The Operations Side of Proposed Overtime Rules

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The last time the U.S. Department of Labor proposed changing the rules on overtime pay, the second most common question the National Council of Nonprofits heard – after what would the proposed regulations do? – was this: Wait, what, you mean this law applies to my nonprofit; since when? The answer then, as now, is that the law on overtime “almost certainly” applies to individual nonprofits and employees, and it has “for a long time.” That still remains true today, even though a federal judge in late 2016 blocked those proposed changes from taking effect

The Department is once again proposing to change the federal overtime rules, and it’s inviting your expertise to make sure the final regulations work.  Nonprofit executives are the operational experts about how the proposed changes would affect nonprofit operations and missions. This article provides the background for busy nonprofit executives, so you can easily file public comments by May 21. Your input now to help improve the final rules could help you avoid painful compliance later.

Proposed Overtime Regulations

We’ll start with the present day, because to understand what’s proposed requires an understanding of current law, and what it means to nonprofits. In March, the U.S. Department of Labor released its proposed rule updating the overtime salary threshold under the federal Fair Labor Standards Act (FSLA), reopening rulemaking on an issue that has drawn significant attention and controversy over the past four years.

At issue is the provision of the federal FLSA that exempts certain employees from the requirement that they receive time and a half overtime pay for work beyond 40 hours in a week. Before an employee can be deemed “exempt,” three tests must be satisfied: the person must (1) be paid on a salary basis; (2) be paid at least the salary threshold set forth by the Labor Department; and (3) satisfy a duties test as being an executiveadministrative, or professional worker. 

The Department is proposing to raise the salary threshold for the white-collar exemption from overtime pay – increasing it from the current level of $455/week ($23,660) to more than $35,000 per year. This rate would be nearly 50 percent higher than the current level that was last updated in 2004, but only half as much as the increase approved by the Obama administration in 2016 (to $47,476/year) that was blocked by a federal court. Learn more about what’s being proposed now by reading this brief abridged version of the draft regulations and the National Council of Nonprofits’ updated analysis. You can also read the comments filed on May 15th by the National Council of Nonprofits.

Now that the proposed changes are out in the open, it’s time to address some underlying questions about this longstanding labor law known as the Fair Labor Standards Act.

Is my nonprofit covered by the overtime law?

As stated at the outset, news of the overtime regulatory reform efforts a few years ago caused many nonprofit executives to recognize (perhaps for the first time) that a web of federal and state wage and hour laws did indeed apply to their organizations and employees, and that they might not be in full compliance. Read the report, The Nonprofit Overtime Implementation Conundrum, for background on the 2015-16 rulemaking and the views of nonprofits.

In particular, many nonprofits were surprised to learn that there is not an exemption in the law for charitable organizations and that there isn’t a coverage threshold based on the number of employees. Actually, that law applies based on a confusing overlay of revenue from “sales” and whether employees engage in “interstate commerce.” While it may be tempting for those who don’t want the law to cover their operations to interpret the quoted terms narrowly, the truth is that just about every nonprofit employee is protected by the law either directly or indirectly.

This is true for several reasons. First, the U.S. Department of Labor treats employees as covered if their job duties somehow connect them with interstate commerce. Use the internet; send and receive email and mail; purchase goods online; accept donations via credit card? All of these functions trigger coverage, according to the people who enforce the law. Second, at least 10 states automatically extend coverage of the federal law to employers in their states with one or more employees. So even if there were a hole in coverage under the federal law, individuals are covered by way of state law. Finally, most employers that fall into the coverage gray area apply the law to their employees because it’s cheaper to comply than taking the risk of being wrong (attorneys fees, time lost due litigation, potential penalties, and low morale of employees), and it’s needed to compete for the best talent. Job seekers offered lower salaries generally are not interested when told the prospective employer doesn’t feel it has to pay overtime when other employers hiring at the same time do pay overtime.

Can’t we just provide comp time as an alternative to overtime?

When the overtime regulations were last under discussion, many organizations reported to the National Council of Nonprofits that they weren’t concerned with a higher salary threshold because they don’t pay overtime; they let their employees take compensatory time off (“comp time”) instead. Problem is, comp time is not permitted for nonprofit or for-profit employers (except within the same pay period as extra hours are worked). Only certain governmental employers may grant comp time in lieu of overtime pay.

How can I cope with rising costs working under fixed government grants?

That is truly an excellent question and one that has troubled nonprofits for years. Governments hire nonprofits to provide vital and valuable services in communities and typically pay nonprofits at set rates pursuant to written agreements. If a government mandates higher labor costs, nonprofits usually can’t turn around and send the government a higher bill for those unanticipated costs or reopen the agreement to renegotiate terms. What’s a nonprofit to do (hence the “operational anxiety” managers feel)?

Something we all can do – and are doing in the current overtime rulemaking – is advocate for a change in federal treatment of grants with nonprofits. Because of a quirk in federal policy, for-profit businesses providing goods and services to government are entitled to reopen their contracts and secure changes that ensure the contractors are not forced to eat the increased labor costs mandated by government. Nonprofits operating under grants have no similar protection. The reason is that the federal government has two distinct sets of rules: the Federal Acquisition Regulations (FAR) governing contracts include reopener clauses in their agreements; the OMB Uniform Guidance controlling grants with nonprofits is silent on the subject.

This disparity in the rules forces nonprofits to bear the brunt of policy changes – and essentially subsidize government for its policies – and adversely affects the people served by programs that suffer from unbearable costs. The solution is to demand that the Department of Labor work with other federal agencies to fix the disparity by ensuring that nonprofits have the same right to reopen written agreements when government imposes new costs.

As part of the Labor Department rulemaking, the National Council of Nonprofits and several other national organizations are formally calling on the federal government to create a mechanism through which nonprofits with government grants and contracts can seek adjustments to cover unanticipated increased costs. You can find our Joint Comments in Support of Government Grants Reforms here. If you agree with the need and proposed solutions, we encourage you to submit your own statement of support by going to the comments page for the Overtime Proposed Rule and letting them know:

“My nonprofit endorses the Joint Comments in Support of Government Grants Reforms submitted as part of the overtime rulemaking on May 15. It is imperative now – before new overtime rules are promulgated – that the federal government create a mechanism that ensures that written agreements that nonprofits have to provide services for governments are adjusted to cover the increased costs of complying with the overtime final rule. We join in the call for the government to treat nonprofits fairly, as the federal government already does in protecting for-profit contractors from government-mandated labor cost increases.”

The public comment period for the proposed overtime regulations ends on May 21, 2019. All charitable nonprofits have the opportunity to raise issues and concerns with Labor Department officials about any or all of the proposed changes. With enough engagement on the grants reform issue – if the Labor Department hears from very many nonprofits – then the regulatory effort can really result in a net positive for all connected to the missions of charitable organizations.

Note: Filing comments on proposed regulations is simple and easy, as our tips for submitting public comments make clear. It’s also important; your government has asked for your expertise, and your nonprofit deserves to have the best rules in place. Thanks for taking the time to share your informed perspective.

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