Nonprofit employees are oftentimes considered different from their for-profit counterparts. For the sake of the mission of their nonprofit, employees may work longer hours, for less pay, and with greater responsibilities. Budgets are thin at many nonprofits. In too many cases, those thin budgets and perceived differences between nonprofit and for-profit businesses translate into a misunderstanding of the fact that federal and state employment laws generally apply equally to both for-profit and nonprofit organizations. The nonprofit’s mission and limited funds do not override its obligation to comply with applicable employment laws, including minimum wage and overtime pay requirements. And those overtime requirements have just been made more onerous for many small businesses and nonprofits.
The federal Department of Labor recently adopted under the Fair Labor Standards Act a new rule, which updates the salary level required for the so-called white-collar exemptions and becomes effective on December 1, 2016. Although a number of nonprofits and employees in many states will not be affected by the new rule, all nonprofit corporations in North Carolina will have to comply.
Why such a result in North Carolina? Where the Fair Labor Standards Act covers enterprises – those organizations with at least $500,000 in annual revenues – or employees who are engaged in interstate commerce or in the production of goods for interstate commerce, the North Carolina Wage and Hour Act applies to all employers in North Carolina, including nonprofits, and its white-collar exemptions are taken directly from the Fair Labor Standards Act. Therefore, a nonprofit corporation in North Carolina with less than $500,000 in revenues must comply with the new federal rule even if some or all of its employees are not engaged in interstate commerce.
What does the new rule do? It increases the salary level under which most white-collar workers are entitled to overtime from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). The other requirements to qualify for a white-collar exemption from overtime pay requirements are unchanged. In addition to meeting the salary level test, executive, administrative and professional employees must be paid on a salary basis and must meet a duties test to be exempt. Salaried workers who do not primarily perform executive, administrative or professional duties are not eligible for the white-collar overtime exemption. The new rule also raises the minimum annual compensation level for highly compensated employees, who are subject to a less stringent duties test, from $100,000 to $134,004. Last, it establishes a mechanism for updating the salary and compensation levels every three years, commencing in 2020.
What can a nonprofit do to insure compliance with the new rule? There are a number of options available to nonprofits and other employers:
- Make No Changes. The employer should review the hours worked by its white-collar employees to determine which, if any, work more than 40 hours in a week. Otherwise exempt employees making more than $47,500 per year are unaffected by the rule no matter the number of hours they work. Employees who do not work overtime will not be affected by the new rule even if they do not make more than the minimum salary level of $913 per week. For example, a manager paid a fixed salary of $40,000 per year may continue to be paid on that basis. Even though the manager is not exempt from the overtime pay requirements, if the manager works no overtime, there will be no overtime amounts payable.
- Raise Salaries. The employer may opt to raise the salaries of its employees who meet the duties tests, whose salaries are close to the new salary level, and who typically work overtime, to a level at or above the new level to maintain their exempt status.
- Pay Overtime. The employer may continue to pay newly overtime-eligible employees a salary and pay overtime for hours worked in excess of 40 in a week. The new rule does not require that salaried employees making less than $913 per week be converted to hourly pay status. There are various ways of paying overtime above a salary, including paying a salary for 40 hours per week and overtime for hours in excess of 40 or, for employees who regularly work more than 40 hours weekly, paying a salary based on more than 40 hours per week and overtime for hours over 40, with those overtime hours already included within the salary being compensated at an additional half time premium and those hours beyond those included in the salary compensated at time and a half.
An employer and employee may also agree to a fixed salary for workweeks in excess of 40 hours; the salary includes overtime compensation. However, the salary must be adjusted to reflect the actual hours worked in the week. Employers and employees may also reach agreement for the payment of a fixed salary in the event of fluctuating workweeks. Such arrangements are valid only where the salary is designed to cover both short and long weeks.
As noted, overtime-eligible employees may be paid a salary. The employer must, however, pay overtime compensation and keep appropriate tracking records to ensure that hours worked are paid at the proper rates.
- Reorganize Workloads, Adjust Schedules, or Reallocate Work Hours. An employer may choose to reorganize its employees’ workloads or adjust employee schedules to avoid the necessity of paying overtime. For example, employees who start work at 8 in the morning but must be at work late in the day may have their schedules readjusted to start later in the day. Additional employees may be hired or work reallocated to employees who typically work less than 40 hours per week.
- Adjust Wages. An employer can adjust the amount of an employee’s earnings to reallocate it between regular wages and overtime so that the total amount paid to the employee remains largely the same. The employer may not, however, reduce the employee’s regular wage to a level below the minimum wage or adjust wages frequently to manipulate the regular rate.
What about getting more volunteer help? Some nonprofits may look to volunteers to mitigate some of the overtime burden imposed by the new rule. Some may seek to have their paid employees also serve as unpaid volunteers. Although, and unlike their for-profit counterparts, nonprofit organizations have some latitude to use volunteers, certain conditions must be met. Failure to satisfy these conditions could cause volunteers to be classified as employees, subject to the minimum wage and overtime laws as well as other laws protecting employees.
The risk of violating federal and state wage and hours laws is high. An unpaid or improperly paid employee may be awarded back pay, including overtime pay, and the employer may be subject to fines under federal law. North Carolina courts are required under the state wage and hour laws to assess an award of double back pay to employees who prevail on a claim that their employer intentionally failed to pay them wages due. Nonprofits should tread carefully when enlisting volunteer help.
To satisfy the wage and hour laws, volunteers must give their time freely for civic, religious, charitable or humanitarian objectives. They generally serve on a part-time basis and must perform their work without compensation or the expectation of compensation. They should not displace employees or perform work that is or would otherwise typically be performed by employees. In other words, a nonprofit may not avoid the new rule and its overtime pay requirements for executive, administrative or professional employees who do not receive the requisite salary level by off-loading their responsibilities or duties to volunteers.
Looking to the nonprofit’s current employees as a source of volunteer hours also poses significant issues. Nonprofit employees may not volunteer to provide for free the same or similar types of services to their nonprofits that they are typically paid to provide. Also,nonprofits may not request or require employees to perform volunteer work during their normal working hours, even if the requested duties differ from their regular job responsibilities. Whether the nonprofit employee – committed to the organization’s mission — wants to work “off-the-clock” is irrelevant.
What should a nonprofit do now? Nonprofits that have not yet started to prepare for the new rule should begin immediately. Here are suggested steps:
- Evaluate which employees will no longer meet the minimum salary level and determine how much overtime they typically work.
- Evaluate each employee’s job description to determine whether the duties test for a white-collar exemption is satisfied.
- Determine what steps will be taken to ensure compliance with the new rule, considering the actions described above, such as raising salaries, wage adjustment, paying overtime, reallocating work, etc. Some employees may be reclassified as non-exempt and will be entitled to overtime; they may continue to be paid a salary.
- Review or implement time-tracking systems to ensure that all working hours are appropriately captured and paid. Such systems may already be in place for the organization’s current non-exempt employees.
- Communicate any changes to the employees.
The increase in the salary level for the white-collar exemptions will have a significant impact on many businesses, particularly small nonprofits. The new rule will be effective on December 1, 2016 and the risk of noncompliance is high. If they have not already done so, organizations must begin now to review and evaluate all categories of their white-collar employees to determine who will be affected by the rule change and how best to comply.
— Melanie S. Tuttle
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