On May 18, 2016, the Department of Labor (DOL) announced final regulations governing the salary level required for the white-collar exemption from the minimum wage and overtime protections of the Fair Labor Standards Act (FLSA). Effective December 1, 2016, the threshold at which workers are exempt from overtime rules of FLSA will increase from $455 per week ($23,660 annually) to $913 per week ($47,476 annually).
There are two types of coverage under FLSA’s minimum wage and overtime protections: enterprise coverage or individual coverage. Under enterprise coverage, FLSA applies to businesses with annual sales of at least $500,000. For non-profits, enterprise coverage applies only to activities performed for a business purpose, like a gift shop. It does not apply to charitable activities that are not in substantial competition with other businesses. Income from contributions, membership fees, many dues, and donations used for charitable activities are not counted toward the $500,000 threshold. However, FLSA specifically applies to hospitals, schools, government agencies, and businesses providing medical or nursing care for residents, regardless of their non-profit status. Even if the employer is not a covered enterprise under FLSA, many individual employees may still be covered. Under individual coverage, employees may be entitled to FLSA protections if they themselves are engaged in interstate commerce or in the production of goods for interstate commerce.
Establishing that a white-collar employee is exempt from overtime requirements involves assessing how the employee is paid (salary basis test), how much the employee earns (salary level test), and whether the employee primarily performs the kind of duties excluded from the overtime protections (duties test). The salary basis test requires that the employee must be paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of the work performed. The salary level test is the level at which the worker is exempt from the overtime pay protection, $913 per week. Generally, in order to be exempt from overtime, employees must be classified as white-collar workers with executive, administrative, or professional duties. If a worker does not meet the required three tests, the employer is required by DOL regulations to pay overtime at time-and-a-half (150%) of the workers hourly wage when they work more than 40 hours per week.
The DOL defines executive employees to have the primary responsibility to manage the business and regularly direct two or more employees. Executive employees must also have the autonomy to hire, terminate, or make significant recommendations about other employees. Administrative workers perform office or non-manual work directly related to management or general business operations. Additionally, an administrative employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. Exempt professional employees must primarily perform work that either requires advanced knowledge in a field of science or learning, usually obtained through a degree, or that requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
Employers have several options for how they choose to navigate the new DOL rules:
- Raise salaries for executive, administrative, and professional employees to exceed the new threshold of $47,476;
- Limit overtime through documented policies and procedures that restrict employees working more than 40 hours per week without supervisor approval;
- Pay overtime above a salary for qualified employees. Employers can continue to pay eligible employees a salary and then pay overtime for hours in excess of 40 per week;
- Reorganize workloads and adjust schedules to spread out work hours;
- Adjust an employee’s base pay to reallocate it between regular rate of pay and overtime compensation.
December is right around the corner. This means employers need to prepare now for the changes to the overtime pay rules. Compliance with the amended DOL regulations will require employers to conduct a thorough analysis to determine potential overtime obligations and then make adjustments to meet the reality of budgets.
No doubt this is going to require time, effort, and changes for non-profits. Members of senior management, particularly the Executive Director and CFO, will need to be heavily involved in the process. Keep in mind, reliance on professionals who understand the financial, as well as Human Resources aspect, will be critical to helping your organization successfully navigate the new rules.
Ed Yoder, CPA, MSA, is an Assurance Manger at PBMares, LLP and is co-leader of the firm’s Not-for-Profit Team. PBMares is an accounting and business consulting firm serving U.S. and international clients with offices in the Mid-Atlantic. For more information, please contact the author or visit their website.