Some Non-Profits May Avoid Salary Increases Mandated by New Federal Overtime Rule

by Holden Law Group

non profitThe new federal overtime regulations set to take effect December 1st of this year require, among other things, that employees classified under the White Collar Exemption meet the salary threshold of at least $47,476 annually.  This has caused many employers to rethink their current pay structures.  While for-profit organizations are in the thick of preparing for this new requirement, some non-profit organizations may be able to breathe a sigh of relief.

Non-profit organizations will not have to raise salaries if they are not subject to the federal Fair Labor Standards Act (FLSA).  To be subject to the FLSA, an employer must either be (1) a “covered enterprise” or (2) have employees who are individually covered.  If a covered enterprise, the FLSA applies to all of the employer’s personnel.  If not a covered enterprise, the FLSA applies only to the employees who meet the individual coverage test.  Many non-profits are not covered enterprises, but most will likely have at least one or two covered employees. Here is a summary of the relevant coverage tests:

  • The organization is a “covered enterprise” if the organization engages in commercial activities that result in $500,000 or more in annual revenues. Commercial activities for a non-profit might be the operation of a gift shop or thrift store. Examples of charitable activities (non-commercial) are: providing temporary shelter; providing clothing or food to the homeless; providing counseling services; and providing disaster relief provisions. Revenue that a non-profit obtains to further its charitable endeavors in the form of membership dues, grants, charitable donations, and other contributions do not generally count towards the $500,000 threshold.
  • Employees of the organization will be covered under the FLSA if they engage in “interstate commerce” as a part of their job duties. The interstate commerce test is very broad. This means that employees who make out-of-state phone calls, receive or send interstate mail or electronic mail (emails), order or receive goods from out-of-state suppliers, or handle credit card transactions may be considered to have engaged in interstate commerce.

Non-profit employers who determine that neither their organization nor individual employees are covered under the FLSA must still comply with California exemption requirements.  The minimum salary requirement in California is double the minimum wage for full time employment.  The current number is $41,600, but it will increase on January 1st with the minimum wage increase.

Employers who ultimately determine that either the organization as whole, or individual employees, are covered under the FLSA can ensure compliance by using one of the following methods:

  • Increase the affected employee’s salary above the $47,476 annual threshold;
  • Reclassify the affected employee(s) as non-exempt and calculate the appropriate hourly rate ensuring that overtime is paid for all hours worked over 8 in a day or 40 in a workweek and that meal and break period rules are followed; or
  • Reclassify the affected employee(s) as non-exempt and provide a salary, ensuring that overtime is paid for all hours worked over 8 in a day or 40 in a workweek and that meal and break period rules are followed. (This option can often times be fraught with risk and more problematic than beneficial. As such, we typically do not recommend it.)

There need not be a one size fits all approach when coordinating compliance in anticipation for the December 1st deadline. It is critical, however, to carefully evaluate your organization and the coverage rules under both state and federal law to avoid any inadvertent violation and potential liability as a result.