Altus Dynamics Blog

The Financial Impacts of the New Federal Overtime Laws and How Nonprofits Can Adjust Accordingly

Posted by Cait Abernethy on Sep 21, 2016 9:30:00 AM

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If you work for a Nonprofit in the United States, you have likely heard that new federal overtime laws/rules are coming into effect December 2016. They affect how you categorize the professionals in your sector - “Exempt” or “Non-Exempt” - and how they’re paid, whether through set salaries or through hourly wages that include overtime for hours worked over 40. If reading that sentence makes you want to hyperventilate into a paper bag for a few minutes, you’re not alone.

From the moment the new rule was put forward for public comment in 2015, the nonprofit community has been asked to make a difficult choice, balancing their mission of helping those in need with the realities of operating. The National Council of Nonprofits encouraged “all nonprofits to conduct a mission-based analysis of the proposed regulations. That means answering questions about how the proposed increase in the minimum salary levels would affect operations, resources, and staffing, as well as what impact the draft regulations would have on persons relying on the services and the mission of the nonprofit” to evaluate the benefits of the changes being proposed.

Many nonprofits are worried about these new laws and how to comply with them, as they’ll take effect December 1st, 2016. In this post I’ve outlined the basics of the ruling, how to determine which employees it applies to, the challenges and financial impacts it may bring to nonprofits, and how your organization can adjust accordingly.

The Basics

In May 2016, the US Department of Labor (DOL) announced changes to rules regarding overtime compensation in the Fair Labor Standards Act, ending a lengthy process that began in 2014 when President Obama requested the regulations be reviewed to ensure they were consistent with his goal of ensuring workers were paid a fair wage for a hard day’s work.

presmemo.jpgThe Department of Labor’s final overtime rule updates the salary level required for the executive, administrative, and professional (“white-collar”) exemption to ensure that the Fair Labor Standards Act’s (FLSA) intended overtime protections are fully implemented, and it provides greater clarity for white-collar workers and their employers, including nonprofit organizations. The final rule will also lead to better work-life balance for many workers, and it can benefit employers by increasing productivity and reducing turnover.

Specifically, these regulations set the minimum salary level for full-time salaried workers to be considered ‘exempt’ from overtime pay to $47,476 annually ($913 per week), which is double the current rate of $23,660 ($455 per week). With this new ruling, if a professional employee is paid less than $47,476, they cannot be considered exempt and must be paid overtime for any extra hours worked.

This means that organizations will need to decide whether to increase salaries or begin to pay time and a half for hours worked beyond 40 hours a week. It is important to realize that calling someone a manager or paying them a salary is not enough to make them exempt from overtime. White-collar employees can be exempt from overtime only if their jobs meet the requirements of a duties test for executive, administrative, and professional employees (described below). In addition to receiving a salary at or above the new thresholds, each exempted employee must also exercise the job duties of those categories and be paid on a salaried basis.

Not following the rules correctly can lead to fines and having to come up with back-pay, so you definitely do not want to stick your head in the sand about these new rules.

How to Decide if an Employee Meets the Duties Test

Workers can only be considered exempt if they are paid a salary that meets the minimum level of $47,476 and they are engaged in duties of an executive, administrative or professional employee. (Professional includes creative and learned professional categories. There are some rules for computer professionals as well.)

You need to evaluate the duties of each employee you think should be exempt from overtime.

The basic requirements for claiming a white-collar exemption under the standard duties test are:

  • Executive: The employee’s “primary duty” must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise (and managing 2 full-time employees as well).
  • Administrative: The employee’s “primary duty” must include the exercise of discretion and independent judgment with respect to matters of significance.
  • Professional: The employee’s “primary duty” must be to primarily perform work that either requires advanced knowledge in a field of science or learning, or that requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

For more information, refer to Classifying Employees Correctly for help in evaluating your job positions.

If the state or federal DOL finds that a nonprofit has misclassified the worker, the nonprofit can be responsible not only for un-paid wages, including overtime, but also state/federal withholding taxes, as well as potential penalties.

How Does the Rule Impact Part-Time Workers?

The salary threshold is the same for all exempt employees, whether they are part-time or full-time. You cannot prorate the salary for part-time employees. Any employee that meets the duties test and is paid a salary must earn a minimum of $913 per week or they must be paid overtime.

For seasonal or occasional workers there are additional considerations. Employers do not have to pay a salary for employees who do not work at all in a workweek but you would want to avoid exempt employees working only a few hours as you would need to pay them their full weekly salary. Exempt status is determined on a week-by-week basis, so a seasonal employee who receives a salary and meets the duties test can be paid a minimum of $913 per week and be considered exempt.

Note that there are special rules when a job requires an employee to sleep in the work place, such as camps and residential programs. You can read about these provisions on the Department of Labor website.

New Call-to-actionChallenges to Consider

The new requirements are going to present some unique challenges for many nonprofits. The ones that we are anticipating include:

  • Many people, including executive directors, are not making anywhere near $47,476, and they often work way more than 40 hours a week. Now organizations must increase their salary to the new exemption level, or pay them overtime, which could result in a larger financial burden for many nonprofits.
  • It may pose a challenge for many nonprofits who have programs in the evenings and weekends and overnight (foodbanks, shelters, taking kids camping, a fundraising event, etc.), which will incur overtime.
  • There will be less flexibility in how and when staff do their work as staff who were formerly exempt but now non-exempt must keep track of their hours to avoid going overtime and over-budget. Many nonprofit staff like having flexibility in hours, as it compensates for the often low pay.
  • The re-categorization of status may affect team morale, as people may wonder why their position is not exempt whereas another position is.

It may increase the workload for exempt staff, who may now have to take on duties of hourly staff so the organization can avoid paying overtime.

What Options Do You Have for Complying to These Changes?

Like other employers, nonprofit organizations have a range of options for responding to the changes to the salary level. The method for compliance, which is entirely within each employer’s discretion, will likely depend on the circumstances of that institution’s workforce, including how much employees currently earn and how often employees work overtime, and may include a combination of responses, such as paying overtime and adjusting employees’ hours and schedules. Some potential responses for nonprofit organizations are:

overtime_graph.jpg1. After evaluation, no changes to pay or hours are necessary.

Many nonprofit organizations may have white-collar employees who satisfy one of the duties tests for exemption and earn between the old salary level ($455 per week) and the new salary level ($913 per week). Employers should evaluate all such categories of white-collar employees to determine which employees do not work more than 40 hours per workweek. The Final Overtime Rule will have no effect on these employees’ pay because they do not work any overtime, even though they will become overtime-protected. They can continue to be paid their salary as before.

 

2. Increase their salary to at least the minimum level of $47,476 annually.

Employers may choose to raise the salaries of employees who meet the duties test requirements, whose salaries are close to the new salary level, and who regularly work overtime, to at or above the salary level to maintain their exempt status.

3. Keep them at their current salary but pay them overtime (time and a half) for any work they do beyond 40 hours a week.

Employers also can continue to pay employees a salary and pay overtime for hours in excess of 40 per week. Although the FLSA requires employers to keep records of how many hours overtime-eligible employees work, the law does not require that overtime-eligible workers be paid on an hourly basis. Rather, nonprofit organizations may continue to pay employees a salary covering a fixed number of hours, which could include hours above 40.

There are several ways to pay a salary and pay overtime. An employer might pay employees a salary for the first 40 hours of work per week, and then pay overtime for any hours over 40. Employers may choose to do this, for example, for employees who work 40 hours per week and do not frequently work overtime, or who do not consistently work the same amount of overtime.

It is also possible for an employer and employee to agree to a fixed salary for a workweek of more than 40 hours, in which the salary includes overtime compensation under certain conditions. If, however, the employee’s schedule changes in any way during any week (either by working more or fewer hours), the employer must adjust the salary for that week. Employees must be paid based on the hours actually worked during the workweek. This method of paying for overtime, therefore, might be most helpful for employees who consistently work the same amount of overtime every week.

4. Reorganize workloads, adjust schedules, or spread work hours.

If complying with these new regulations is going to incur your organization a lot of overtime costs, you may decide to hire new employees or redistribute work hours in excess of 40 across current staff, such as by increasing the work hours of staff who work less than 40 hours per week. It’s important to note that you have to pay employees overtime when they work more than 40 hours a week even if you have told them not to work overtime, and you cannot use compensatory time for salaried employees instead of paying overtime. Only public agencies, such as state and local governments, are permitted to use compensatory time.

By using a scheduling tool, you can also help you control your hourly staff’s overtime by making intelligent shift suggestions of qualified employees who will not be put into an overtime situation by taking the shift.

5. Reduce the amount of time your staff spend on administrative tasks.

When considering the above options, also look at what percentage of staff’s time is allocated directly to service delivery, and what percentage is allocated to administrative work? In a recent Statesman Report, researchers found that most caseworkers are so bombarded with paperwork and administrative tasks that they spend only 26% of their time with children and families. The rest of their time is taken up by things such as:

      • Shift planning and finding relief coverage (manual call downs are a huge time suck, for example).
      • Coordinating manual client intake and assessment processes (often the same info is captured and recorded manually multiple times along the intake process).
      • Tracking down information from other partner programs and agencies.
      • Incident tracking and updating case notes/support plans.

Having to complete these administrative tasks, on top of the time they are spending with clients, is often what pushes them over and above their standard 40 hour work week. Implementing a modern and integrated ERP, Workforce Management and Case Management solution will automate these manual processes and free up staff’s precious time, allowing them to give more focus to clients and causing less overtime hours to be needed to complete these mission-critical tasks.

Conclusion

Nonprofit organizations make enormous contributions to the communities they work within and the world at large by providing services and programs that benefit vulnerable individuals in a variety of facets of life. The Overtime Rule - put in place by the Department of Labor and coming into effect December 1st, 2016 - will make thousands more nonprofit workers eligible for overtime pay—an expansion that is long overdue. While many nonprofits have responded negatively to the new Overtime Rule, protesting that this higher standard of pay is unreachable with their meager budgets and will result in staff reductions, service cuts, and even agency closings, it’s important to remember that this expansion will not only improve the quality of life for thousands of frontline workers by ensuring that they are fairly compensated for all of the hours that they work, but it will also spur economic growth by enabling them to work their way towards financial security.

Despite the potential financial strain it may place on nonprofits, who are already doing more with less, it is also important to respect workers’ time and pay them fairly for their labor. If exploiting your lowest paid workers is absolutely key to your enterprise model, then it may be the model needs some rethinking.


Is your financial software equipped to handle these changes? Can your scheduling tool automate scheduling to meet employee requests, minimize overtime hours, and honor seniority? Ours can.

Since it was designed specifically for the nonprofit sector, our solution was created to handle even the most irregular of schedules and can automate the allocation of hours to eliminate time sheet calculations. Want to learn more? Request a free guided trial today and see how easy your scheduling and finances can become!

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This Post Was Written By Cait Abernethy
Cait Abernethy is the Marketing Coordinator at Sparkrock and is excited about marketing trends, enthralled by technology of all kinds, and is interested in the ways local actions can have a global impact.
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