Published in Nonprofits
New overtime regulations likely to hinder nonprofit capacity Courtesy Photo

New overtime regulations likely to hinder nonprofit capacity

BY Sunday, October 16, 2016 07:19pm

KALAMAZOO — As nonprofits struggle to navigate changes in overtime regulations, they may be forced to slow the expansion of new programs and services and put a hold on staff increases.

That’s according to experts statewide who note that the Dec. 1 changes to overtime regulations will move the threshold for nonprofit and for-profit entities from about $27,000 to $47,000 for exempt employees. These U.S. Department of Labor changes to the Fair Labor Standards Act significantly increase the overtime pay requirements after an employee has worked the standard 40-hour workweek. 

“The trend for the last 30 years for nonprofits has been increasing pressures to build efficiency,” said Kyle Caldwell, executive director of the Dorothy Johnson Center for Philanthropy housed on the campus of Grand Valley State University. “Increasingly, they are moving the resource pool toward individual and other types of giving including ‘fee for service’ and that creates very tight margins. Nonprofits will cut everywhere except for services in order to sustain their work.”

In the United States, one in 11 Americans work for a nonprofit and many of these entities already are working with limited benefits and constrained salaries, Caldwell said.

“When you throw the overtime rule on top of that, you are essentially increasing costs without increasing outputs,” he said.

While larger institutional nonprofits, such as hospitals, will figure out how to incorporate these changes into their business model, this is expected to be more of a challenge for small to mid-size entities.

John Dillworth, president and CEO of Goodwill Industries of Southwestern Michigan, said the changes will essentially wipe out his organization’s bottom line and create an even greater need to find other revenue-generating sources.

“This increases our labor costs by about 2.5 percent,” Dillworth said. “We make about 2.5 percent when all is said and done, so when we have an increase (in labor costs) of 2.5 percent, it’s an increase in expenses and we better find some revenue or a break-even scenario at best.”

However, the FLSA changes aren’t the only financial challenge facing Goodwill: The organization also is dealing with a 36-percent increase in health care costs.

“We’re looking at how we can further maximize the material donations we receive to maximize our revenues,” Dillworth said. “We know some will work and some won’t. We’ll see what sticks and works and go with those.”

In the meantime, Goodwill employees, like many nonprofit workers, will be experiencing a cultural change in the way they work. Goodwill employs 205 full-time and 96 part-time employees.

“We will have to really watch the time people spend doing what they do,” Dillworth said. “For a lot of folks, they’ve never been in a situation where they have to keep track of each hour. They’re not too excited about it, but that’s the reality.”

Numerous organizations have been orienting supervisors and staff to the new rules and working with them to create an understanding of the need to change the way they do business, Caldwell said.

“We are likely to see more of a shift to part-time staff, more attention to the clock, spreading the workload among the same pool of employees, and we will see some downsizing eventually,” Caldwell said. “What we’re also hoping is that individuals, institutions and other funders will ask how they can be supportive by providing bridge funding, or overhead funding.”

As the for-profit and nonprofit sectors continue to wrestle with the regulatory changes, a coalition of 21 states, including Michigan, sued the U.S. Department of Labor in September over the changes, calling them an “inappropriate federal overreach by the Obama administration.”

Nevada Attorney General Adam Laxalt, who filed the lawsuit, said the rule would burden both the private and public sectors by straining budgets and forcing layoffs or cuts in working hours.

“This rule, pushed by distant bureaucrats in D.C., tramples on state and local government budgets, forcing states to shift money from other important programs to balance their budgets, including programs intended to protect the very families that purportedly benefit from such federal overreach,” Laxalt said.

Henry (Hank) Jackson, president and CEO of the Society for Human Resource Management (SHRM), said that thousands of HR professionals expressed their concerns about the proposed rule. He said SHRM is disappointed in the dramatic increase in salaries under which employees are eligible for overtime and the automatic increases to the salary level.

“The salary threshold — although slightly less than originally proposed — will mean many employees will lose the professional ‘exempt’ status that they have worked hard for and the flexibility from rigid schedules that they care deeply about. While changes in regulations were meant to benefit employees, a change of this magnitude will do the opposite. There likely will be fewer opportunities for overtime pay as employers are forced to restructure their compensation and staffing.”

Caldwell said he thinks there should have been an easier way for nonprofits to express the need for a waiver regarding the DOL overtime changes.

“Once the rules came down and nonprofits didn’t get a carve-out, that made the business model even more constrained,” he said. “I don’t know if a carve-out would have been the way to go. Some people are feeling this is right and the thing to do. Creating a better way to seek a waiver probably should have been incorporated in the thinking.”

He said nonprofits have increasingly been stepping in to provide services that the government is no longer funding. This has been placing additional pressure on the nonprofit sector even before the changes in overtime regulations were introduced.

“I don’t think people get it. The role of nonprofits has always been to step into the gap and when that’s apparent, people don’t understand how this seamless transition occurs,” Caldwell said, citing the city of Flint as an example. “Almost half of the rescue funding pledged to Flint is coming from a handful of foundations instead of government. That’s philanthropy stepping in to rescue a municipal failure.” 

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