New Federal Overtime Rules Delayed
On November 22nd, a Federal District Court judge in Texas granted a preliminary injunction to delay the December 1st implementation of the Obama Administration's proposed changes to the Fair Labor Standards Act. The Department of Labor has appealed the injunction, but the pace and outcome of the appeals process are uncertain at this time. According to Society for Human Resource Management (SHRM):
Employers should stick with whatever course of action they already decided to take at this point [in response to the delay], whether they opted to wait and see what happens to the rule or to roll forward with changes for employee-morale reasons or other purposes.
It is clear from GPNP mebers' responses to our survey that organizations were in the process of preparing for the December 1st implementation deadline. Recognizing that, please see this article from SHRM on how to communicate with employees about the delay. Additionally, please see SHRM's resource page with advice for navigating the delay.
New Federal Overtime Rules Will Significantly Impact PA Nonprofits
Click here to download GPNP's one pager on the FLSA changes. Background on the changes is available here. Click here to download the slides from GPNP's July 28, 2016 educational session with Schneider Downs.
On May 18, 2016, the Department of Labor announced its changes to Fair Labor Standards Act's (FLSA) regulations governing exemptions from the FLSA's overtime pay requirements. GPNP is in full agreement with the intent of ensuring fair wages for all employees. The nonprofit sector is committed to the quality of life for all Pennsylvania residents. However, the new regulations pose significant and unique challenges for Pennsylvania’s nonprofit organizations.
- The overtime exemption level will be raised from $23,660 ($455 per week) to $47,476 ($913 per week).
- The compliance date is set at December 1, 2016.
- The overtime threshold will be raised every three years beginning January 1, 2020.
The Department of Labor issued two guidance documents for nonprofits. The brief guidance is available here; the expanded guidance is available here. The Department of Labor’s full resource page on the changes is available here. Additionally, detailed information concerning the changes to the Fair Labor Standards Act here.
The Potential Impact
The new regulations will have significant ramifications for nonprofits. Some of the major issues include:
- Nonprofits’ labor costs will increase, but nonprofits cannot raise their prices like a for-profit business to keep up.
- Many nonprofits are unable to raise fees for services or renegotiate their reimbursement rates with government funders.
- Nonprofits are unable to change their business and service delivery models quick enough to meet such a short compliance period.
- Many nonprofit positions fall under the new salary threshold.
- Impacted positions will likely include early childhood teachers and specialists, therapeutic counselors, adult day services staff, special education staff, workforce development managers, caseworkers, senior program staff, accountants, controllers, fundraisers, among many others.
- Nonprofits will be burdened with additional administrative work to track hours;
- Many salaried workers making less than the new threshold will have their positions reclassified as hourly employees, forcing agencies to devote resources to new time tracking systems.
- Employee morale may suffer, as employees may face new time constraints and restrictions that disrupt how they perform their duties.
Questions for State and Federal Government Funders
- Will state and federal government funders adjust their contracts with nonprofits to reflect the new regulatory climate?
- Will state and federal government funders ensure there are adequate resources to cover the actual costs of service provision under the new regulations?
GPNP is in full agreement with the intent of ensuring fair wages for all employees. The nonprofit sector is committed to the quality of life for all Pennsylvania residents. We have heard from you and recognize that the new regulations pose significant and unique challenges for Pennsylvania’s nonprofit organizations.
For many of you, this is an incredibly difficult situation requiring a full revision to your service delivery model. You are attempting to meet rising demand for vital services in our community. Now you are required to significantly increase your personnel costs. You are being asked to do all of this under the threat of diminishing state funding for the current fiscal year after incurring costs due to the 2015-2016 PA budget impasse.
State legislators are currently negotiating the 2016-2017 budget.
We urge you and your board members to call your legislators this week and explain the impact of this federal policy change on your bottom line. Call your state legislators and let them know that the cost to deliver your services just went up drastically. Click here to find your state legislators.
The new regulations, which take effect on December 1, 2016, will:
- Raise the standard salary overtime exemption threshold from $23,660 ($455 per week) to $47,476 ($913 per week).
- Update the overtime exemption threshold every three years beginning January 1, 2020.
- Leave the “duties test” unchanged.
Federal legislators are weighing responses to the new regulations; you and your board members need to call them and explain how your organization will be impacted. Click here for Senate contact information; click here for House contact information.
After your organization’s calls are made, please let us know who you called and what type of response or feedback you received.
GPNP and The Forbes Funds will be offering trainings to help nonprofits adjust to the new regulatory climate. In addition, we will be arranging more state and federal legislative visits to discuss this issue. If you have any questions or suggestions, please let us know.
Advice for Nonprofits
Schneider Downs' Mary Lynn Gimigliano provided this analysis for nonprofits:
… what does this mean for not-for-profit organizations? Holding down expenses is always an area of concern for not-for-profit organizations, and salary expense can be a major element of the organization’s total expense picture. The new proposed overtime pay regulations could substantially increase salary expense for an organization if it currently has a number of salaried employees earning a base salary of between $23,660 and $50,440 who also work a large amount of overtime hours.
In an effort to lessen the effect of the proposed regulations, the organization could make changes to its compensation structure for their salaried employees. If they believe that overtime pay is already factored into their pay scale for salaried employees, they could convert the salaried employee to an hourly employee with an hourly rate that would bring the employee’s annual compensation with paid overtime to the same level as their current salaried compensation. If the employee is close to the new threshold and works a number of overtime hours, the organization could raise that employee’s salary to just over the threshold. This would avoid overtime pay and could be a positive outcome if the former salary plus overtime pay would be an amount higher than the new salary. For other salaried employees, the base salary of the employee could be lowered with the expectation that overtime pay will bring that employee’s total compensation back to the pre-change amount.
Schneider Downs' Adam Goode provided these recommendations:
- Collect all current salary, bonus and hours data to determine the best course of action for their business.
- Until we have a final ruling, the $970 per week ($50,440 per year) threshold is only an estimate.Employers should be prepared for scenarios both below and above that amount.
- Consider whether amounts normally paid in the form of bonuses can be converted to salary.
- Determine if a process is in place to accurately track hours worked for current exempt employees who may be switching to hourly.
- Determine if staffing changes are required to enable the employer to keep an employee’s hours under 40.
- Determine if new policies are needed to ensure that hourly employees don’t exceed 40 hours in a week.Employers may need to factor in work-from-home time, time an employee is checking and responding to email and other such time that isn’t strictly tracked today.Employers may also want to consider a process for overtime authorization to help manage payroll expense.
- If the employer decides to switch salary employees to hourly, analyze the potential impact that change might have on employee benefits.
- If the employer decides to increase employees’ salary to meet the minimum threshold for exemption, remember that there will be a mechanism in place for the minimum threshold to rise on an annual basis.The employer would need to continue to increase these employees’ salary by that increased amount in order for the employee to continue to be classified as exempt.
- Evaluate potential employee morale issues that these changes may have.Determine how these changes should be communicated to employees.Instances such as changing an employee from salary to hourly, giving pay raises to less-experienced employees, changing benefit classification and other changes can all have an adverse effect on employee morale.
A team from Schneider Downs presented to GPNP on July 28, 2016. To sum up, nonprofits' compliance plans must be multifaceted and address internal technology, the impact on employees, communication, education, and internal policies. Click here to download the slides.
Bill Pokorny wrote for Wage & Hour Insights:
Any changes to the duties tests in the new final rules are likely to face some serious court challenges. However, employers shouldn't pin their hopes on litigation alone. Start looking at your exempt positions and analyzing which ones may be at risk if the duties tests do change. If you need to re-classify any employees, the period between issuance of the final rules and their effective date is your window to make the change. It's going to be a narrow one, so don't miss the opportunity.
SHRM's Smith wrote:
[Attorney Alexander] Passantino said employers should be considering now how they might deal with a salary threshold increase to $50,440 per year. ‘Regardless of when the final rule is published, they are looking at, probably, 60 days for an effective date. An employer hoping to come into compliance without having thought about the issues prior to that time is going to be way behind the eight ball.’
SHRM's Smith also wrote:
The Department of Labor’s (DOL) proposed overtime rule could force some nonprofits to close, which could end much-needed services to vulnerable populations, such as the abused or people with intellectual disabilities, nonprofit officials say.
The proposed rule more than doubles the exempt employees’ salary threshold. Nonprofits may not be able to absorb this leap, according to Elizabeth Hays, SHRM-SCP, director of human resources for MHY Family Services in Mars, Pa., which offers help to troubled and abused youth. Speaking at a U.S. Chamber of Commerce symposium about the proposed rule on Feb. 1, Hays said that if the DOL doesn’t assess the realistic impact its proposal will have on all employers, ‘nonprofits may be writing their final chapters.’ ...
Marc Freedman, executive director of labor law policy for the U.S. Chamber of Commerce, concluded the symposium by calling on attendees to contact their Democratic representatives and raise the concern that nonprofits may have to shut down if the proposed rule is finalized. The DOL already has heard from businesses; maybe it will listen to Democratic members of Congress, he said.
ADP published a resource page on the FLSA change can be viewed here.
Independent Sector posted two webinars addressing the FLSA change that are available here.
GPNP will continue to monitor the new regulations and provide updates on key developments.
An exempt employee is a salaried worker paid over $23,000 that performs exempt job duties with three classifications of executive, professional, and administrative. Exempt employees are not entitled to overtime pay.
A non-exempt employee is paid under $23,000 ($455 per week). Non-exempt employees must receive time and a half pay for any hours worked past 40 per week.
Exempt Job Duty Classifications
According to FLSA, there are three types of exemption categories: Executive, Administrative and Professional:
Executive Exemption: An employee’s primary duties are management of the company or a subdivision, they regularly supervise two or more employees, and has authority or whose opinion is given weight to hire or fire other employees.
Administrative Exemption: An employee’s primary duties are performance of non-manual work that includes the exercise of discretion or independent judgment to matters of significance.
Professional Exemption: An employee’s primary duties require knowledge of an advanced field of learning primarily acquired by prolonged education or requires talent in a recognized field or artistic endeavor.