Michigan Nonprofit Association Blog

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Nonprofits: Programs, fundraising could be hurt by new overtime rules

By:  Sherri Welch, Crain's Detroit Business

Top nonprofit groups including Washington-based Independent Sector, the Council of Michigan Foundations and the Michigan Nonprofit Association have been busy educating nonprofits this week on the new overtime regulations finalized by the U.S. Department of Labor last week.
Like other employers, nonprofits expect to see their administrative costs rise and are looking at ways to minimize the financial impact on the cost side of the business. With many operating on grants or contractual funding, the change will be tough to absorb, nonprofit leaders say, given that many of the grants are multi-year contracts with costs locked in and that the government has not signaled its intent to increase funding to maintain the same level of service provided by the nonprofits it funds.
At the same time, human service agencies and other nonprofits that rely on donations — and need to keep administrative costs low to show donors the bulk of their dollars are going to the cause — could see their fundraising impacted by the new rules.
As Crain's reported earlier this week, the new regulations greatly expand the number of workers eligible for overtime pay by increasing the annual salary threshold at which companies are required to pay overtime to salaried workers from $23,660 to nearly $47,476. Employers, whether nonprofit or for-profit, have until Dec. 1 to implement the new rules.
Human service agencies, which rely heavily on donations and can't pass increased costs through to clients as nonprofits like hospitals and universities potentially may be able to do, are likely to see a hit on the revenue side of the business, as well as the cost front, said Chad Audi, president and CEO of Detroit Rescue Mission Ministries.
As costs go up, donors will see a higher percentage of the money they donate covering administrative costs, which won't be well-received, he said. Donors also typically prefer to support programs that produce results they can see rather than operational and infrastructure costs for human service agencies.
Detroit Rescue Mission, which is operating on a $16.5 million budget, is in the midst of calculating the hours its 310 permanent employees currently work, how many work overtime and how much the overtime would cost. (The nonprofit also employs 40 part-time employees year-round and staffs up to a total of 180-200 during the summer to operate two summer camps for Detroit youth.)
The numbers aren't yet final, but "at this point we're looking at least a 25 percent increase in administrative costs," Audi said.
That would translate to roughly another $450,000 in administrative costs tacked on to its $1.8 million in costs during the nonprofit's fiscal 2015, ended September 30.
"How do you sell that to donors?" Audi asked. "Everybody likes to give directly to the programs. We try hard to keep our administrative costs low. Now they're forcing me to raise them."
The only way to hold down administrative costs is to drop benefits by transitioning employees to part-time status of under 30 hours per week, he said. That will create new, part-time jobs for people who need work. But it will also force many existing employees to work two different jobs to cover their bills and put more pressure on them to meet federally mandated requirements to pay for health insurance if their employer doesn't offer it to them.
The legislation says a person can still volunteer, but they can't volunteer on the work they are paid to do, Audi said. What policy makers don't understand that is there are a lot of people who work in nonprofits who are retired, take a lower-paying job at a nonprofit to give back and don't care about the amount of hours they're working. Then you have the students who come to build their resume while making a difference, and they don't care about the amount of time they are working, he said.
"This legislation is saying people who work over 40 hours are eligible for overtime or you are breaking the law," Audi said.
Organizations that make less than $500,000 are exempt, but how many employees would they have in the first place? That's the only exemption they've noted in the new legislation, he said.
Human services agencies should be exempted, especially if employees are willing to work over 40 hours because they are invested in the mission, Audi said.
An added wrinkle is a requirement that nonprofits raising funds through the Combined Federal Campaign, a workplace campaign for federal employees, can't have administrative costs exceeding 23 percent of their total revenue, he said.
The Detroit Rescue Mission's administrative costs are currently about 17 percent of its revenue. Increasing its administrative costs by about 25 percent would bring them to about 21 percent of revenue — still under that threshold, but getting alarmingly close, he said.
"If we can't raise the funds to cover our program operations, then we have to start cutting our programs."
Last September, about two months after the new regulations were introduced, Independent Sector's former President and CEO Diana Aviv weighed in, calling for phased-in implementation for nonprofit employers, which are funded, in part, by grants and contracts spanning multiple years. Their funding structure makes it difficult to adjust to the new rules in a single fiscal year, she said. Phasing in the new regulations would enable nonprofit employers to better absorb the increased costs without a reduction in programs and services.
Among other things, Aviv and Independent Sector also called for increasing the cost of providing the same level of programming and services funded through government contracts, which accounted for a third of total 2012 revenues for public charities reporting to the IRS that year.
Aviv chided the federal department for not engaging the nonprofit sector as it was drafting the new regulations.
"Through such conversations the department would have learned that charities will struggle to absorb such a dramatic increase in labor costs, and that instead the number of hours worked by key staff will be reduced, resulting in a loss of capacity for these organizations," she said. "The reality is that the impact of this proposal will be most acutely felt by those individuals and families who depend upon the programs and services provided by the nonprofit community every day."
But no exemption or phased-in approach was included in the final regulations.
The feedback from the Michigan Nonprofit Association's members has been mixed, President Donna Murray-Brown said.
"Many fear the added costs will lead to layoffs and fewer services," she said.
But at the same time, "we all understand the importance of a living wage to the people we employ as well as the people we serve."