On May 18, 2016 the Department of Labor (DOL) announced changes to the FLSA regulations that will raise the minimum salary level for the executive, administrative, and professional employee exemptions to $913 per week, or $47,476 per year, more than double the current minimum of $455 per week, or $23,660 per year. This change, which goes into effect December 1, 2016, will have a uniquely significant impact on the non-profit sector. While the DOL notes that “non-profit work is a complex and important sector in our economy and civil society,” the DOL also notes that neither the FLSA nor the DOL’s regulations provide an exemption for non-profit organizations in the payment of overtime.
Employees in the non-profit sector can be covered by the provisions of the FLSA under one of two tests – enterprise or individual coverage. With respect to enterprise coverage, organizations with annual sales or business of at least $500,000 are deemed covered, and by extension, so are their employees. For a non-profit, enterprise coverage applies only to the activities performed for a business purpose; it does not apply to the organization’s charitable activities that are not in “substantial competition with other businesses.” Additionally, certain “named enterprises” (such as hospitals, schools and preschools, and government agencies) are covered regardless of the level of annual sales.
While many non-profits may not constitute an “enterprise” for purposes of organization-wide coverage under the FLSA, their employees may be entitled to FLSA protections under the individual coverage provisions if they engage in interstate commerce. This includes such things as making or receiving interstate phone calls, placing orders with out of state companies, processing credit card donations from out of state donors, and transporting items or persons across state lines. Critically, this analysis will need to be performed as to each employee and may result in some employees being covered while others are not. Any employee who is deemed covered under this analysis is covered by the new regulations regarding the minimum salary level, and their employers will need to take steps to ensure that compensation is properly paid.
For most non-profits, their employees will be covered by the FLSA, and any exempt employee making less than $47,476 per year will need to be handled in one of the following ways prior to December 1, 2016:
- Increase salaries. This may work for some workers who already are very close to the new threshold and who meet the duties test for the executive, administrative or professional exemptions.
- Convert the employees to nonexempt and pay overtime. Most employers think of nonexempt employees as being paid on an hourly basis, but the FLSA does not require that workers be converted to an hourly pay system simply because they fall below the new threshold; nonexempt employees can continue to be paid on a salary basis. However, regardless of the method of compensation, employers will need to begin tracking the new nonexempt employees’ time and paying overtime for hours worked in excess of 40 per week.
Employers can also control costs in the manner that nonexempt employees are managed. Some cost controlling methods include:
Monitor overtime hours and redistribute work duties. Employers may take steps to limit the amount of overtime worked by employees and redistribute workload as needed.
Adjust base pay and pay overtime to equal prior salary. Employers can reallocate compensation between the regular rate of pay and overtime compensation to create a new base rate and overtime rate. This generally works well if the employee works a relatively small amount of predictable overtime. This will require computing a new rate and ensuring the employee is given adequate notice as to how the new structure will not impact overall compensation.
We encourage all non-profit organizations to take this opportunity to examine 1) whether its employees are covered by the FLSA under enterprise or individual coverage, and 2) whether changes are needed with respect to the compensation of certain employees in light of the new regulations. Keep in mind that from the DOL’s perspective, some non-profits may not be covered under the FLSA, but it is likely many, if not most, employees of non-profits are entitled to FLSA protections.