Dec 14, 2015 - 1:45pm

Proposed Overtime Regulation Threatens Nonprofits and State, Local Governments


Former Senior Vice President, Labor, Immigration, and Employee Benefits

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A group of Boy Scouts sit by the fountain at the World War II Memorial in Washington, D.C. The Boy Scouts of America is one of the groups that expressed opposition to proposed overtime regulations. Photo credit: T.J. Kirkpatrick/Bloomberg

While much attention on the impact of the proposed changes in the overtime regulations has rightly been on how typical for-profit employers will have to adjust, what has not gotten adequate attention is the impact the new rule will have on nonprofit employers as well as state and local governments.

What makes these employers so vulnerable to disastrous consequences is that they are incapable of increasing their revenues. Nonprofits are dependent on philanthropy, and in some cases public tax contributions to maintain operations. State and local governments are, of course, entirely dependent on tax revenues.

As proposed, the new salary threshold of $50,440/year (up from $23,660) will result in many employees being reclassified from salaried to hourly and eligible to earn overtime compensation. Employees in these groups routinely work long and odd hours to serve their clients whose needs do not fall neatly into the typical eight hour workday, or 40 hour work week. If these employees do end up earning overtime (i.e. they work more than 40 hours a week) this will substantially increase the labor costs of these nonprofit employers and state and local governments.

To avoid this significant budget hit, many charitable groups will be forced to reduce their operations and services such as providing support, free medical care and other welfare services for people and families in need, and many local governments also provide such services. Cut backs in these offerings would mean fewer people who have come to rely on these providers would be served. Imagine calling a hotline for suicide or domestic abuse late at night and hearing a message like, “Thank you for calling our hotline, unfortunately no one can take your call right now because we cannot afford to pay overtime to our staff. Please leave a message at the tone.”  How is this a good thing?

The nonprofit sector took advantage of the comment period to express their opposition and describe the consequences they foresee if the new regulation goes into effect as proposed:

The Salvation Army National Headquarters  

Like many non-profit organizations in this country, The Salvation Army faces significant budget challenges and we are concerned that the proposed increase in the minimum salary for “exempt” employees would substantially increase the cost of delivering our services, most of which are provided free of charge. Based on information that have been collected to date, it appears that 50% or more of our employees nationwide who are currently classified as “exempt” would become “non-exempt” if the minimum salary threshold is raised to the level contemplated by the Proposed Regulations. The significance of the effect of this change to our organization cannot be over-stated.

The YMCA of the USA

YMCAs have informed YMCA of the USA that if their labor costs significantly increase as a result of the Final Rule, they may need to lay off staff. Even if jobs are not eliminated, some YMCAs will have to reduce the hours for certain reclassified employees which, in turn, will result in them receiving reduced compensation.

The Boy Scouts of America

In particular, the chief executives of our local councils have already informed us that they will be unable to absorb the DOL’s proposed massive increase in the minimum salary requirement for the Executive, Administrative, and Professional (EAP) exemption.  … If the new minimum threshold is at or near the $50,000 level and is implemented in the 2016 calendar year, the consequences will be devastating.

Operation Smile

Yet still, this proposed update will increase our payroll cost by nearly $1 million annually affecting over 50 percent of our workforce. Considering that a cleft lip surgery performed somewhere in the world costs an average of $240, this would mean 4,166 fewer surgeries provided by Operation Smile globally each year. This is not a programmatic or financial cost we can absorb, and we will have to evaluate ways to reduce our payroll costs either through lowering base hourly rates or reducing the size of our domestic workforce. 

Lutheran Services in America

Like other sectors and organizations, we recognize that the proposed rules may lead to significant staffing and budget management changes.

In addition, powerful testimony was delivered at a hearing in the House on July 23 by Elizabeth Hays, the director of Human Services for MHY Family Services, a charitable operation in Mars, Pa., serving at-risk youth and their families. She described their assessment of the impact the proposed regulation would have on their operations:

Raising the exempt salary threshold under the new FLSA regulations to $50,440 literally presents the risk of MHY closing its doors. Given our nonprofit status and tight costs, we are unable to provide pay increases and hire additional employees. I estimate that these changes could result in additional costs of $797,371.38 a year — more than three-quarters of a million dollars of additional unfunded costs on an $8.7 million budget. This assigns to MHY a 9.1 percent unfunded increase to our current budget.

Given our reliance on federal, state and local funding, MHY’s service programs are not expected to receive any significant increases at this time. Unfortunately, the youth that we serve present increasingly chronic and complex mental health and trauma issues, while demands on MHY and programming expectations from stakeholders have increased exponentially. We are forced to do more with less.

            Among the state and local governments that objected were these:

New Mexico State Personnel Board State Personnel Office

Since the State FY16 Budget has already been appropriated, any increases to expenditures for overtime to comply with the proposed rule changes would have to be accommodated by reductions in other areas, such as freezing hires, freezing salary increases, or freezing reclassifications with pay increases when an employee takes on duties representative of a higher job classification. Such freezes … could affect the ability of the State to provide statutorily required services to the public. … Further, if automatic updates are adopted into law, it is unknown at what point in time the automatic increase will take place, and they may not coincide to public and private employers’ budget cycles.

The Board of County Commissioners of Warren, Ohio

The cost to this county would be an estimated $89,000.  … While the current threshold of $455 per week may be low and some increase is reasonable, the proposed increase is simply too much for small governments to absorb at one time.  

The Pennsylvania State Association of Township Supervisors

The group objected to the proposed changes, asserting that municipalities will be required to either increase taxes or reduce services.

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Apparently the potential impact of the proposed regulations on charitable nonprofits touched a nerve in the Wage and Hour Division, as Wage and Hour Administrator David Weil posted a blog item on August 26 (just before the comments closed on September 4) downplaying the impact the proposed regulation would have on nonprofit employers.   The WHD also issued a new Fact Sheet in August explaining how the FLSA applies to charitable nonprofits.  The Wage and Hour Division has been silent on any impact this proposal would have on state and local governments.

While Weil and the Fact Sheet make clear there is no per se exemption, they claim only certain activities are covered by the FLSA (those that are commercial in nature like operating a gift shop) and the charitable operation has to generate over $500,000 in revenue from these operations for the employees to be covered by the FLSA. To what extent this statement addresses the concerns raised by nonprofits is unclear, and it would at least require a detailed analysis of how much time an employee spent performing duties that would be covered by the FLSA versus those that are not, to provide any relief. In many charitable nonprofits employees handle many different roles including those that might be covered by the FLSA as well as those that would not be making such an analysis extremely difficult and complicated.

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About the Author

Former Senior Vice President, Labor, Immigration, and Employee Benefits

Johnson is the former Senior Vice President, Labor, Immigration, and Employee Benefits.