Overtime Regulations: Final … at Last!

Overtime Compensation

Since the middle of 2016, we’ve reported on the fate of federal labor-law regulations championed by the Obama Administration that were designed to give a huge “raise” to many workers around the United States. These rules changed the formula that employers – for-profit and nonprofit alike – use to determine which employees are eligible for overtime pay for putting in more than a set number of hours in a day or week. 

It had been over a decade since the Department of Labor had established a key element of the test – that is, the salary cut-off of just $23,000 a year. Support was growing to change that figure that was so artificially low compared with economic realities that too many workers were being unfairly excluded from otherwise statutorily required overtime pay. 

The Obama Labor Department issued final overtime regulations in May 2016 with a delayed effective date of December 1, 2016, to give employers time to plan and adjust to the new rules. As expected, some opposition emerged in the summer and fall of 2016 in the form of lawsuits and calls on Congress to reject the changes. 

Of course, on November 8, 2016, the unexpected happened: a change of Administration, with a dramatically different political philosophy and policy goals.

  History of These Regulations

The lawsuits continued and the lame-duck White House proceeded as if the overtime rules would go into effect – and stay in effect – as planned.

A funny thing happened, though, in the early months of the new Administration. Unlike the fate of many other Obama-era laws, regulations, and rules which were summarily reversed or severely restricted, the proposed overtime changes were not tossed out. The Secretary of Labor Alexander Acosta, installed after a disastrous first Cabinet pick did not work out, announced his support for some upward revision to the income-cap limits for overtime eligibility – though not in the significant amount adopted by the Obama DOL final regulations. 

He proceeded to (successfully) shepherd a middle-ground compromise through a few years of delays and uncertainty. In Time for Nonprofits to Engage on Overtime Proposals (April 12, 2019), we told you that the Department of Labor had published proposed regulations and announced the statutorily required public-comment period. 

Over the next several months, the proposed regulations survived, but – alas – Secretary Acosta did not. 

The Acting Secretary of Labor, Patrick Pizella, issued the final regulations on September 24, 2019. 

  Final  Regulations Announced

In a press release, Mr. Pizella explained that “for the first time in over 15 years, America’s workers will have an update to overtime regulations that will put overtime pay into the pockets of more than a million working Americans,” adding that the “… rule brings a commonsense approach that offers consistency and certainty for employers as well as clarity and prosperity for American workers.”

According to this official statement by the Department of Labor, the increases adopted are “long overdue in light of wage and salary growth since 2004.” Remarkably, the agency confirms that “nearly every person who commented on the Department’s 2017 Request for Information, participated at listening sessions in 2018 regarding the regulations, or commented on the Notice of Proposed Rulemaking agreed that the thresholds needed to be updated for this reason.” 

Not everyone had been on board for the more dramatic increases adopted by the Obama Administration; some in the nonprofit sector worried that the financial burden would be difficult to absorb. In a 2016 survey conducted by the National Council of Nonprofits – taken in connection with adoption of the original Obama-era regulations changes – a frequently mentioned concern is the matter of nonprofits being subject to contracts and grants negotiated and awarded without regard to additional costs that will result even with a much more modest jump in the overtime formula. 

Some opposition and concern from the nonprofit sector continued even with the compromise rates proposed by Secretary Acosta. 

  New Overtime Regulations

Under the final rule, the Department of Labor raises the “standard salary level” from $455 to $684 per week; that is, about $35,568 a year for a full-time employee. It also raises the “total annual compensation level for “highly compensated employees (HCE)’” from $100,000 to $107,432 a year. 

In addition, this change allows employers to “use non-discretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices” and revises certain special salary levels for workers in U.S. territories and in the motion picture industry. 

More information about the final rule is available here.  

  Conclusion

The new regulations go into effect on January 1, 2020, and apply generally to all employers – for-profit as well as nonprofit. 

We’ve cautioned before that there is an important caveat to this discussion of federal overtime rules. The overtime-eligibility cutoff amount in some states continues – even under this compromise formula – to be higher than the new rate salary cut-off rate of $35,660. In California, for instance, the state salary threshold is $41,600; even that amount will jump further “along with the minimum wage” until 2022. 

 

More About Nonprofits and Labor Laws

In A Reminder to Nonprofit Employers, we discussed common fallacies that many nonprofit directors and staff believe; these mistaken ideas can and do cause their organizations (and them!) a boatload of trouble.

First, many people associated with 501(c)(3)s focus only on federal tax-exemption laws and compliance with those complex rules and regulations. They are either unaware of – or ignore – other federal and state laws that can and often do apply across-the-board to the nonprofit as well as the for-profit sector. For instance, most labor laws that apply to businesses apply to nonprofits, too.

Second, because charities enjoy favored status under the law and do important work in their communities, directors and staff are sometimes lulled into thinking that the rules – including labor laws – can be relaxed from time to time due to exigent circumstances. While there are some exceptions for the nonprofit community, the safe course of action is to assume that all general worker laws apply.

   Labor Laws Require Timely Wages Payment

In a recent question-and-answer column in the Washington Post, business adviser Karla L. Miller passes on a question posed by an employee of a nonprofit that serves limited-income families. This worker – who is leaving shortly to study for a master’s degree – wants to know if she should blow the whistle on the organization that seems to have ongoing cash-flow problems. Workers don’t always get paid on time.

Specifically, the nonprofit issues paper checks to all employees every two weeks, but the only way these workers can get their money is to cash the check at the bank used by the organization. Apparently, on a fairly frequent basis, there isn’t enough money in the group’s bank account to cover all of the employees’ checks. Those who delay may have to wait up to a week to get paid. This would-be whistleblower mentions that some of the workers are foreign-born and are unaware that workers in the U.S. expect to get paid on a regular basis.
Ms. Miller’s response is clear and unequivocal: This is both morally wrong and illegal, notwithstanding that nonprofits – understandably – have fluctuations in cash flow, the cause of which is often outside their control.

Under the federal Fair Labor Standards Act, wages must be paid on a regular schedule. State labor agencies generally have rules and regulations about what the term “regular payday” means.  See, for example, California’s Department of Industrial Relations website:

In California, wages, with some exceptions … , must be paid at least twice during each calendar month on the days designated in advance as regular paydays. The employer must establish a regular payday and is required to post a notice that shows the day, time and location of payment.

This rule applies to all employers – for-profit and nonprofit.

Fudging this rule – for instance, in the way this nonprofit gives employees checks that may or may not be backed by sufficient funds – doesn’t meet this payment standard. A check that can’t be covered right away is a “worthless piece of paper.”  

The responsibility for regular payment of workers is not a staff issue. A nonprofit’s board of directors has certain fiduciary duties, one of which is to make sure that the organization is “managing funds properly and not committing labor violations.”

Another area of liability in the particular case addressed by Ms. Miller is a matter of banking law; it’s illegal to intentionally issue bad checks.

   Whistleblower Protections

An important matter raised in connection with this question-and-answer posed to Ms. Miller for her column is reporting violations and getting the problem fixed.

The employee, herself, raised the matter of blowing the whistle on this nonprofit’s illegal practice. She had a gut feeling that her situation – that is, about to leave for graduate study – made her a perfect candidate to alert authorities so that her vulnerable coworkers can be protected in the future.

Ms. Miller concurred; it’s certainly easier for a departing employee to raise the alarm than for current employees to complain.

In Whistleblower Policy for Nonprofits, we explained that the law grants substantial protections to any worker who asserts rights or reports wrongdoing. There are also laws against an employer retaliating against a complaining employee.

The federal law is the Sarbanes-Oxley Act. In California, workers have rights as well under the state’s whistleblower statute. Even before significant amendments effective January 1, 2014, California Labor Code section 1102.5 included protections broader than in the federal statute.

Nonprofits – like all employers – should have formal, whistleblower-protection policies in place that explain the legal protections afforded to workers as well as the procedures for reporting problems.

   Conclusion

On a related issue, if nonprofits are having trouble paying their workers, they are likely also behind on making payroll tax deposits – or thinking about delaying those payments for a while. Managing cash-flow problems in this way is “excruciatingly common” but extremely dangerous, as we explained in Payroll Taxes: The One Payment a Nonprofit Should NEVER Skip. The IRS will impose huge penalties that often balloon out-of-control to the point that the organization can never recover.

Another Reminder to Pay Withholding Taxes

The year 2017 will not go down in the record books as a quiet or uneventful one, and while everyone’s attention seems to be on the newly proposed tax plans released by the House and the Senate, nonprofits need to  remember the taxing requirements currently in place.
For the philanthropy community, the new political reality poses enormous possible challenges, particularly for 501(c)(3)s which have, in the past, safely relied on government funding and grants of key programs, especially in the realm of social services.
The full details of the federal budget have not yet been decided, but many groups are already facing decisions and hard choices about how to generate new revenue and how to cope with too many bills to pay.  
While exploring options, one decision should be avoided: delaying, or not paying, federal withholding taxes for employees.

  Law of Withholding Taxes

We’ve written about this in an earlier post: “Payroll Taxes: The One Payment a Nonprofit Should NEVER Skip.” It’s important enough, though, to emphasize again for readers who, at that earlier time, may not have paid attention because there were enough funds to make these payments.
Why is it so critical to avoid this mistake? Because the government may pursue individual board members and executives for this money.
Although nonprofits are exempt from payment of federal and state income taxes, they are still liable for the same duties and obligations that all employers face, including payment of payroll withholding taxes for employees.

There’s no ambiguity or uncertainty about the duty to withhold and pay over payroll taxes. The law concerning nonpayment of withholding taxes is clear and unambiguous. These funds are deemed to be held in trust for the United States; diversion of these funds for operational or business expenses is prohibited.

Personal Liability for Withholding Taxes

There is also no question that the law holds individuals personally responsible for nonpayment of these taxes, and the penalties are severe:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Under this law, the definition of a “person” includes “any officer or employee of a corporation who has a duty to collect, account for, or pay withholding taxes.”
While there is a limited exception for certain unpaid volunteer board members of tax-exempt organizations, there’s an exception to that exception; that is, “… if it results in no person being liable for the penalty imposed… ”

Conclusion

There is a long line of cases in which “…the IRS has successfully held board members and executives of charitable organizations liable for misuse of withholding taxes that should have been remitted to the government.” The agency is aggressive in these matters, and – generally – the federal courts uphold these actions.
“Board members, executives, and employees who fall within the Code’s definition of a responsible person should actively ensure that their nonprofit has remitted all withholding taxes to the government on time.”
 

Long-Awaited ERISA Decision Reached

Late last year, we previewed a pending Supreme Court case involving pension plans of religiously affiliated nonprofits.
On June 5, 2017, the ruling was issued: All eight justices participating in Advocate Health Care Network v. Stapleton agreed that the “church plan” exception to ERISA coverage for employees is broad enough to include all religiously-affiliated facilities including ones that were not originally established directly by a church. New Justice Gorsuch was not involved in this decision.
This is good news for hospitals, universities, and other religiously affiliated nonprofits who will save money by not having to abide by the worker-protection rules of the Employee Retirement Income Security Act.  Of course, the losing side – a group of current and former employees of these institutions – are not pleased at all. These plaintiffs had argued that allowing their employers to opt out of the worker-protection ERISA rules has a detrimental financial effect on them and perhaps some hundreds of thousands of others similarly situated.

When Does ERISA Apply?

InSupreme Court Will Decide ERISA Church Plans Exception,” we explained that the federal Employee Retirement Income Security Act (ERISA) protects pension benefits of most American workers:

Without ERISA, your pension may be at risk without you ever knowing it.  If you are a participant in a defined benefit plan covered by ERISA, federal rules specify the amounts that employers are required to contribute on an annual basis so that your plan has enough money to pay you benefits when they are due. Further, through the federal Pension Benefit Guaranty Corporation (PBGC) participants are guaranteed a level of retirement benefits if for any reason the employer defaults on its obligation to pay benefits. In other words, in a plan covered by ERISA, your benefits are insured by the PBGC in the same way your balance in a federally insured bank account is insured by the FDIC.
If a plan is not subject to ERISA, there is no such federal protection. Uncovered plans are subject only to the terms of the plan document. While the ‘rights of employees and retirees are determined by state law,’ there isn’t the same level of protection. ‘That’s why ERISA was enacted in the first place.’

In addition, “among the provisions set by ERISA are requirements that pension plans meet certain minimum funding requirements, and that plans do not discriminate in their benefits by doing such things as providing comprehensive health insurance coverage for men but not women.”
On December 2, 2016, the Supreme Court issued writs of certiorari in 3 consolidated cases involving religiously affiliated, nonprofit, healthcare employers. This issue had been bubbling up for some time, and the lower courts hearing these cases did not agree on the outcome; that is, the proper scope of the “church-plan exception” to ERISA. This is a typical situation in which the U.S. Supreme Court steps in to resolve the dispute.

  ERISA Exception for “Church Plan”

Since ERISA is intended to provide broad protection for workers, there are just a few exceptions written into this landmark federal statute. One key exception is for “church plans”; that is, plans intended to apply to clergy and other church employees.

When Congress enacted ERISA in 1974, it exempted church plans because it felt that federal regulation might ‘be regarded as an unjustified invasion of the confidential relationship that is believed to be appropriate with regard to churches and their religious activities.’

There are certain requirements to meet this exception. Originally, the plan had to be “established by a church.”
ERISA, though, has been amended a number of times. The current question is whether the language changed enough to now include nonprofits that are religiously affiliated even if they weren’t originally created by a church.

  High Court Approves Broad “Church-Plan” Exception

Although this litigation involves religious hospitals and healthcare facilities, the outcome doesn’t turn on the “religion” aspect. Instead, it’s a matter of the interpretation of the language of the ERISA statute; that is, “statutory construction.” (It also isn’t limited to the healthcare field, but can include other religiously affiliated institutions including – for instance – universities.)
In other words, did Congress intend to broaden the “church-plan” exemption beyond the original requirement that a plan be established by a church, and does it now apply to institutions formed by nonprofit organizations instead of directly by a church?
The United States Supreme Court says yes: Under the “plain language” of the current statute, religiously affiliated hospitals and healthcare organizations can fit into the “church- plan exception” even if they were created by nonprofit organizations.
Certain issues remain unsolved due to the complexity of the ERISA statute.
And while these nonprofit employers may, under the rules of statutory construction, qualify under this available exception, it’s clear from the opinions that some of the justices – Sonia Sotomayor, in particular – have concerns “about the potential consequences of leaving employees of these organizations unprotected by ERISA.”
Some commentators on this decision leave no doubt about their reactions; see, for instance, an article titled Supreme Court Ruling Could Let Catholic Hospitals ‘Pocket’ Millions in Retirement Funds”: “The impact of the decision means Catholic hospitals, which employ tens of thousands of low- to middle-income workers, can now generally avoid the pension and health insurance protections required by federal law.”

  Conclusion

The question before the courts – which had produced uneven results in the past – has been resolved as a matter of law. Nevertheless, this resolution has unsatisfying ramifications which Congress may or may not choose to remedy by legislation.
 
 
 

Overtime Rules Changes: More News

A little over a year ago, the Obama Administration Department of Labor announced a huge pay raise for millions of American workers – just in time for the 2016 holiday season.
This gift came in the form of final overtime regulations, set to take effect on December 1, 2016. Under the new formula, the number of employees eligible to receive time-and-a-half when they have to work long hours would greatly increase. Some four million more or so U.S. workers would be eligible to receive overtime pay for extra hours worked.
Now – in mid-2017 – the fate of these dramatic changes is still up in the air.

Overtime Rules Originally Proposed

While, normally, employment matters are governed by the individual states, the federal government has a role to play in guaranteeing “fair labor standards” nationwide.
The Obama Administration rules would have altered the

compensation requirements relating to which employees may be treated as exempt under the Fair Labor Standards Act’s (FLSA) overtime and minimum wage requirements under the ‘white collar’ exemptions. Once effective, the minimum salary threshold you would have had to pay in order to characterize an employee performing the requisite work as exempt would have increased from $455 to $913 per week, which annualizes to $47,476 (up from $23,660 per year). Also, this amount would have been ‘updated’ every three years (meaning that it would have likely increased with each update) with the first update scheduled for January 1, 2020.

These regulations were to have applied to for-profit businesses as well as to many nonprofit-organization employers.
The original delay in effective date (from May 2016 to December 2016) was to give the affected employers time to make plans for these dramatic cost hikes.
All along, there was mixed reaction in the charitable community to these dramatic changes: On the one hand, the sector generally supports improving wages and benefits for workers; on the other hand, there is real concern about further strains on already tight organizational budgets.
There was pushback as well from the for-profit world and from Republican politicians. The GOP-controlled Congress took action last fall to legislatively place roadblocks to these changes with the understanding – of course – that any Democratic president would exercise a veto.
At the same time in 2016 when these legislative blocking methods were being advanced, a litigation strategy also developed.  Two lawsuits were filed; the most successful challenge came from —

a group of 21 state attorneys general who filed suit in federal court, asserting that the DOL exceeded its authority in changing the compensation cutoff amount. On November 22, 2016, a federal district judge in Texas issued a preliminary injunction with nationwide effect. The judge wrote that it was “improper for the USDOL to adopt a salary test that categorically excludes a substantial number of workers who meet the exemptions’ duties-related requirements.

Of course, there was a seismic event a bit earlier in November 2016 that created a giant wave of uncertainty about the ultimate fate of these labor regulations.
The Obama Administration filed an expedited appeal to the Fifth Circuit Court of Appeals, with a request for an expedited briefing schedule that was granted. The originally scheduled effective date – December 1, 2016 – came and went. So, too, did Inauguration Day 2017.

The New Administration Takes Its Time

It was possible – even likely – that the new Administration would nix the entire new regulatory scheme, but that would take more than a photo op and a quick swipe of a fancy pen. Final regulations that have been adopted can only be unwound through a lengthy process.
We posted a mid-April 2017 update In “What’s the Latest with the Overtime Rules?  

On January 20, 2017, the Trump Administration at least nominally stepped into the shoes of the Department of Labor as appellant against the GOP state attorneys general. [Curiously] instead of quickly and definitively withdrawing support for the federal government position – like Jeff Sessions’ Department of Justice did in connection with a Texas voting rights case – the new Administration asked for a continuance of the due date of its brief [in the Fifth Circuit appeal]  in order to give ‘new personnel’ time to evaluate the case.

The hunt for a new Secretary of Labor took considerable time. The first nominee, Andy Puzder, a restaurant magnate who was known to be against raising the minimum wage, eventually withdrew his name for unrelated reasons. Alexander Acosta, the nominee eventually confirmed, is not as hard-line on this matter:

At a confirmation hearing in March, Acosta said the salary threshold for overtime exemption should be raised from $23,660 to ‘somewhere around $33,000’ after figuring for inflation to the cost of living since 2004—the last time the regulation was successfully adjusted…. Acosta said that once confirmed, he would decide whether the department would continue to appeal the November 2016 federal court decision that halted the Obama-era rule on overtime pay.

On April 14, 2017, before Acosta’s official confirmation, the Department of Labor asked the appellate court for more time to file a brief in the ongoing litigation. That request was approved; a deadline was set for June 30.  “The DOL [was] obviously keeping its options open as it awaits the confirmation of a new secretary of Labor,…”  

  Newest Developments

On June 7, 2017, the new Labor Secretary told House Appropriations hearing members that the DOL will “submit a request for information” (RFI) on this issue within a few weeks. As explained on the DOL’s own website: “Agencies generally use RFIs when they want public input on whether a new rule or changes to an existing rule are needed and comments on what course the agency should take should it decide to move forward.” 
Officially, on July 26, 2016, the Labor Department issued a formal request for public comment with a 60-day comment deadline.

  Conclusion

Members of the philanthropic community as well as academics and professional advisors are strongly encouraged to take advantage of this DOL public comment opportunity before the late-September deadline. 
Even if the new federal overtime rules never take effect, or are tweaked somewhat, the overtime-eligibility cutoff amount in some states is already considerably higher than the existing federal cutoff of $23,660. In California, for instance, the state salary threshold is $41,600. Also, that amount is “increasing each year along with the minimum wage” until 2022. In these states, any new federal rules would only have a minimal impact.