Client Alert: Nonprofit Employers - Take Note of New FLSA Overtime Rules Effective July 1st
Date: July 8, 2024
FLSA regulations define the standards by which employees can qualify for exempt status, which places them outside the scope of the overtime pay requirements. For many of the most common exemptions – known as “white-collar” exemptions – such as those covering executive, administrative, and professional employees – one requirement of exempt status is that the employee be paid on a salary basis at a rate that meets or exceeds the threshold amount set by the DOL. For the past several years, that threshold salary amount has been set at $684 per week or $35,568 per year. Anyone earning below $684 was automatically deemed “nonexempt,” and therefore, entitled to overtime pay.
Under regulations issued earlier this year, the salary threshold amount is set to increase effective July 1, 2024, to $844 per week, or $43,888 per year. The regulations further provide for future periodic adjustments tied to national earnings data, with the first such adjustment to occur on January 1, 2025. As of that date, the threshold salary amount is set to increase to $1,128 per week or $58,656 per year. The new regulations will also increase the minimum salary requirements applicable to the “highly compensated employee” exemption from the current annual minimum of $107,432 to $132,964, effective July 1, 2024, and the threshold for this exemption will increase again to $151,164, effective January 1, 2025.
Legal Challenges to the New Regulations
The new regulations are the subject of two legal challenges, both of which were brought in federal court in Texas. On June 28, 2024, a federal district court in the Eastern District of Texas issued a preliminary injunction, enjoining the Final Rule from taking effect on July 1, but only as to State of Texas employees. There has not been a ruling on the other legal challenge – brought by a coalition of U.S. business groups. Employers should, therefore, consider any steps that may need to be taken to ensure compliance with the new salary thresholds as of July 1st.
Employers Must Still Comply with State Labor Laws Providing Greater Employee Protections
Employers should remain mindful of the need to comply with both the FLSA’s Final Rule and the state labor laws where their employees work. Some states (such as Maryland and Virginia) follow the FLSA’s overtime definitions and have adopted the FLSA’s salary thresholds for the “white-collar” exemptions while other states have their labor statutes that impose higher salary thresholds than under the FLSA’s Final Rule and/or do not recognize all of the “white-collar” exemptions recognized by the FLSA’s regulations (or may have different requirements). For instance, New York state has higher salary thresholds for the executive and administrative exemption than the FLSA’s salary thresholds for those exemptions, but it does not have a state salary threshold for exempt “professionals.” Therefore, it follows the FLSA’s Final Rule salary threshold for the professional exemption. Additionally, New York State Labor Law does not recognize the FLSA’s “highly compensated employee” exemption. Similarly, Pennsylvania has adopted its salary thresholds that define the scope of the “white-collar” exemptions under the state’s overtime statute, which are subject to periodic adjustments based on state wage data. Due to these variations, employers in those jurisdictions may be at risk for their employees becoming disqualified from exempt status under those states’ laws even if they are paid at rates meeting or exceeding the new FLSA thresholds.
Is My Nonprofit Organization Covered by the FLSA?
There are two ways in which an employee can be covered by the FLSA and therefore entitled to its protections: “enterprise coverage” and “individual coverage.”
Enterprise Coverage
The FLSA generally covers/applies to employees employed by businesses or organizations (“enterprises”) with (1) at least two employees and (2) an annual gross volume of sales or business of at least $500,000. Concerning nonprofit organizations, this figure relates only to commercial activity conducted by a nonprofit organization, such as operating a gift shop in a nonprofit museum or a veterinary clinic providing veterinary services for a fee. Only employees engaged in commercial activities are protected by the FLSA on an enterprise basis, not all employees of the nonprofit organization. Furthermore, receiving donations or membership fees is not a “commercial activity” and therefore, does not count toward the $500,000 threshold.
Enterprise coverage also includes all hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies, regardless of the number of employees or whether they engage in commercial activities.
In determining whether a nonprofit organization is a “covered enterprise” under the FLSA, the DOL’s Wage and Hour Division will consider only activities performed for a business purpose, but not the charitable activities performed by the nonprofit. “Charitable, religious, educational, or similar activities of organizations operated on a nonprofit basis where such activities are not in substantial competition with other businesses do not result in the organizations being considered covered enterprises.”
Therefore, a nonprofit’s income from contributions, membership fees, dues (except any part which represents the value of a benefit, other than of token value, received by the payer), and donations (cash or in-kind), used in the furtherance of charitable activities, are not considered in determining whether an organization has met the dollar threshold required for FLSA enterprise coverage.
Individual Coverage
Individual employees not covered under the “enterprise” basis test may independently still be covered under the FLSA, regardless of the number of employees, if they are individually engaged in interstate commerce or the production of goods for interstate commerce, or any closely related process or occupation directly essential to such production.
Examples of Activities That May Result in Individual Employee Coverage Under the FLSA Are: Regularly making telephone calls to persons in another state, handling credit card transactions for someone out-of-state, shipping materials to another state, producing goods that will be sent out of state, traveling to other states for work, handling records of interstate transactions, transporting persons or property to another state, doing janitorial work in buildings where goods are produced for shipment outside the State. The DOL’s Wage and Hour Division (“WHD”) has stated that it “will not assert that an employee who, on isolated occasions, spends an insubstantial amount of time performing individually covered work is individually covered by the FLSA.” The DOL interprets broadly who qualifies as "engaging in interstate commerce" meaning that even regular email correspondence across state lines could result in the DOL considering an individual covered under the FLSA.
State Laws May Apply Differently to Nonprofits: Regardless of whether the federal FLSA applies, most nonprofit organizations will be covered by their state’s labor laws. Some states’ labor laws provide special treatment for nonprofit organizations so your organization must confer with legal counsel about the impact of state labor laws. Other state labor laws may impact nonprofit organizations differently from for-profit businesses, including definitions of who is an “employee” under the law and how workers’ compensation and unemployment insurance laws apply. Even the frequency of pay requirements within a state may differ for certain types of nonprofit employees.
What Should Employers Do Now? In light of the Final Rule that took effect July 1st, nonprofit organizations would be well-advised to:
- Review their budgets to determine the impact of the Final Rule on the reclassification of workers; what adjustments or considerations must be made concerning government and funder contracts to account for any projected salary increases that may be required to sustain the exempt status of exempt employees now and with the upcoming scheduled increases to the salary thresholds over time.
- Review worker classification status and salary for each position carefully together with updated job descriptions. Do this review now with your legal counsel to preserve privilege in determining whether an employee needs to be reclassified as nonexempt.
- Conduct annual pay equity audits to determine whether workers are being paid fairly, comparable to the market and whether employees performing the same or comparable work are being paid comparably based on performance, skillset, and work experience (to avoid discrimination claims).
- Review state law requirements for your nonprofit. Ensure your organization is complying with both the FLSA new salary thresholds and applicable state salary thresholds which may be higher than the FLSA and that any exemption that you are using to classify an employee is recognized by the labor law of the state where that employee is working.
- Avoid Common Wage/Hour Mistakes:
- Don’t assume that because an employee is “salaried,” they are exempt from overtime pay requirements. Being paid on a salaried basis is just one of three factors in determining whether an employee fits within a “white collar” exemption to the FLSA’s overtime pay law– employees must be paid on a salaried basis, meet the applicable salary thresholds, and meet the applicable duties tests. Under the FLSA, if a salaried employee does not satisfy all of these requirements, they are non-exempt and must be paid overtime as required under the law.
- Understand the difference between hourly rate and “regular rate of pay;” they are not necessarily the same. Overtime pay required by the FLSA gets paid at a rate of 1.5 times an employee’s regular rate of pay (not 1.5 times an employee’s hourly rate of pay). The “regular rate” can be a factor of the hourly rate and shift differentials, bonuses, and other compensation that may affect an employee’s total weekly income.
- Postings and Notices: Provide required labor and minimum wage postings and notices required by state law, and train managers on these legal updates.
- Recordkeeping: Remember that the FLSA imposes recordkeeping requirements on employers, not just compliance with proper worker classification, and state labor laws may similarly impose recordkeeping requirements regarding hours worked and notice requirements relating to worker classification and pay rate.
Stay tuned for more information about the FLSA Final Rule and Nonprofits in our upcoming webinar on August 7, 2024, register here.
For more general information on the FLSA Final Rule and employees not related to nonprofits, join our webinar on August 6, 2024, by registering here.
Our Labor and Employment Law Group is available to assist with worker classification analyses, training, and conducting employment law audits to ensure compliance with federal and state labor laws.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.