The Impact of the FLSA on Nonprofits

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The new overtime rules taking effect Dec. 1 2016 under the updated Fair Labor Standards Act (FLSA) will affect nearly all U.S. businesses and millions of workers, and the FLSA impact on nonprofits will be equally large. Luckily, when issuing the new rules the Department of Labor (DOL) also released guidance specifically for nonprofit employers.

The DOL notes nearly all nonprofits must comply with the new FLSA overtime rules, explaining "neither the FLSA nor the Department's regulations provide an exemption from overtime requirements for non-profit organizations. While some non-profits may not be covered under the FLSA, it is likely that many employees of non-profits are entitled to FLSA protections." This guidance assumes there are two ways to be covered by the FLSA for nonprofits, either as a business enterprise or an individual engaged in interstate commerce.

Let's examine each ground that could affect nonprofits once the updated FLSA rules take effect:

Enterprise Coverage

The FLSA applies to businesses with sales or revenues of at least $500,000 per year. The DOL makes it clear enterprise coverage does not extend to "charitable activities" — such as collecting donations — but may apply to the business activities of nonprofits, such as operating a gift shop. Although "enterprise coverage" looks like it creates a nonprofit exemption from the FLSA, the DOL has issued Fact Sheet #14: Coverage Under the Fair Labor Standards Act (FLSA), which designates some nonprofits as "named enterprises" under the FLSA, and thus explicitly covered.

The DOL applies FLSA coverage to the following "named enterprises," which may also be nonprofits: hospitals, businesses providing medical or nursing care for residents, government agencies and schools and preschools. These nonprofit entities and their employees are clearly covered by the FLSA.

Individual Coverage

Assuming a nonprofit isn't covered as an enterprise, employees may still be covered by the FLSA as individuals. "Individual coverage" under the FLSA extends to workers who engage in interstate commerce. The DOL's fact sheet cited above takes a broad view of the term "interstate commerce," noting that interstate activity doesn't have to be motivated by a business purpose. It also offers examples of where "individual coverage" would apply.

"Examples of employees who are involved in interstate commerce include those who do the following: produce goods (such as a worker assembling components in a factory or a secretary typing letters in an office) that will be sent out of state, regularly make telephone calls to persons located in other states, handle records of interstate transactions, travel to other States on their jobs, and do janitorial work in buildings where goods are produced for shipment outside the State," according to the DOL.

But the DOL is clearly seeking to extend FLSA protections, rather than permit exemptions from coverage, so you'll need to be careful about claiming an employee is outside the FLSA rules. Because of the complexity of the FLSA impact on nonprofits, managing your particular compliance risk will require a careful, fact-based analysis of both enterprise and individual coverage.

High-Level Managers at Nonprofits

The FLSA does, however, create an exemption for highly-compensated employees, which may cover high-level managers at nonprofits. As the department guidance explains, "White collar workers who fail the standard duties test but are 'highly compensated' — earn more than $134,004 in a year effective December 1— are almost all ineligible for overtime under the highly compensated employee exemption, which has a minimal duties test. This exemption will cover many high level managers at non-profit organizations."

Preparing for the FLSA Changes

The National Council of Nonprofits says nonprofits have much work ahead of them to comply with the coming changes. Nonprofit "employers have various options to comply with these change in overtime rules, ranging from increasing exempt employees' salaries to the new level, converting them to hourly employees and paying overtime, or making other changes to benefits or operations."

Like nearly all U.S. employers, nonprofits will find themselves forced to reclassify many exempt employees as nonexempt and thus start tracking their time worked. While nonprofit entities are treated differently by the Department of Labor, they will no doubt need to ramp up their compliance efforts along with many other organizations in order to be ready for Dec. 1.