More Nonprofit Employees Qualify for Overtime Under New Regulation

A new regulation from the Department of Labor that expands overtime benefits to full-time, salaried employees who make up to $47,476 a year has major implications for nonprofits.

Previously, the threshold was $23,660. The new policy, which goes into effect December 1, will apply to an estimated 4.2 million workers, including many who work at nonprofits.

“This is really the most dramatic change to these regulations since they were first published in the 1930s in terms of number of people impacted in one fell swoop,” said Robert Boonin, an employment lawyer and member of the Wage & Hour Defense Institute.

He believes nonprofits are “very vulnerable to being seriously hit because they have fewer resources to keep people from being exempt” from qualifying for overtime.

Employers can exempt employees from overtime pay for working more than 40 hours a week if they meet a three-part test: The employees must be white-collar professionals as opposed to manual laborers, administrative support staff, or service workers. They must be paid a salary, not per hour. And they must earn as much or more as the salary threshold, soon to be $47,476 a year.

To avoid paying overtime wages, nonprofits and other employers subject to the Fair Labor Standards Act will have to either limit salaried employees who make less than the threshold to 40-hour work weeks or raise their pay above $47,476.

The rule also raises the salary ceiling above which workers known as Highly Compensated Employees are exempt from overtime pay from $100,000 to $134,000. Many high-level managers at nonprofits fall into this category, according to the Department of Labor.

For all employees, the regulation will automatically update the salary threshold and ceiling every three years, beginning January 1, 2020. The Department of Labor estimates that the 2020 threshold will be $51,168 and ceiling will be $147,524.

The new rules don’t affect hourly employees, who remain eligible for overtime pay if they work more than 40 hours a week.

Not All Charities Included

In conjunction with the new regulation, the Department of Labor published information to help clarify which charities are subject to the Fair Labor Standards Act and therefore must adhere to the new regulations. It applies to most hospitals and schools but not all nonprofits.

All employees are covered if the organization for which they work has annual revenues of at least $500,000 from “commercial activities.” Income that a nonprofit uses for charitable activities does not count.

But even if a nonprofit is not covered by the law, an individual employee may be covered if he or she engages in interstate commerce on the job. Duties such as making out-of-state phone calls, sending interstate mail and email, and processing credit card transactions counts as interstate commerce.

The policy change is likely to affect nonprofits in several ways: Many will have to train more employees and supervisors to keep accurate time records, Mr. Boonin said, and some charities could have trouble creating accurate operating budgets.

The potential increase in personnel expenses means that nonprofits with government contracts requiring them to provide services at a set cost may find themselves “between a rock and a hard place,” said David L. Thompson, vice president for public policy at the National Council of Nonprofits.

The question for them will be: “How do we live under our contract written under an earlier iteration of the law?” he said.

To that end, the Department of Labor noted in a fact sheet for nonprofits that it is encouraging government and private grant makers to consider how the new rules will affect nonprofit grantees.

With more employees qualifying for overtime pay, Mr. Boonin predicts “there are going to be claims down the road that they’re not getting paid for overtime. I think employees may be suing, either for being misclassified in the past or, more likely, for mistakes in compensation going forward.”

Nonprofits Divided

The nonprofit world has so far avoided picking sides on this issue, Mr. Thompson said. While most charity leaders wish they could pay their employees more, they also worry about going out of business.

“On employment issues like these, we nonprofits tend to have moral support but operational anxiety,” he said. “There is no right answer for nonprofits, typically. If you talk to the development-office person or the finance person, you’ll get a different answer than from the executive director.”

The council is soliciting answers to its survey about how nonprofit leaders think the regulation will affect their work.

The early responses vary, reports Mr. Thompson: Some nonprofits say, “We all have to do better and pay more,” while others say, “We’ll have to shut down.”

One charity noted that nonprofits that can’t afford to pay overtime wages may have to limit service hours and develop a “tolerance for wait lists.”