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Nonprofits Can Avoid Overtime Requirements If They Avoid 'Enterprise' Status

    Client Alerts
  • December 04, 2017

Last year’s proposal to increase the minimum salary to qualify for exemption from federal overtime requirements hit nonprofit employers particularly hard. While the new salary levels never went into effect, many nonprofits reviewing their overtime classifications discovered that some of their employees did not meet the duties test for claiming exemption from overtime requirements. Given the limited financial ability of many nonprofits to absorb overtime expenses, we received questions from these employers asking whether they could avoid overtime obligations.

When the overtime proposal was released, the U.S. Department of Labor issued a guidance for nonprofit employers explaining their obligations under the Fair Labor Standards Act. This guidance reminded nonprofits that they may be able to entirely avoid FLSA coverage if they do not meet the “enterprise” definition included in the statute.

This definition only makes employers subject to the FLSA’s overtime and minimum wage requirements if they have annual revenues under $500,000. Some small nonprofits can claim general exemption from the law on this basis. Donations, membership fees, and dues paid to the organization do not count toward this minimum. It does apply to funds generated through commercial efforts such as a thrift shop or event tickets.

However, even these smaller employers may have individual employees subject to the FLSA if they engage in interstate commerce. For nonprofits, interstate commerce includes things like:

  • Making out-of-state phone calls
  • Receiving/sending interstate mail or electronic communications
  • Ordering or receiving goods from an out-of-state supplier
  • Handling credit card transactions or performing the accounting or bookkeeping for such activities

Most nonprofits have employees regularly engaged in these activities. These employees are subject to FLSA requirements regardless of the size of the organization. Some smaller organizations may not meet the enterprise test and may have employees who do not engage in interstate commerce. These employees are not entitled to federal minimum wage or overtime pay.

As a final complicating factor, many states have wage and hour laws that apply to employees not subject to FLSA coverage. These laws vary by state, but in some circumstances they provide exemptions or reduced payment obligations for certain nonprofits. Nonprofit organizations reviewing their wage payment obligations should thoroughly analyze their status under the FLSA and related laws before making final decisions regarding employee pay.