Q&A #160 – Are nonprofit organizations subject to the Fair Labor Standards Act (FLSA)?
Question: I serve as Executive Director for a 501(c)(3) nonprofit organization. I recently became aware of proposals to change the minimum salary requirements for employees to be considered FLSA exempt. However, I have also read that the FLSA does not apply to all nonprofits. Are nonprofits subject to the FLSA, and do we need to be aware of changes to this law?
Answer: Many nonprofits are technically not subject to federal Fair Labor Standards Act (“FLSA”) wage and hour law requirements due to rules that limit FLSA applicability to organizations that meet certain “enterprise coverage” or “individual coverage” thresholds. However, this is often a moot point since nonprofits are usually subject to state wage and hour laws, many of which are built upon federal FLSA definitions and exemptions. Consequently, most nonprofits must monitor changes in federal FLSA rules carefully as these may have state law compliance implications.
The Wage and Hour Division of the Department of Labor (“DOL”) has summarized its interpretation of how the FLSA applies to nonprofit organizations in Fact Sheet #14A: Non-Profit Organizations and the Fair Labor Standards Act (FLSA), as well as in its comments to FLSA rules issued in 2016, which cite the statutory definitions under 29 U.S.C. §§ 203(r) and (s), 206(a), and 207(a).
This guidance explains that an employee of a nonprofit organization can be entitled to protection under the FLSA (including federal minimum wage and overtime requirements) based on either the activities and revenue of the organization (“enterprise coverage”) or the activities of the individual employee (“individual coverage”).
A nonprofit is subject to enterprise coverage under the FLSA if it engages in “ordinary commercial activities” that generate at least $500,000 in annual gross sales or revenue. Importantly, this test only counts revenue from activities performed with a “business purpose,” does not count revenue from contributions, donations, and membership fees or dues (except to the extent the membership fees or dues represent payment for a benefit of more than token value).
The DOL explains that operating a gift shop or providing veterinary services for a fee are two examples of commercial activities that count towards enterprise coverage under the FLSA. Be aware that this analysis is different from the analysis that would apply to determine whether this revenue triggers unrelated business income tax (“UBIT”) or qualifies as “exempt function revenue” for Form 990 purposes, since the FLSA is a separate law with different policy considerations.
Alternatively, employees of a nonprofit will have individual coverage under the FLSA “if they are individually engaged in interstate commerce or in the production of goods for interstate commerce, or in any closely-related process or occupation directly essential to such production.” Thus, an employee whose duties involve these activities on more than isolated occasions or an insubstantial amount of time will generally be covered by the FLSA even if the organization does not meet the threshold for enterprise coverage.
The DOL mentions several examples of interstate commerce activities, including “making/receiving interstate telephone calls, shipping materials to another state, and transporting persons or property to another state.” The DOL’s comments to the FLSA rules issued in 2016 further explain that, unlike the enterprise coverage test, these interstate commerce activities need not have a “business purpose” to result in individual coverage:
“For example, if an employee regularly calls an out-of-state store and uses a credit card to purchase food for a non-profit that provides free meals for the homeless, that employee is protected by the FLSA on an individual basis, even though the non-profit may not be covered as an enterprise.”
Note that employees who meet the threshold for individual coverage may nonetheless be considered “exempt” from FLSA minimum wage and overtime requirements to the extent their duties qualify under FLSA exemptions for executive, administrative, or professional employees or other specific job categories.
Nonetheless, the issue of whether the federal FLSA applies to a particular organization or nonprofit employee is largely an academic exercise with few practical implications. This is because nonprofit organizations are usually subject to state wage and hour laws, and these state laws are often more protective and generous to employees than federal law. These laws often explicitly refer to federal FLSA definitions and exemptions, including the FLSA exemptions.
Planning Tip – Nonprofits should periodically assess the salaries, job descriptions, and work duties for all staff positions to ensure continued compliance with FLSA exemptions such as the exemptions for executive, administrative, or professional employees. These exemptions are highly fact-specific and depend largely on the employee’s authority, discretion, and independent judgment, as well as the nature of the employee’s duties and other factors. Duties and job responsibilities can change over time and required minimum salaries for FLSA exempt positions are periodically increased, so do not assume that a position that was once FLSA exempt will always remain FLSA exempt.
As a result, changes in federal FLSA rules, such as changes to the minimum salary requirements for FLSA exempt positions, can potentially have a significant impact on an organization’s compliance obligations under state law, regardless of whether the organization is technically subject to the FLSA, and nonprofits should keep a close eye on these developments.
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