Beware: New Overtime Rules Apply to Most Nonprofits

June 14, 2016
By Zachary S. Kester, JD, LLM, CFRM and Kylie Schreiber, at Charitable Allies

To their detriment, many nonprofits believe the new overtime rules going into effect on December 1, do not apply to them since they are not business “enterprises.”

But this overlooks the reality that “individual” employees may qualify for overtime because of their job duties. The majority of employees who make less than $47,476 in annual salary will be entitled to overtime.

Any individual employee who engages in interstate commerce in some shape or form is eligible for minimum wage and overtime pay standards, according to the Fair Labor Standards Act (FLSA) and the U.S. Department of Labor (DOL). Interstate commerce is a rather broad concept, and is explained further below.

To make matters worse, the DOL utilizes language in its recently published guidance [pdf] for nonprofits to suggest that they do not often investigate or take action regarding violations for “individual” employees. But in states like Indiana, employees can use the strict wage and hour laws against employers for nonpayment of wages, which include overtime pay. So organizations should think twice before becoming too complacent.

An entire nonprofit organization can be required to pay overtime under “enterprise” coverage if they have annual revenue of over $500,000 resulting from commercial business, even if those commercial activities are “charitable” and otherwise permissible under the Internal Revenue Code (IRC). Activities such as sales of donated goods, sales by volunteers or the provision of myriad social services can trigger overtime obligations for nonprofits if revenue from such services totals more than $500,000 annually for that nonprofit.

But even if your organization has no business “enterprise” revenue (or such revenue is less than $500,000), an individual employee often is still entitled to overtime by the nature of their job. If that employee’s job function regularly touches upon interstate commerce, they can get overtime. Interstate commerce can be as simple as making out-of-state phone calls, receiving and/or sending interstate mail or electronic communications, ordering or receiving goods from an out-of-state supplier, handling credit card transactions or performing the accounting or bookkeeping for such activities.

The DOL has explained the reasons for the new regulations, including the need to clarify frequent misunderstandings about FLSA’s applicability to the nonprofit sector due to the charitable nature of them that differentiates them from for-profit entities. But again, the DOL has indicated that the individual exception is broad and will affect most employees not otherwise covered by the “enterprise” rule.

While the default rule is that nonprofit organizations do not pay overtime if an employee exceeds 40 hours in a week, many exceptions exist that nearly swallow the rule.

A nonprofit organization is not automatically subject to FLSA overtime requirements, but many are. FLSA coverage can come one of two ways:

  • Commercial Enterprise: The entire organization is subject to FLSA minimum wage and overtime requirements if they have annual revenue of over $500,000 resulting from commercial business, even if those commercial activities are “charitable” and otherwise permissible under the IRC. So many nonprofits, especially those who are not social service nonprofits, would not meet this definition.
  • Individual Employees: Individual employees are subject to FLSA coverage if they engage in interstate commerce, work to produce goods for interstate commerce, or move people or things (including intangibles, such as information) across state lines. This includes employees who use the internet and download material from websites located across state lines. So many individuals employees at nonprofits would meet this definition and be covered by FLSA.

But even if the organization or its employees trigger this requirement, the analysis doesn’t end there. There may be other exceptions that apply so that employee would not be paid overtime.

The “white collar” exemption is comprised of the “executive,” “administrative” and “learned professional” exemptions. The “white collar” exemption applies if:

  • Employee is paid on a salary or fee basis
  • Employee meets the various duty requirement for an executive, administrative, or professional role
  • Employees earnings meet the salary threshold that is no less than $913 a week (raised from $455 a week) or $47,476 for a full-year worker.

There is more than one option for compliance with the new overtime rules. Some options include raising salaries for “white collar” workers, paying overtime for weeks where the employee exceeds 40 hours, or further spreading out workloads. Each organization, after looking carefully at employees who are eligible for overtime pay based on their duties and salaries, can make changes as they see fit.

Overall, it is important for nonprofits to understand that they are not automatically exempt from paying employees overtime just because they are not a business “enterprise”. In many cases, individual employees performing work relating to interstate commerce are eligible for overtime pay. To avoid big lawsuits, it is in the best interests of most nonprofit organizations to compliant, not complacent, with regulations.

Attorney Zac Kester provides generalist and strategic nonprofit legal and consulting services. He holds a Master of Laws, a post-law school advanced degree, in which he studied the unique needs of tax-exempt nonprofit organizations. His legal and consulting career has focused on nonprofit organizations.

With highly experienced legal and training personnel, Charitable Allies provides all manner of legal and educational services for boards, officers, management and staff of myriad charities throughout the sector. From basic one-time questions about a single matter to training for boards and officers to complex reorganization or merger of activities, Charitable Allies is your go-to cost-effective provider of legal services to nonprofit organizations.

Contact Zac Kester, executive director, at 317-333-6065 or zkester@charitableallies.org with any questions.