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"Fixing" the Wrong Problem and Causing a Bigger One: Nonprofit Organizations and Small Businesses Are Likely to Suffer More than Most Under New Fair Labor Standards Regulations

One of my biggest criticisms of the Fair Labor Standards Act is that while some very low paid employees may be exempt, it requires employers to pay overtime to some very highly paid technical employees who turn out to be non-exempt. The Secretary of Labor hopes to address the low pay exemption situation by increasing the minimum base salary threshold for exempt employees from $23,660 to $50,440. Unfortunately, the higher threshold may end up causing more harm than good, especially to non-profit organizations.

The Department of Labor seems to have given little thought to the effect that more than doubling the minimum salary threshold is likely to have on countless nonprofits funded only by donations from individuals and grants from charitable foundations and the government, whose supervisors and managers often earn salaries in the $40,000 to $50,000 range. Nonprofits endeavor to provide their employees with health insurance and a 401(k) (or 403(b)), but would be hard-pressed to increase front-level supervisors beyond the new threshold. Additionally, the type of work that nonprofits do is the kind that sometimes results in unexpected overtime. Nonprofits often have little control over when the hurricane may strike, refugees may be displaced, or the economy may go into a recession. Effective nonprofits need to be flexible.

Small businesses, from local newspapers to grocery stores, likewise usually provide benefits to employees but would be equally hard pressed to just raise salaries to meet this new test. At the same time, their businesses often require employees who are paid in the $40,000 to $50,000 range to be on call for emergencies and to devote numerous hours to protect the narrow margin that keeps such small businesses going concerns.

So what is a nonprofit or small business with a significant number of currently exempt employees to do once the Department of Labor implements the new regulations? First, and foremost, begin assessing your situation now—who is being paid how much, do they meet the new threshold, and if not, how many hours over forty do they typically work? This will help you understand how much your payroll costs would go up under the new threshold. Second, begin thinking about what you might do to keep your overtime costs down. If an exempt employee makes just under the new threshold, it may be best to increase that employee’s salary. You may want to reconsider allocation of job responsibilities between different personnel or adjust schedules in order to reduce overtime. You may decide that it is smarter to add more employees or reduce fringe benefits in order to justify paying certain employees a higher salary. (Unfortunately, the DOL does not give you credit for providing those benefits.) Finally, make sure your managers and your board members understand the effect that the new regulations may have, so that no one is surprised when the regulations go into effect.

While the rule is in the final stage before being put into effect, no one can be sure exactly when it will become final, and it is likely that politics will have a role to play in the timing as well. While there is plenty nonprofits and small businesses can do to get ready for the change, when it comes to whether the Department of Labor will soon address the heart of this problem—highly compensated technical employees who must be paid overtime—well, I wouldn’t hold my breath.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.