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The Impact of New Overtime Rules on Government

The federal change won’t just hit state and local personnel costs.

A new federal rule that more than doubles the number of employees eligible for overtime pay has state and local governments scrambling. Already, governments are facing tight budgets and slow revenue growth. But the new rule, which goes into effect Dec. 1, threatens not only to increase personnel costs, but operating costs as well.

The rule change, which was issued by the Department of Labor in May, affects the earnings of both public- and private-sector workers. Governments are looking now at how much it will impact payrolls. But nonprofits are warning that the rule could also result in substantially higher rates next year for governments that contract services out.

The change is an update to the Fair Labor Standards Act and doubles the minimum salary that full-time white-collar workers must earn to be exempt from getting overtime pay to $913 a week, or $47,476 per year. The salary level was set at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census region, which is currently the South.

David L. Thompson, vice president of public policy for the National Council of Nonprofits, said that the new rule will certainly "change the culture of nonprofits. The attitude has typically been, keep working until the mission is done," he says. "Now, in most scenarios, you're going to have nonprofits saying to governments, 'The next agreement is going to cost more money.'"

That's because unlike for-profit businesses, nonprofits can't submit change orders when unexpected costs arise. And since most contracts have already been signed for the year, many nonprofits will have to absorb the extra costs come December. As it stands, nonprofits already eat, on average, 20 percent of the costs incurred in their government contracts. So nonprofits, according to Thompson, will be particularly eager to make sure they build overtime costs into future agreements.

The new rule would nearly quadruple the number of nonprofit employees eligible for overtime pay to 1.3 million nationwide, according to the Economic Policy Institute. While it's difficult to say how precisely this will translate to those doing work for state and local governments, there will certainly be an impact as roughly one-third of revenue for nonprofits is from government grants and contracts.

Meanwhile, the policy institute estimates the number of state employees eligible for overtime pay will increase to 928,000 -- five times the current national number. For local governments, eligible employees will quadruple to 1.1 million.

The new rule, however, doesn't automatically apply to all workers in every state because of an old stipulation in the labor standards act limiting it to organizations or individuals who conduct business across state lines. But it's certain to impact the 10 states and the District of Columbia that automatically link to the federal labor standards act.

The Wisconsin Counties Association has been particularly outspoken about the rule change and has partnered with a diverse coalition of local governments, universities, small businesses and nonprofits to protest it. In a letter to Wisconsin Sen. Tammy Baldwin, association executive director Mark O'Connell said the Labor Department did not do enough to take cost of living into consideration when setting the new salary threshold.

"An annual salary of $50,000 means something much different in Wisconsin," he wrote, "than it does in New York and California."

For their part, according to a recent survey by the National Council of Nonprofits of its members in all 50 states, nonprofits are torn: While it serves to lift up those most in need, the new rule also increases operating costs.

Liz Farmer is a former GOVERNING fiscal policy writer.
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