Overtime Eligibility Set to Expand on January 1, 2020 – Is Your D.C. Nonprofit Affected?
On September 24, 2019, the Department of Labor (DOL) issued new regulations affecting whether an employee is subject to the minimum wage and overtime requirements set forth in the Fair Labor Standards Act (FLSA). The new rules, scheduled to take effect January 1, 2020, may convert some "white-collar" exempt employees into overtime-eligible workers for both nonprofit and for-profit employers. Specifically, employers with exempt white-collar workers earning $23,600 – $35,568 will be required to pay those employees overtime starting in 2020.
Background – FLSA Overtime Requirements and Exemptions
In general, the FLSA requires that employers pay employees an hourly wage at least one-and-a-half times their regular rate for time worked in excess of 40 hours in a given workweek.1 However, workers employed in certain capacities, including a "bona fide executive, administrative, or professional capacity," may be exempt from these overtime requirements.
Currently, an employee is exempt from overtime under this "white-collar" exemption if:
1. The employee is paid on a salaried basis, rather than based on the number of hours worked (the “salary basis test”);
2. The employee's salary meets a minimum level of at least $455 per week ($23,660 per year) (the "salary level test");2 and
3. The employee's primary job duties meet the definition of an executive, administrative, or professional employee (the “duties test").
An employee must meet all three tests in order to be exempt from being paid overtime. Furthermore, an overtime-eligible employee cannot waive their right to receive overtime or “volunteer” to work unpaid overtime; overtime-eligible employees who do in fact work overtime, even without employer consent, are always entitled to overtime pay.
Non-compliance with overtime requirements, including “misclassifying” an employee as overtime exempt when they are in fact entitled to overtime, can result in severe consequences at both the federal and state/District level. Penalties for employers can include the payment of back wages, liquidated damages equal to up to three times the value of back wages, administrative fees, and attorney/court costs.
Effect of the New Regulations on Your Nonprofit
Beginning January 1, 2020, the threshold for the salary level test will increase to $684 per week, or $35,568 per year. This means that employees making under $35,568 per year will no longer qualify for the white-collar overtime exemption, even if they are paid a salary and have job functions which meet the duties test. These employees will become eligible for overtime pay when they work more than 40 hours in a workweek.
The new rules will allow employers to use nondiscretionary bonuses and incentive payments, including commissions, paid on an annual or more frequent basis to account for up to 10 percent of an employee’s salary basis. Practically speaking, this means that employees making at least $32,037.20 can still meet the salary threshold for overtime exemption if they are paid the remainder of $35,568—up to $3,530.80—in nondiscretionary bonuses and incentive payments on at least an annual basis.
Finally, the new rules also raise the annual compensation threshold for exempt "highly compensated employees” (“HCEs”) from $100,000 to $107,432. Under the FLSA, HCEs who meet a specified salary level can be overtime-exempt without having to meet the standard duties test; instead, a less demanding version of the duties test applies to these employees. Under the new rules, employees making $100,000 – $107,432 can no longer qualify for this special exemption, a change from the current regulations.
Differences from Proposed 2016 Obama DOL Regulations
The new DOL rule is expected to make 1.2 million additional workers eligible for overtime pay under the FLSA via the increased salary threshold, and an additional 100,000 employees overtime eligible as a result of the HCE threshold adjustment. Its impact will be significantly smaller than a planned 2016 rule, introduced by the Obama administration, which would have made covered employees overtime eligible if they made under $47,476 per year. That rule, which would have also included automatic salary level increases over time, was struck down by a federal judge in late 2016 and was not revived by the incoming Trump administration.
Understanding the Impact on Your Nonprofit
Assuming the new regulations are not blocked by judicial action before the January 1 effective date, nonprofit employers should plan on paying overtime to currently exempt employees who earn less than $35,568 annually. Nonprofits may have to adjust their payroll and timekeeping practices to ensure they can track the specific hours worked by affected employees within a given workweek.
Some employers may decide, if applicable, to increase an employee’s salary to $35,568 or more so that they remain overtime exempt. Employers may also transfer job duties from overtime-prone individuals to other staff, and/or implement policies to ensure that newly overtime-eligible employees do not actually work overtime, such as giving employees the rest of the week off when they hit 40 hours in a given workweek. Nonprofits should budget for the impact of new, unavoidable overtime pay in their calendar year 2020 budgets and going forward. They may also consider engaging with funders and contractors to help cover any new overtime-related expenses.
Nonprofits may also use the salary level adjustment as an opportunity to reassess their exempt classifications across the board, including whether exempt employees meet the duties test. Under both the current and incoming regulations, employees who make more than the salary threshold are still eligible for overtime if their job duties do not meet the specific requirements for a bona fide executive, administrative, or professional position. Specific rules and definitions apply to all three of these categories. Employers may want to perform an audit of each employee’s real-world job duties, possibly with the assistance of legal counsel, to ensure that employees who meet the salary threshold also meet the duties test for overtime exemption.
For more information about FLSA overtime requirements (based on the current $23,660 salary threshold), including a deep dive into the white collar duties tests, see our 2017 webinar: Exempt or Not Exempt – That is the Question: A Webinar About Employee Overtime Requirements.
1) In certain jurisdictions, some nonprofits may be exempt from FLSA overtime requirements either because they do not earn enough revenue to trigger coverage under the statute (the “enterprise coverage” test) or because none of their employees engage in “interstate commerce” (the “individual coverage” test). These exceptions have been narrowly construed and are inapplicable to most scenarios. Furthermore, virtually all employers in D.C. are covered by FLSA overtime rules because D.C. law automatically incorporates federal standards, without allowing for either enterprise or individual coverage exemptions. Maryland and nine other states, similarly, automatically incorporate FLSA standards into their state-level overtime regulations.
2) Some states, such as New York and California, have established higher salary thresholds than the federal DOL threshold. D.C., Maryland, and Virginia all follow the DOL's salary threshold.
