule: Overtime." https://www.dol.gov/whd/overtime/final2016/