DOL Seeks to Clarify Overtime Rule’s Application to Nonprofits

By Allen Smith, J.D. Jun 8, 2016
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Nonprofit organizations that think the overtime rule doesn’t apply to them need to think twice, and may have to either redouble their fundraising efforts or brace for possible cuts in the services they provide. Despite the fact that these businesses engage in charitable activities, which would  exempt them from overtime pay requirements a​s enterprises, individual employees may still be eligible for overtime pay.

The Department of Labor (DOL) on May 18 released a fact sheet and guidance that clarify how and when nonprofits or their employees are covered by the Fair Labor Standards Act (FLSA), which the rule implements.

There are two types of FLSA coverage: enterprise coverage for certain businesses or individual coverage. While enterprise coverage is limited in the case of nonprofits, individual coverage is expansive.

“Enterprise coverage will not apply to a subset of nonprofits: those engaged in certain charitable, religious or educational activities without $500,000 or more in business-related revenue or sales,” said Michael Eastman, an attorney with NT Lakis in Washington, D.C. Eastman also is counsel to the Society for Human Resource Management (SHRM). “However, even if enterprise coverage does not apply, individual employees may still be entitled to the FLSA’s protections.”

Consequently, Eastman took issue with a Morning Consult opinion column that suggested nonprofits shouldn’t fret over the new overtime rule. Morning Consult reports on politics, policy, Wall Street and business strategy.

“It is highly misleading to suggest that most nonprofits will not need to worry about the revised rule,” Eastman stated. “Nonprofit tax status has no bearing on whether an employer is required to pay its employees overtime.”

Enterprise Coverage

The FLSA’s enterprise coverage applies to businesses with annual sales of at least $500,000. For a nonprofit, enterprise coverage applies only to the organization’s activities performed for a business purpose, such as operating a gift shop or providing veterinary services for a fee, the DOL fact sheet noted. Income from contributions, membership fees and donations used for charitable activities are not counted toward the $500,000 threshold.

Suppose a nonprofit animal shelter provides free veterinary care, animal adoption services and shelter for homeless animals, the DOL hypothesized in its guidance. “Even if the shelter takes in over $500,000 in donations in a given year, because the shelter engages only in charitable activities that do not have a business purpose, employees of the animal shelter are not covered on an enterprise basis,” the DOL stated.

But if a nonprofit operates a sandwich shop, the restaurant employees are protected by the FLSA on an enterprise basis if the restaurant generates revenue of at least $500,000 a year.

The FLSA also applies to the following enterprises, regardless of their dollar volume:

  • Hospitals.
  • Institutions primarily engaged in the care of older adults and people with disabilities who reside on the premises.
  • Schools for children who are mentally or physically disabled or gifted.
  • Federal, state and local governments.
  • Preschools.
  • Elementary and secondary schools.
  • Institutions of higher education.

Individual Coverage

Even if organizations aren’t covered by the FLSA on an enterprise basis, the law likely still applies to some employees individually, the guidance stated.The FLSA covers employees who engage in interstate commerce.

This would include workers who:

  • Make out-of-state phone calls.
  • Receive or send interstate mail or electronic communications.
  • Order or receive goods from an out-of-state supplier.
  • Handle credit card transactions or perform the accounting or bookkeeping for such activities.

Suppose an office manager of a nonprofit regularly e-mails out-of-state suppliers to purchase office materials. The employee is individually covered by the FLSA.

Or take an employee who works at a homeless shelter that regularly receives clothing from corporations located across state borders. This worker is individually covered by the law.

Don't forget about state laws, which may be more stringent than the federal, especially regarding lack of the need for interstate commerce, cautioned Kathy Speaker MacNett, an attorney with SkarlatosZonarich in Harrisburg, Pa.

Will Nonprofits Need to Cut Services?

Eastman predicted that the overtime rule’s increase in the exempt salary level from $455 a week ($23,660 a year) to $913 a week ($47,476 a year) would unduly burden nonprofits, which he said “face funding constraints that limit their flexibility in responding to new labor costs.”

The end result may be cuts to the services that nonprofits offer. As Rose Johnson, SHRM-CP, senior director of human resources for the United Way of the National Capital Area in Vienna, Va., noted, the final overtime rule’s raised salary threshold, increased triennially, “would significantly impact a nonprofit organization’s ability to minimize labor cost and meet the needs in the community.”

She said the increase in the threshold will “demand greater efforts to raise more money to support programs that are critical for those in need in the community and meet new wage requirements.”

Eastman and Christine Walters, SHRM-SCP, independent consultant and author at FiveL Co. in Westminster, Md., will speak on the overtime rule’s impact on nonprofits during a session at SHRM’s 2016 Annual Conference & Exposition in Washington, D.C., on June 21.

SHRM also will testify June 9 before the U.S. House of Representatives Education and the Workforce Committee on nonprofits and the final overtime rule.

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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