Overtime Regulations – Which Organizations Are Subject to the New Rules

A. Introduction

On May 17, 2016, the Department of Labor issued new regulations determining whether an employee is subject to the minimum wage and overtime requirements set forth in the Fair Labor Standards Act (the “FLSA”). The new rules will take effect December 1, 2016, and may result in converting many "white-collar" exempt employees to overtime-eligible workers.
 
In general, the FLSA requires that nonprofits pay non-exempt employees an hourly wage at least one-and-a-half times their regular rate for time worked in excess of 40 hours in a given workweek. However, workers employed in certain capacities, including a "bona fide executive, administrative, or professional capacity," are generally exempt from the overtime requirements.
 
Currently, an employee is exempt from overtime under the "white-collar" exemptions if:
 
1. The employee is paid on a salaried basis, rather than based on the number of hours worked (the “salary basis test”);
2.  The employee's salary meets a minimum level of at least $455 per week ($23,660 per year) (the "salary level test"); and
3. The employee's primary job duties meet the definition of an executive, administrative, or professional employee, (the “duties test").
 
In other words, an employee must generally meet the salary basis, the salary level and the duties test in order to be exempt from being paid overtime (lawyers, doctors, teachers, and certain computer professionals are not subject to the salary level test – only the salary basis and duties test). Beginning December 1, the salary level test will increase to $913 per week or $47,6660 per year.

B. Applying the Rules to Your Nonprofit – Is Your Nonprofit a Business Enterprise?

When considering the impact of the new Department of Labor overtime regulations, one question nonprofits ask is this:  Do the overtime requirements apply to my organization the same way they apply to a for-profit business? The answer is, generally speaking, yes. Both federal law and local law, when taken together, require that almost all nonprofit organizations meet such standards.
 
The Enterprise Test

The first step in determining whether your organization is subject to the regulations is looking at what federal law calls the enterprise test.  Under the FLSA, your organization’s employees are subject to the overtime rules if your organization is an enterprise engaged in interstate commerce.

To satisfy the enterprise test, a nonprofit must either:

1. Have annual business revenues (volume of sales made or business done) of at least $500,000, or
2. Be a school, hospital, nursing home or other residential care facility.

In general, a nonprofit organization will meet the enterprise test if it engages in commercial activities for a business purpose that result in sales made or business done of at least $500,000. However, for purposes of determining whether a nonprofit meets this test, not all revenue is counted. The regulations make clear that a nonprofit’s religious, educational and charitable activities are not performed for a business purpose and will not be counted as commercial activities unless they compete with other, commercial businesses.  In addition, certain revenue received by a nonprofit in order to carry out its religious, educational, or charitable activities is not counted towards the $500,000 threshold.  This includes contributions, membership fees, donations, and dues as long as the payer receives no more than a nominal benefit in return.
 
Thus, a nonprofit that receives $600,000 in contributions to operate a facility that provides emergency shelter for victims of domestic violence without charge will likely not pass the enterprise test because running a shelter is a charitable activity not carried on for a business purpose, and the donations received to support the activity are not counted to determine if the nonprofit has at least $500,000 in business income.

However, the revenue that a nonprofit organization receives from commercial activities is counted. For example, revenue from the operation of gift shops, thrift stores, or food establishments count, because these activities compete with other commercial businesses. Indicia of competition with commercial enterprises include advertising and soliciting customers.
 
The determination of whether an activity is commercial in nature is very fact specific, and may leave many nonprofits confused.  In order to provide some guidance, the DOL has provided three specific illustrations of how it will apply the enterprise coverage test:
 
Example: A nonprofit animal shelter provides free veterinary care, animal adoption services, and shelter for homeless animals. Even if the shelter takes in over $500,000 in donations in a given year, because the shelter engages only in charitable activities that do not have a business purpose, the shelter does not meet the enterprise test.
 
Example: A nonprofit organization operates a thrift store in which its employees sell donated items. The thrift store is engaged in commercial activity by selling goods. If the thrift store generates revenue of $500,000 or more in a year, the nonprofit will satisfy the enterprise test and its employees will generally be covered by the overtime protection.
 
Example: A nonprofit organization operates a sandwich shop. Many of the employees that work in the restaurant, including cooks and wait staff were recently homeless, and are participating in a job readiness program. Even though the restaurant’s operation includes charitable purposes, the restaurant is engaged in ordinary commercial activities because it competes with other restaurants. If it generates revenue of at least $500,000 a year, the restaurant and its employees are covered by the overtime regulations.
 
The Individual Test

However, even if a nonprofit organization does not satisfy the enterprise test, federal law provides that its employees may still be subject to the new overtime regulations.  The regulations provide that if an employee is regularly “engaged in commerce or in the production of goods for commerce” between states he or she is covered, even if the nonprofit as a whole is not (the “individual test”).  For purposes of administering the individual test, an employee is engaged in commerce if the employee, while performing his or her job:

1. Makes out-of-state phone calls;
2. Travels to other states;
3. Receives or sends interstate mail or electronic communications, such as texts or emails;
4. Orders or receives goods from an out-of-state supplier; or
5. Handles credit card transactions or performs the accounting or bookkeeping for those transactions.
 
It is important to keep in mind that an employee located in Virginia who calls or emails someone in D.C. or Maryland or travels from the District to Maryland or Virginia would be engaged in interstate commerce.

The employee is not required to spend a minimum amount of time with these activities. It is enough that the employee’s activities involving interstate commerce are regular and recurring, even where they are a small part of the employee’s regular job duties. Again, whether an employee is engaged in interstate commerce is a very fact specific test, and the employer must look at what an employee is actually doing on the job when making this determination, rather than relying on a job description.

Finally, the new regulations serve as an important reminder to nonprofits to make sure they are otherwise complying with the FLSA’s minimum wage and overtime requirements.  Nonprofits should use this opportunity to conduct an overall assessment as to whether the nonprofit is meeting the requirements for determining if an employee is eligible for overtime pay. Even if an employee earns $913 per week, they will be subject to overtime if the employee’s duties do not meet any of the overtime exemptions for executive, administrative or professional employees.

C. State Laws

However, understanding your organization’s requirements under federal law is only one half of the equation.  Although an employer or employee is not covered by the FLSA, local law may still subject them to the new overtime regulations. The overtime laws in Maryland and the District of Columbia incorporate the federal standards, and mandate that all employers with employees working in Maryland and D.C. comply with those standards.  Moreover, neither Maryland nor D.C. law contain the enterprise and individual exceptions contained in the FLSA. Therefore, under the laws in both jurisdictions, beginning December 1, 2016, workers employed in Maryland and the District of Columbia are eligible for overtime if they are paid less than $913 per week.  This is true even if the employer’s annual business revenue is less than $500,000 per year; the organization is a nonprofit; and an individual employee does not use the telephone, internet or other forms of communication to do business with people in other states. Therefore, nonprofits with employees in D.C. and Maryland will generally be subject to state overtime laws even if they are not subject to the requirements of the FLSA.

Virginia does not have a state specific overtime law, and only the FLSA potentially applies to an employer’s Virginia-based employees.  So a nonprofit that does not meet the $500,000 threshold is not subject to the FLSA and Virginia law does not extend the minimum wage and overtime laws to the nonprofit’s Virginia-based employees.  But remember that, under the FLSA, the nonprofit’s employees may still be covered if they use the tools of interstate commerce.  Moreover, given the proximity of Virginia to Maryland and D.C., the possibility that individual employees working in Virginia will be covered by the FLSA is greater because it is more likely that such employees will communicate with individuals or entities in D.C. and Maryland.

In order to ensure that your nonprofit complies with the new overtime regulations, you may want to consult with an attorney when determining whether the organization meets the enterprise test, and if not, whether your employees meet the individual test. Finally, your attorney can verify whether local laws will also apply to your employees.