Last month we launched our series on the Department of Labor’s revised Fair Labor Standards Act (FLSA) rules on overtime pay. The DOL projects this change could impact more than 4 million American workers when goes into effect, December 2016. In Part II of our series, we explore how this translates to the nonprofit sector, what exemptions are available for nonprofit employers, and other considerations.

It’s hardly been two months since the Department of Labor announced its final rule on overtime regulations, and interest (and anxiety) within the nonprofit sector continue to build. Rightly so, too – nonprofit employers are subject to the new rules with some limited organization and individual employee exemptions. There’s a cloud of uncertainty forming – leaders are having real struggles assessing and projecting the impact, both short- and long-term.

In the midst of this uncertainty, there are early indications that the FLSA’s overtime “final rule” will have widespread implications for the sector, and will adversely affect specific types of nonprofits. During AICPA’s Non-For-Profit Industry Conference in Washington D.C. two weeks ago, this topic came up in at least two sessions I attended. During the “Poll the CFO” session, John Kroll from the University of Chicago said they estimate up to a $10 million annual impact due to research assistant positions, nurses, and other student labor expenses.  Michael Forster of the Woodrow Wilson Center expects the DOL will step up monitoring next year within the nonprofit sector and that NPOs should be bracing for their audits.

To clear up the uncertainty, the DOL has provided specific guidance for nonprofits. It all boils down to how the rule change will extend the FLSA’s coverage to salaried employees. For starters, the entire nonprofit organization could meet the enterprise coverage test criteria, thereby ensuring all its employees are covered by the protections afforded by the FLSA, like overtime pay, if they make less than $47,476 (updated from $23,660 previously).

Enterprise Coverage

To meet this organization level test, most NPOs would need to engage in ordinary commercial activities resulting in sales made or business done of $500,000+ annually. These are in contrast to charitable activities, which are normally free of charge, like providing food, supplies, shelter, and/or counseling services to the homeless, domestic violence victims, or disaster survivors.

Income that helps to further a charitable cause like contributions, membership fees, monetary and non-monetary donations, and general dues (minus applicable benefits) also do not apply to the $500,000 annual threshold.

Medium to large size museums, zoos, aquariums, and any operating a store/selling merchandise would likely exceed the annual amount, and thus FLSA protections for their employees would be in play.

There are also entire categories of NPOs where the $500,000 dollar volume doesn’t even apply, thus making these changes applicable – “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; and preschools, elementary and secondary schools, and institutions of higher education.”

Clearly, enterprise coverage applies to only NPOs of a certain type, but when it does apply, the impact could certainly be high!  Even if the enterprise coverage test doesn’t cover the NPO’s employees, individual coverage can still be extended via the FLSA.

Individual Coverage

Individual coverage is creating the most uncertainty for nonprofit employers. They may not even be able to estimate impact, since they don’t record overtime for their salaried employees. In addition, the “job duties” test of exempted work activities likely isn’t an area they’ve had to be concerned about previously. Job titles don’t matter here – the nature of the work does.

To start with, employees whose work involves or relates to the movement of persons or things across state lines (aka, interstate commerce) are covered by the FSLA’s protections. This would bring into scope employees who today regularly communicate and help receive materials, donated goods, or equipment from out-of-state suppliers. Gift processors who handle online or telephone donations would also be covered. In these situations, they may qualify for a special exemption like the classic “white collar” exemption.

This “white collar” exemption remains intact and covers three types of workers with job duty tests:

  • Executives managing the enterprise, department, and two or more FTEs are exempt
  • Administrative staff members typically found in accounting, finance, marketing, HR, IT, and public relations who exercise discretion and independent judgment on significant matters
  • Professionals typically referred to as “learned” or “creative” professionals such as lawyers, teachers, and doctors

In these individual exempt scenarios though, those employees must now be paid at least $47,476 annually or $913/week, otherwise they qualify for extra overtime pay afforded by the FLSA if they do indeed work beyond a normal 40-hour workweek.

Clearly, the expected impact on many nonprofit employers will be significant – tracking overtime, adjusting schedules, raising salaries, providing overtime pay, and generally ensuring compliance is worrying many. We’ll continue to explore the new FLSA overtime rule as we get closer to December, and welcome feedback about how you may adapt within your own NPO.