Adapt to DOL’s Final Overtime Exemption Provisions

Posted December 2019

On September 24, 2019, the U.S. Department of Labor issued the final version of its overtime rule. The new rule goes into effect on January 1, 2020, and is expected to provide overtime protection to 1.3 million American workers who are not currently eligible. Eligible workers are entitled to at least time and one-half their regular pay for all hours that they work over 40 in a work week.

Nonprofit organizations are not excluded from the new law and its implications for them will be discussed below.

What is new under the final rule?

Under the Fair Labor Standards Act (FLSA), the so-called white-collar exemption provides an exemption from overtime pay requirements for employees employed in a bona fide executive, administrative, or professional capacity. In order to be qualified for the exemption, an employee must meet all of the following three tests:

(1) The salary basis test –The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed

(2) The salary level test –The amount of salary paid must meet a minimum specified amount

(3) The duties test — The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.

The final overtime rule increases the salary threshold for exempt employees from $455 per week to $684 per week. In other words, workers who earn less than $35,568 a year would be paid overtime, even if they are classified as a manager or professional. However, employers can use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level.

The new rules also raise the total annual compensation requirement for highly compensated employees from the currently enforced level of $100,000 per year to $107,432 per year, and revise the special salary levels for workers in U.S. territories and the motion picture industry.

How will the new rule affect nonprofit organizations?

In general, the FLSA is a federal law applicable to employers only if they are either (a) engaged in sufficient business activity (in excess of $500,000 annual gross sales), in which the entire organization will be covered (“enterprise coverage”) or (b) their employees are engaged in sufficient interstate commerce, in which case these employees will be covered (“individual coverage”). Income from charitable activities does not count toward the definition of business activities, so contributions, membership dues, in-kind donations, and proceeds from fundraising special events are not considered.

There is also a ministerial exemption from the FLSA coverage, for both overtime and minimum wage requirements. However, this exemption does not mean that all churches and their employees are exempt from the FLSA. An employee’s duties, title, and related training should have a predominately religious emphasis for this exemption to apply. There are guidelines that nonprofit employers need to consider in determining whether any of their employees are excluded from FLSA (and corresponding state law) coverage. Also, special considerations may come into play regarding missionaries’ compensation.

How to adapt to the new rule?

To adapt to the new rule, employers should pull out data for exempt (salaried) workers earning below the threshold and consider reclassifying positions. Costs of raising employee salaries above the new threshold should be weighed against the costs of paying overtime. In addition, workers’ job duties should also be reviewed to ensure compliance with the duties test.

Employers should also consider the effects the new requirements may have on their employee benefit plans, retirement plans, and health plans. For example, some employers have different benefit schedules for salaried (exempt) and hourly (nonexempt) workers, or use exempt and nonexempt status to determine benefit eligibility and contribution levels. Thus, reclassifying an exempt employee to nonexempt or vice versa could create a change in the benefits plan for which he or she could be qualified. For employer-sponsored retirement plans, shifting employees from one plan to another as a result of their exempt-nonexempt status change could create issues with nondiscrimination testing, top-heavy coverage or a reduction of certain benefits.

To effectively implement changes and adapt to the new overtime rule, businesses should work closely with their attorneys and CPAs to assess fully the effects of the new law on the structure of their labor force, employee benefits and pay structures.

Nonprofit organizations must keep in mind that they are not excluded by the law and should begin planning for this change now.

We are always pleased to assist you in determining your best course of action for minimizing the negative repercussions and maximizing job effectiveness associated with the final overtime rules. Please contact us if you have any questions or want to learn more.

By: Christina Li, CPA