Under the Fair Labor Standards Act (FLSA) employers must pay their employees a minimum of time-and-a-half for hours worked over the standard 40-hour work week. Traditionally, most white collar employees were exempt from this rule. But that’s about to change.

On May 18, the federal Department of Labor (DOL) issued its final rule updating overtime regulations. The rule changes the annual salary threshold for overtime pay from $23,660 to $47,476 — with automatic adjustments every three years — and there’s no exception for nonprofits. This threshold applies to both white- and blue-collar workers, regardless of their duties. (See “Employee classification: The never-ending challenge.”)

The new rule becomes effective December 1, 2016. So you need to determine as soon as possible whether any of your staff members will become newly eligible for overtime pay.

Affected organizations

First, the good news for nonprofits concerned about shrinking budgets and rising costs: Most smaller organizations are unlikely to become subject to the new overtime rules. Nonprofits generally must have an annual dollar volume of at least $500,000 in sales or business to be subject on an “enterprise” level. Charitable, educational and other tax-exempt activities won’t be considered — only activities performed for the purpose of making a profit, such as selling merchandise in your charity’s gift shop or donated items in your thrift store.

What types of nonprofits could be subject to the new rules, then? Hospitals, businesses that provide medical and nursing care, educational institutions and government agencies fall under FLSA rules regardless of their annual sales volume. Other large charities that compete with for-profit businesses are also likely to be affected.

Also, nonprofit employees of all sizes of organizations may qualify for overtime pay on an individual level if they’re engaged in interstate commerce. For example, if a development staffer’s primary responsibility is soliciting out-of-state donations via phone calls and U.S. Mail, that employee may be eligible for overtime pay. Even administrators and accounting staffers recording and processing interstate donations could qualify.

To illustrate who’s exempt and who isn’t, the DOL has used the example of a nonprofit animal shelter. In addition to providing free veterinary care and other services for homeless animals, the shelter offers veterinary care for a fee to pet owners. Assuming such fee services generate less than $500,000 per year, shelter employees who might otherwise be eligible for overtime under the new rule, aren’t. But an employee who otherwise meets the FLSA’s salary requirements and whose sole responsibilities are to solicit funds from animal lovers across the country may fall under the rule.

Implications for employees and employers

The federal government’s proposed overtime rule change is the first in more than a decade — it’s intended to help American workers keep up with rising costs. Where the old threshold set salaried employees eligible for overtime pay at the 20th percentile of weekly earnings, the new minimum is set in the 40th percentile. (Note that some states, such as California, have set their own overtime thresholds at higher amounts than those traditionally enforced by the federal government.) The DOL has estimated that at least four million salaried American workers will be affected, but some researchers have put that number at closer to 13 million.

Although your nonprofit likely wants to pay employees well for their hard work, the new rule may force you to make difficult decisions. Either you increase your staffing budget to pay overtime (or pay higher salaries that would make eligible employees exempt from overtime) or you limit employees’ workweeks to 40 hours. The first option will be a financial strain if your budget is already stretched to its limits. The second option could force you to scale back services or even eliminate programs.

Looking forward

Now that the final rule has been issued, your nonprofit can’t ignore the possibility that some of your staff members will be reclassified. Review the current FLSA classifications of your staff and determine who might be affected by the change. Particularly note the hours worked by staffers who are at or near the $47,476 threshold. Also talk to your financial advisor about your nonprofit’s specific situation and what you may need to do before December 1.

Employee classification: The never-ending challenge

Deciding which employees are exempt from overtime and which are nonexempt has always been a challenge for employers. But it’s important: Misclassification can result in financial penalties and other negative consequences most nonprofits can’t afford.

The final rule issued by the Department of Labor in May makes no changes to the duties test, which must be considered in addition to how your staffers are paid (hourly or salaried) and how much. Also be sure to take into account the knowledge, skills and educational background employees need to perform their jobs. In general, executives, professionals and many administrators are exempt. Manual laborers, customer service personnel, and clerical and data-entry workers typically aren’t. For more detailed guidance, check the Department of Labor’s website at http://webapps.dol.gov/elaws.

© 2016

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