How the New Overtime Regulations Affect Your Nonprofit

Basic Summary
On May 18, 2016, the Department of Labor released new overtime regulations detailed in the Fair Labor Standards Act (FLSA). These new regulations have many nonprofit executives and employees wondering if, and how it will affect them. Below is a summary of the changes with the final rule:

• The final rule goes into effect on December 1, 2016, and increases the standard salary level from $23,660 ($455 per week) to $47,476 ($913 per week). The compensation level for highly compensated employees (HCE) increases from $100,000 to $134,004 per year.
• The final rule provides for automatic updates to raise the threshold to the 40th percentile of full-time salaried workers in the lowest-wage Census region every three years beginning January 1, 2020. It is estimated that the salary threshold will increase to $51,168 in 2020.
• The final rule allows for up to 10 percent of a non-HCE employee’s salary to be non-discretionary bonuses, incentive pay, or commission, provided the payments are made on at least a quarterly basis.

It is likely that many employees of nonprofits are entitled to the protections of FLSA. There are two ways an employee can be covered by the law and therefore entitled to its protections (which includes the salary level increase):

1. Enterprise Coverage – All employees of an organization would be covered if the organization has annual revenue from sales made or business done of at least $500,000. It is important to note that income from contributions, membership fees, cash and non-cash donations, and many dues are not counted towards the $500,000 threshold. An example of an activity performed for a business purpose would be operating a gift shop or providing services for a fee.
2. Individual Coverage – Employees of an employer who are not covered under enterprise coverage can be covered under individual coverages if they are engaged in interstate commerce. Examples of interstate commerce are as follows:
   • Making out-of-state phone calls.
   • Receiving or sending interstate mail or electronic communications.
   • Ordering or receiving goods from an out-of-state supplier.
   • Traveling to other states for their job.
   • Handling credit card transactions or performing the accounting or bookkeeping for such activities.

The salary level is one of three tests used to determine whether employees are exempt from FLSA’s requirements (generally referred to as the white collar exemptions). In order for an employee to be exempt, that employee must meet all three tests: salary basis test, salary level test, and duties test. The final rule does not make any changes to the duties test which is used to determine whether the employee primarily performs executive, administrative or professional duties.

Implementation Options
The Department of Labor does not dictate which implementation option employers choose to comply with the new overtime rule. Some of the options available to employers include the following:

• Raise salaries – Employers may choose to increase employees’ salaries to the new salary level of $47,476.
• Pay overtime above a salary – Employers are not required to move newly overtime eligible employees to hourly, but for weeks that more than 40 hours are worked, overtime would be paid at time and a half. This option would be beneficial for employees who normally do not work more than 40 hours a week, but have seasonal or occasional spikes in hours.
• Change employees to hourly and reduce or eliminate overtime hours – Employers can shift the workload to other employees to ensure workloads are distributed and overtime hours are minimized.
• Adjust base pay and pay overtime – Employers can reallocate the amount of regular pay and overtime compensation by reducing the amount of pay allocated to the base salary (as long as the employee still earns at least the hourly minimum wage) and add overtime pay to account for hours worked over 40.

Examples
Determining whether the new regulations apply to your organization or employees should be done on a case by case basis. Below are examples of when the regulations apply and when they do not.

• An office manager regularly sends emails to out-of-state suppliers and purchases supplies and equipment from out-of-state vendors. The employee is individually covered by the FLSA and entitled to its protections including minimum wage and overtime unless a specific exemption applies.
• An employee does not regularly use the phone or computer to conduct interstate communications and works only with clients within the state. This employee would not be covered under FLSA as he/she does not participate in a substantial amount of interstate commerce.

We Are Here to Help
It is important to understand the overtime regulations and ensure that you have properly implemented the new salary threshold. Please contact us if you are unsure of how the new regulations apply to your organization or employees or have specific questions in regards to implementation.

Briana Peters

As a Partner in the Firm’s Green Bay office, Briana provides audit, review, and tax services to nonprofit organizations. In addition, she works on audits of employee benefit plans and commercial entities. She is also the Director of Training for the Firm.