How Nonprofits Can Prepare for the New Overtime Rule

By Eric Cormier

Eric Cormier
A new rule on overtime pay set to take effect in December, which could lead to higher payroll costs for many Massachusetts nonprofits, means those organizations should take steps, sooner rather than later, to best manage payroll expenses.

This past May an important change was made to the exemption rule of the Fair Labor Standards Act (FLSA). Starting Dec. 1, white collar employees who earn less than $913 per week, or $47,476 annually, will be eligible for overtime pay.

Since these new dollar figures are about 100% over current earnings levels determining which workers are exempt from overtime rules, many nonprofits face the possibility of higher payroll costs when the rule change takes effect.

The new rule also establishes an algorithm, tied to economic factors, which will help determine future adjustments to the minimum salary requirement.

Which Employees Are Affected?

In general, the new FLSA exemption rule applies to employees who perform executive, administrative, or professional duties. However, while the exemption rule applies equally to nonprofits and for-profit companies, some nonprofit organizations may not fall under the jurisdiction of the FLSA. A nonprofit with annual sales or business revenues of under $500,000 is not subject to the Act. The $500,000 threshold applies to business activities, such as running a gift shop. It does not include fundraising.

In determining whether a nonprofit is a covered enterprise, only activities performed for a business purpose are considered. Additionally, income that a nonprofit uses in furtherance of charitable activities is not factored into the $500,000 threshold. Such income might include contributions, membership fees, monetary and non-monetary donations, and dues (except for any portion for which the payer receives a benefit of more than token value in return).

Some nonprofits engaged in charitable activities may also manage revenue-producing activities that may bring the organization within the scope of the FLSA. If this side business produces revenue of at least $500,000 annually, the organization’s employees are entitled to the protections of the FLSA and the overtime rule.

However, as is typically the case when it comes to regulatory compliance, it’s not that simple.

Even if a nonprofit is not subject to FLSA rules as an enterprise, under certain circumstances some of its employees may be covered as individuals. For example, according to the Department of Labor, “Under individual coverage, employees may be entitled to FLSA protections if they themselves are engaged in interstate commerce or in the production of goods for interstate commerce.” It is always best to seek professional advice to determine your enterprise’s status regarding the exemption rule.

All hospitals, schools and pre-schools, government agencies, and businesses providing medical and nursing care for residents are fully covered by the FLSA’s exemption rules.

Here are some steps to help ensure that payrolls don't spiral out of control when the new rule takes effect:

1. Determine the impact

Be aware of how many employees will be affected. Review job duties of relevant employees, and develop compensation plans to review the cost of increasing salaries and/or reclassifying any affected employees as nonexempt, which requires employers to track hours and pay additional overtime pay for more than 40 hours in a workweek.
2. Time-tracking software may help

Nonprofits without tracking systems will need to implement hourly tracking systems to manage new time-keeping responsibilities for employees reclassified to non-exempt status. Organizations with hourly tracking systems that are less robust should consider electronic solutions that allow workers to clock-in and clock-out at their workstations or via mobile devices.
3. Current overtime rules are worth reviewing

Is written permission from a supervisor required before an employee works overtime? If not, a change in protocols and policies may be needed to better track and control overtime costs. For many nonprofits new checks and balances will become crucial to ensure that productivity and costs are appropriately managed.
4. Talk to employees

Once a nonprofit determines if the new rules will have an impact and identifies the employees who will be affected, management should communicate with the affected employees and their supervisors to proactively explain any protocol or policy changes.
5. Consider adjustments for some salaries

Some enterprises may decide to make pay adjustments for some employees whose salaries are near the cap. Doing so could reduce some of the timekeeping complexities the law might create. However, it’s necessary to understand that a salary increase alone does not guarantee an employee is exempt from overtime because there are also “duties tests” that must be met for an exemption to apply.
The FSLA rule change is a reminder that all nonprofits should regularly review and refine timekeeping procedures and take advantage of new technologies that save time and money. Doing so can benefit both workers and the organization as a whole.

Eric Cormier is a senior human resources specialist in the Boston office of Insperity, a national provider of human resources and business performance solutions, whose clients include a variety of nonprofit organizations. Call 800-465-3800 or visit
August 2016