On July 1, new federal rules will go into effect that will raise the amount of money an employee must earn to be exempt from being paid overtime. As a result, more nonprofit employees will receive overtime pay for the extra hours they work — or their employers will have to boost their income so they’re above the new limits. The Department of Labor plans a much larger increase in January.
“Now that the rule has been announced, nonprofits are starting to pay attention,” says David Thompson, vice president of public policy at the National Council of Nonprofits, which has put together an evaluation of the rule for nonprofits. “They ought to be paying attention to this stuff every day anyway. They ought to be adjusting, using any change as an opportunity to reevaluate how they operate, why they operate, whether they are making the best use of their resources.”
Currently, employees whose jobs meet certain criteria do not have to receive overtime pay if they earn more than $35,308 a year. That salary threshold, which has been in place since 2019, is being increased to $43,888 on July 1. The increase is roughly equivalent to the rate of inflation over that time. On January 1, the salary threshold will jump again, to $58,656, and will be updated every three years based on federal wage data.
The U.S. Department of Labor estimates that 460,000 nonprofit workers will be affected by the July and January changes and that it will cost groups $44.8 million.
Nonprofits in North Carolina are concerned about the changes, says David Heinen, vice president for public policy and advocacy at the North Carolina Center for Nonprofits. A recent webinar the group hosted on the rule attracted more than 300 nonprofit leaders, and the group has put together an online guide to help organizations comply with the new rule. Many leaders are concerned with how to meet the new standards without sacrificing their missions. They may face questions from staff about why some employees are getting raises while others are getting time and a half overtime pay, switch from salaried to hourly, or see their duties change.
It’s an awkward position to be in for some leaders. Charities generally support the larger goal of boosting incomes for all workers, including their own staff, Heinen says. But that can be hard to do in a state where the minimum wage is the federal $7.50 an hour, and leaders of small rural nonprofits may not make more than $50,000 a year themselves.
A Reason to Assess
The rule changes are likely to prompt groups to assess their staffing practices. Many nonprofit leaders may not have a real sense of how many hours their salaried employees are working or how well they use their time, says Judy Conti, government affairs director at the National Employment Law Project. Salaried employees may be working 50, 60, or more hours a week regularly with no additional compensation. Leaders may not be aware of that since the extra hours don’t cost extra money.
“When something is free, you don’t have an incentive to use it as sparingly and efficiently as possible,” Conti says. “Managers need to look at this as an opportunity and an incentive to really manage your people.”
Beyond the simple salary test, leaders need to understand whether an employee’s job duties allow them to be exempt from receiving overtime pay, even if their annual pay puts them above the limit. Being exempt from receiving overtime pay for working more than 40 hours a week is reserved for professionals who do executive, administrative, or professional work — typical white collar jobs. For example, Conti says, an office manager who answers phones, types memos, and pays bills according to procedures made up by someone else is not exercising independent judgment. Because of that, the employee cannot be exempt from getting overtime, even if the job title is manager and the position pays more than the new limit of $43,888.
In some cases, it may make sense for an organization to raise employees’ salaries above the threshold depending on their hours and the job they do. In others, it may be more cost effective to make them hourly employees below the threshold salary and occasionally pay them overtime, Thompson says.
He says organizations may need to start tracking hours to make sure employees who now qualify for overtime don’t work more than 40 hours a week if the group doesn’t have the money. That could lead to greater efficiencies but also more effort to track hours. For many hybrid and remote workers, whose workdays lack defined boundaries, tracking work hours can be a challenge. Thompson cautions that some employees might be upset if their positions shift from salaried to hourly, and the changes brought on by rule change could disrupt work cultures where employees were less aware of these issues.
Contracts That Don’t Cover Costs
Because nonprofits may have to increase pay for some employees, they may have to curtail programs to compensate for that, says Kristen Wilson, CEO of Arizona Impact for Good, a statewide association of nonprofits. “With already strapped budgets, they may able to do less in the community.”
Some nonprofits may have to cut services to pay for increased labor costs.
The increases come at a time when nonprofits have struggled to hire and retain staff and pay competitive salaries. Inflation has increased the cost of other expenses, too, says Nonoko Sato, executive director for the Minnesota Council of Nonprofits.
The new rules give leaders another reason to appeal to donors and grant makers, she says. But tight budgets are only part of the problem groups face.
Many nonprofits have government contracts that pay less than it currently costs to deliver services. It’s an issue that Thompson brought up with federal agencies while the Labor Department was considering these rules. He says the agencies were not receptive to increasing grants and contracts for groups because of these new mandates.
“You’re raising our costs,” Thompson says of the new rules. “But you’re not willing to raise how much you’re paying us.”
Ultimately, the regulations will require adjustments and additional money, says Conti, of the National Employment Law Project. But she says organizations that are on sound financial footing should be able comply, particularly with the July increase, without too much trouble.
“If the extra money that you have to pay out because of this regulation is going to be the difference between success and failure, providing services or not providing services, then you probably have much bigger problems than this regulation,” Conti says. “I’m incredibly sympathetic to nonprofits who are doing work and paying on the margins. This is but one of the many issues that funders need to better understand.”
