When Do Nonprofits Have to Pay Overtime?
No other issue in employment law creates more confusion than determining when an employee is eligible for overtime pay under the Federal Labor Standards Act (FLSA). With for-profits, the issue usually revolves around whether the employee falls under one of the various exceptions, the most common being the "white-collar worker exemption." (You can read my recent blog on the new landmark rule affecting this exception here.)
For non-profits that are tax-exempt as a public charity under chapter 501(c)(3), this issue is particularly confusing because navigating all the exceptions and “exceptions to exceptions” can cause serious vertigo.
As a threshold matter, the FLSA specifically requires the following nonprofits to pay overtime:
1. Hospitals (i.e., establishments primarily engaged in offering medical and surgical services to patients who generally remain in the establishment overnight, several days, or for extended periods);
2. Residential care facilities primarily engaged (i.e, 50% of more of income attributable to) the care of the sick, aged, mentally ill, or developmentally disabled who live on the premises;
3. Preschools, elementary school and secondary school (as determined under state law), and colleges; as well as schools for mentally or physically handicapped or gifted children.
If you are not one of these, then your liability for overtime will depend upon whether you fall under “enterprise coverage” or “individual coverage.” The Department of Labor recently published this explanation:
Enterprise coverage. Generally speaking, a covered enterprise is one with an annual volume of sales made or business done of $500,000 or more per year. Nonprofit charitable organizations are notcovered enterprises under the FLSA, however, unless they engage in ordinary commercial activities that result in sales made or business done that meets that threshold. Ordinary commercial activities means operating a business, like a gift shop. Activities such as providing free temporary shelter, free clothing or free food to homeless persons, however, are not considered ordinary commercial activities; rather, they are charitable in nature and enterprise coverage does not apply.
So great - your charitable organization is not one of the specifically named nonprofits in the Act and is not engaged in commercial activity. You’re in the clear, right? Not so fast. Here comes the mother of all exceptions - “individual coverage.” Again, the DOL’s explanation:
Individual coverage. Organizations that don’t meet the tests to be covered on an enterprise basis likely still have employees who are covered individually. An employee who engages in interstate commerce is covered by the FLSA. Such activities include making out-of-state phone calls; mailing information or conducting business via the U. S. mail; ordering or receiving goods from an out-of-state supplier; handling credit card transactions; or performing the accounting or bookkeeping for such activities. As we have said previously, however, we will not assert individual coverage for employees who perform this type of work only on occasion, and for an insubstantial amount of time.
Huh? So an employee who spends a “substantial amount of time” doing something as simple as making out-of-state phone calls is individually entitled to overtime? Yep.
Here’s a handy example the DOL provides:
A nonprofit animal shelter provides free veterinary care, adoption services, and shelter for homeless animals. Those are charitable activities. In addition, the shelter provides veterinary care for a fee to customers, which is a commercial activity. If the revenue generated from the organization’s commercial activities is at least $500,000 in a year, the employees engaged in the commercial activities are protected by the FLSA on an enterprise basis. Employees of the organization’s charitable activities are not covered on an enterprise basis since those activities do not have a business purpose. However, an employee who spends a considerable amount of time fundraising on the phone and taking credit card donations from other states would be individually covered.
So there you have it. A charitable organization is not liable for overtime unless it is a specifically named nonprofit or unless it is engaged in commercial activity or unless it has employees who make interstate phone, calls or use the mail or process credit card payments or do accounting for them or order or receive supplies from an out-of-state supplier. As one commentator recently pointed out, this would mean that a janitor who uses supplies from an out-of-state cleaning supply company would qualify for overtime.
What’s the pragmatic approach? If you want to understand your overtime obligations, hire an employment lawyer to help you navigate through this labyrinth of regulations. This will be particularly critical as the DOL enacts its radical transformation of the “white collar exemption” later this year, which overnight will make 5 million more American workers overtime eligible - including many nonprofit employees.
