This month’s newsletter focuses on the new overtime regulations enacted on May 18, 2016 as provided by the Fair Labor Standards Act (FLSA).
The New Overtime Rules—A Summary
The new regulations have caused confusion because some nonprofit observers have indicated that tax exempts need not be concerned with the standards. However, as we shall see, this is not the case. A summary of the changes as they impact the nonprofit sector is as follows:
The new overtime rule changes update the compensation amounts needed for executive, administrative and professional workers to be exempt. They also amend the salary basis test which allows employers to include nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level. The new changes increase the standard salary level to the 40th percentile of earnings for full-time salaried workers - $913 per week or $47,476 annually. Compensation levels are updated every three years to maintain the levels at the above percentile.
Herein lies the confusion for nonprofits. The FLSA provides two types of coverage, enterprise and individual coverage, for nonprofits. Enterprise coverage applies to businesses with annual sales of $500,000 or more. Annual sales are those generated by a nonprofit for a business purpose, such as a gift shop or fees for services. The $500,000 threshold does not include contributions, membership fees, and donations used for charitable activities. However, some types of entities are “named enterprises” meaning they are covered by FLSA regardless of their annual sales, business or non-profit status. They are:
- Schools and preschools;
- Government agencies;
- Businesses providing medical or nursing care for residents.
While some non-profits may not be covered under the FLSA’s enterprise rules, it is possible that many employees of these non-profits are covered as individuals. Individual coverage applies to employees who engage in interstate commerce or in the production of goods for interstate commerce.
Engaging in interstate commerce as defined under FLSA is rather broad. Interstate commerce includes making telephone calls, sending e-mails or writing letters to someone in another state, and ordering or receiving goods from an out-of-state vendor. Many employees use goods from out-of-state vendors, buy goods for their nonprofit using Amazon.com, make calls or send emails to out-of-state vendors. These activities subject employees to FLSA coverage as individuals.
The FLSA does not cover employees who spend an insubstantial amount of time on these services as well as volunteers who provide these services to the non-profit.
Why Nonprofits Need to Understand How the New Overtime Rules Impact Them
The reason this is important for nonprofits is because the salary structure for employees performing managerial duties in nonprofits, and therefore not eligible for overtime, is rather low. If covered by FLSA, manager-level employee’s earning less than $47,476 as well as enterprise or individual levels may be eligible for overtime pay. Nonprofits on tight budgets will need to plan for increased salary related costs.
In summary, many nonprofits may not fall under the new regulations because their business activities do not generate more than $500,000 of “business purpose” sales. Nonprofits that generate income through individual contributions, foundation or corporate grants, will be outside of the new regulations. However, assessing whether individual employees fall under FLSA because they are engaged in interstate commerce is more complicated, and requires careful analysis. This is because it is rare that employees do not engage in some kind of interstate commerce as defined by the regulations.
The new regulations promulgated by the Department of Labor update the FLSA and are to take effect on December 1, 2016.
Open the following fact sheet from the DOL for additional information: DOL Fact Sheet
. If you have additional questions about the new regulations please call us, or consult with your HR specialist or counsel.