Final Changes to the Fair Labor Standards Act (FLSA) Announced

Changes to the Standard Salary Overtime Exemption Threshold and the Impact on Non-Profits and Governments

On May 18^th, 2016, the U.S. Department of Labor issued its final changes to the Fair Labor Standards Act (FLSA). Below is a summary of these changes (effective December 1, 2016).

• The standard salary threshold will increase from $455/week to $913/week ($47,476 for a full-year worker). This means that 35% of full-time salaried workers will be automatically entitled to overtime, based solely on their salary.
• The rule updates the total annual compensation level above which most white collar workers will be ineligible for overtime, from the current salary of $100,000 to $134,004/year.
• The salary threshold will automatically be updated every three years, beginning January 1, 2020.
• Each update will raise the standard threshold to the 40^th percentile of full-time salaried workers in the lowest wage Census region, estimated to be $51,168 in 2020.
• The Highly Compensated Employees (HCE) threshold will increase to the 90^th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020.
• The Department will post new salary levels 150 days in advance of their effective date, beginning August 1, 2019.
• Up to 10% of the salary threshold for non-HCE employees will be allowed to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis.
• The final rule does not make any changes to the ‘duties test’ that determines whether white collar salaried workers earning more than the salary threshold are ineligible for overtime pay. For workers with salaries above the updated salary level, employers will continue to use the same duties test to determine whether or not the worker is entitled to overtime pay. Job title and/or salary level alone never determine exempt status under FLSA.
• The law does not require that newly overtime-eligible workers be converted to hourly pay status.
• Regardless of the dollar volume of business, employees of certain institutions commonly referred to as “named enterprises” are entitled to minimum wage and overtime protections unless a specific exemption applies. “Named Enterprises” included hospitals, institutions primarily engaged in the care of older adults and people with disabilities who reside on the premises; schools for children who are mentally or physically disabled or gifted; federal, state and local governments; and preschools, elementary and secondary schools and institutions of higher education.
• Even if the organization is not covered on an enterprise basis, individual employees within the organization can be covered on an individual basis if they engage in interstate commerce or in the production of goods for interstate commerce.

How Can Non-Profits and Governments Mitigate the Impacts of this Ruling?

We understand that these new regulations will pose significant challenges for entities not exempt from these overtime requirements. In addition to the “named enterprises” listed above and the individual coverage for those conducting interstate commerce discussed above, FLSA is applicable to non-profits with revenues deriving from ordinary commercial activity of at least $500,000. Ordinary commercial activity includes activities performed for business purposes (such as operating a gift shop or providing services for a fee). FLSA does not apply to the organization’s charitable activities that are not in substantial competition with other businesses. Charitable activities include activities such as providing free of charge temporary shelter, food or clothing to the homeless, sexual assault, domestic violence, or other counseling services, and disaster relief provisions. Income from contributions, membership fees, many dues and donations used for charitable activities are not counted towards the $500,000 threshold.

In Response to this Ruling You Have the Following Options:

• Continue to pay newly overtime-eligible employees a salary and pay overtime in excess of 40 hours per week. It is recommended that this approach be used for times of the year when there are occasional spikes in hours worked that your organization can plan and budget for ahead of time.
• Adjust the employees’ base pay and pay overtime. You can adjust the amount of an employee’s earnings to reallocate it between the regular rate of pay and overtime compensation. This method will work for employees who work a relatively small amount of predictable overtime. The revised pay can be on a salaried or hourly basis, but it must include payment of overtime when the employee works more than 40 hours in a week.
• Raise workers’ salaries above the new threshold.
• Limit workers’ hours to 40 per week.
• Evaluate and realign employee workload. You can limit the need for overtime by ensuring that workloads are distributed to minimize overtime and that you have the appropriate staffing levels to meet the demands of the services you are providing.
• Some combination of the above.

The Department of Labor has issued separate guidance documents specifically for non-profits and governments.

Contact us to explore the implications for your organization.