Table of Contents
Background
On May 18, 2016, President Obama and Secretary Pérez announced the publication of the Department of Labor’s final rule updating the overtime regulations of the Fair Labor Standards Act (FLSA), which will automatically extend overtime pay protections for millions of workers within the first year of implementation.
Under the new rule, anybody making a salary of less than $47,476 ($913 a week) will automatically qualify for overtime pay when they work more than 40 hours a week. That’s roughly double the $23,660 threshold (or $455 a week) that’s currently in place. The Department of Labor estimates the rule change could result in an additional $12 billion in pay for workers over the next decade.
The change – which has been criticized as too drastic by many employers – will go into effect on Dec. 1, 2016. It is intended to expand access to overtime pay for otherwise low-salaried workers who log long hours but have been treated as exempt from overtime because they perform some managerial duties.
In figuring out whether salaried workers’ income qualifies them for overtime, employers will be allowed to count their bonuses and commissions up to 10% of the threshold. For example, if someone is currently making $44,000 in annual salary and gets a $4,000 bonus, her/his total income ($48,000) will mean that she/he will remain exempt from overtime.
The new rule does not change the duties test that defines what constitutes administrative, executive, and professional work, but does raise the salary threshold on “highly compensated employees” from $100,000 to $134,004. The new threshold will be updated every three years to make sure it stays at the 40th percentile of full-time salaries in the lowest income region of the country. Based on wage growth projections, that means it could rise to $51,000 by 2020 (year of first update).
Application to Churches and Other Nonprofits
In order to be subject to minimum wage and overtime requirements and thus qualify for the FLSA protections, employees must be “covered” by the FLSA. Coverage under the FLSA is usually achieved in one of two ways: (1) the organization is a covered enterprise; or (2) a particular worker is individually covered.
Generally, churches and other nonprofit organizations are not covered by the FLSA’s overtime rule, unless they engage in ordinary commercial activities that result in sales made or business done that meet the $500,000 threshold. Ordinary commercial activities are activities such as operating a business, like a gift shop. Activities that are charitable in nature, however, are not considered ordinary commercial activities, and do not establish enterprise coverage. Examples of activities that are charitable in nature and normally provided free of charge include the following:
• Providing temporary shelter
• Providing clothing or food to homeless persons
• Providing sexual assault, domestic violence, or other hotline counseling services
• Providing disaster relief provisions
In determining whether a non-profit organization is a covered enterprise, the Wage and Hour Division (WHD) of the Department of Labor considers only activities performed for a business purpose. Additionally, income that a non-profit organization uses in furtherance of charitable activities is not factored into the $500,000 threshold. Such income might include contributions, membership fees, monetary and non-monetary donations, and dues (except for any portion for which the payer receives a benefit of more than token value in return).
Regardless of the dollar volume of business, the FLSA applies to hospitals; institutions primarily engaged in the care of older adults and people with disabilities who reside on the premises; schools for children who are mentally or physically disabled or gifted; federal, state, and local governments; and preschools, elementary and secondary schools, and institutions of higher education.
Example 1
A church operates a thrift store (separate entity from the church) in which its employees sell donated items. The thrift store is engaged in commercial activity by selling goods. If the thrift store on its own generates revenue of at least $500,000 in a year, the thrift store’s employees are protected by the FLSA on an enterprise basis and are entitled to minimum wage and overtime protection unless a specific exemption applies.
Organizations that are not covered on an enterprise basis likely still have some employees who are covered individually and are therefore entitled to the FLSA’s protections.
Individual employee coverage is based on the nature of the particular employee’s work activities. An employee who engages in interstate commerce or in the production of goods for interstate commerce is covered by the FLSA. Employees whose work involves or relates to the movement of persons or things across state lines are also considered engaged in interstate commerce. Such activities include:
• 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.
The Department of Labor, however, will not assert that an employee, who on isolated occasions spends an insubstantial amount of time performing such work, is individually covered by the FLSA.
Example 2
An office manager at a church regularly sends e-mails to out-of-state suppliers to purchase office materials and equipment. The employee is individually covered by the FLSA and entitled to its protections, including receiving minimum wage and overtime unless a specific exemption applies.
Example 3
An employee works at a homeless shelter that regularly receives food and clothing donations from corporations located across state borders. The employee’s job duties consist of receiving and logging these donations. The employee is individually covered by the FLSA and entitled to its protections, including receiving minimum wage and overtime unless a specific exemption applies.
Applying The White Collar Exemption
Establishing that a white collar employee is exempt from the FLSA’s minimum wage and overtime requirements involves assessing how the employee is paid (salary basis test), how much the employee earns (salary level test), and whether the employee primarily performs the kind of job duties that Congress meant to exclude from the law’s overtime protections (duties test). Job titles never determine exempt status under the FLSA. Additionally, receiving a particular salary, alone, does not indicate that an employee is exempt from overtime and minimum wage protections. Rather, in order for a white collar exemption to apply, an employee’s specific job duties and earnings must meet all of the applicable requirements provided in the regulations. Further, not all salaried white collar employees qualify for the white collar exemptions; in fact, many salaried white collar employees are entitled to minimum wage and overtime.
Options For Compliance
1) After evaluation, no changes to pay or hours necessary
Many non-profit organizations may have white collar employees who satisfy one of the duties tests for exemption and earn between the old salary level ($455 per week) and the new salary level ($913 per week). Employers should evaluate all such categories of white collar employees to determine which employees do not work more than 40 hours per workweek. The Final Rule will have no effect on these employees’ pay because they do not work any overtime even though they will become overtime-protected. They can continue to be paid a salary as before.
Example
The manager of a church bookstore performs the duties of a bona fide administrator and is paid a fixed salary of $42,000 a year. The bookstore is open from 10am-4pm, Tuesday through Saturday. The manager regularly works from 9am-5pm, Tuesday through Saturday. Because of the change in the salary level (from $23,660 to $47,476), the manager is no longer an exempt employee. Nevertheless, the Final Rule has no impact on the manager’s pay, because the manager does not work more than 40 hours in a given week. The bookstore can continue to pay the manager a fixed salary of $42,000 a year.
2) Raise salaries
Employers may choose to raise the salaries of employees who meet the duties tests, whose salaries are close to the new salary level and who regularly work overtime, to at or above the salary level to maintain their exempt status.
Example
A Director of Administrative Operations at a local church is paid a salary of $45,000 a year. Her job duties qualify her for the administrative exemption. The manager’s job requires regularly working overtime to direct business operations in multiple time zones. The employer may choose to raise the manager’s salary to at or above $47,476 a year to maintain the manager’s administrative exemption.
3) Pay overtime above a salary
Employers also can continue to pay employees a salary and pay overtime for hours in excess of 40 per week. Although the FLSA requires employers to keep records of how many hours overtime-eligible employees work, the law does not require that overtime-eligible workers be paid on an hourly basis. Rather, non-profit organizations may continue to pay employees a salary covering a fixed number of hours, which could include hours above 40. There are several ways to pay a salary and pay overtime.
An employer might pay employees a salary for the first 40 hours of work per week, and then pay overtime for any hours over 40.
Example
Alexa, a development manager for a cultural institution, earns a fixed salary of $41,600 per year ($800 per week) for a 40 hour workweek. Because her salary is for 40 hours per week, Alexa’s regular rate is $20 per hour. If Alexa works 45 hours one particular week, the employer would pay time and one-half (overtime premium) for five hours at a rate of $30 per hour. Thus, for that week, Alexa should be paid $950, consisting of her $800 per week salary and $150 overtime compensation.
Employers also have the option of paying a straight time salary for more than 40 hours in a week for employees who regularly work more than 40 hours, and paying overtime in addition to the salary.
Example
Jamie, an HR manager at a nonprofit community loan fund, earns a fixed salary of $44,200 per year ($850 per week) for a 50 hour workweek. The salary does not include the overtime premium. Because the salary is for 50 hours per week, Jamie’s regular rate is $17 ($850/50). In a normal 50 hour week, the employer would pay Jamie the additional half time overtime premium for the 10 hours of overtime ($8.50 per hour). If Jamie worked
more than 50 hours in a week, the employer would also owe overtime compensation at time and a half the regular rate ($17 x 1.5) for hours beyond 50 (because the salary does not cover any payment for those hours).
Kindly note there is no requirement that employees “punch in” and “punch out.” An employer does not need to require an employee to sign in each time she starts and stops work. The employer must, however, keep an accurate record of the number of daily hours worked by the employee. To do so, an employer could allow an employee to just provide the total number of hours worked each day, including the number of overtime hours, by the end of each pay period.
4) Reorganize Workloads, Adjust Schedules or Spread Work Hours
Churches and nonprofit organizations may wish to reorganize workload distributions or adjust employee schedules in order to comply with the Final Rule. For example, work assignments that are predictable could be assigned at the beginning of the workweek (rather than, for instance, late in the day on Friday for an employee who typically works Monday-Friday) in order to manage overtime hours. Or, when employees regularly perform duties outside of a 9 to 5 workday, churches and nonprofit organizations may consider adjusting those employees’ schedules to encompass when most of the work takes place, so that they will not work more than 40 hours each workweek. (The FLSA does not specify days or schedules, such as a Monday-Friday workweek or a 9am to 5pm workday; this is provided only as an example of a schedule that many workers follow.)
Example
John, a manager at a charity consignment shop (subject to FLSA coverage) who satisfies the duties test, currently begins work at 8am Monday-Friday. Under the Final Rule’s new salary level, he would be newly entitled to overtime compensation. Among other duties, John accepts donations to the shop from donors, and the busiest time for drop-offs is always between 4pm-6pm, so John routinely works until 6:30pm. The shop may wish to adjust John’s schedule such that he doesn’t need to begin work until 10am, thus limiting the number of overtime hours he works.
To reduce or eliminate overtime hours, churches and nonprofits may decide to hire new employees or redistribute work hours in excess of 40 across current staff, by increasing the work hours of staff members who work less than 40 hours per week.
5) Adjust Wages
Employers can adjust the amount of an employee’s earnings to reallocate it between regular wages and overtime so that the total amount paid to the employee remains largely the same. Employers may not, however, reduce an employee’s hourly wage below the highest applicable minimum wage (federal, state, or local), or continually adjust wages each workweek in order to manipulate the regular rate. The employees’ hours worked must still be recorded, and overtime must be paid according to the actual number of hours worked each week.
Example
Assume a fundraising supervisor at a church who satisfies the duties test for the executive exemption earns $37,000 per year ($711.54 per week). The supervisor regularly works 45 hours per week. The employer may choose to instead pay the employee an hourly rate of $15 and pay time and one-half for the 5 overtime hours worked each week.
$600.00 (40 hours x $15 / hour)
+ $112.50 (5 OT hours x $15 x 1.5)
_______________________
= $712.50 per week
Alternatively, the employer may choose to pay that employee a salary for 40 hours of $600 per week and pay the overtime for hours in excess of 40 per week.
$600.00 (salary for 40 hours/week, equivalent to $15/hour)
+ $112.50 (5 OT hours x $15 x 1.5)
_______________________
= $712.50 per week
6) Use of Volunteers
A volunteer generally will not be considered an employee for purposes of the FLSA if the individual volunteers freely for public service, religious, or humanitarian objectives, and without contemplation or receipt of compensation. Under the FLSA, employees may not volunteer services to for-profit private sector employers. Also, individuals generally may not volunteer in commercial activities run by a non-profit organization (such as a gift shop).
Under the FLSA, a person who works in a volunteer role must be a bona fide volunteer. Generally, volunteers serve on a part-time basis and should not displace employees or perform work that would otherwise typically be performed by employees. Additionally, paid employees of non-profit organizations may not volunteer to provide the same type of services to the non-profit organization that they are otherwise typically employed to provide.
Example
A non-profit medical clinic has an office manager who handles office operations and procedures. The clinic hosts an annual 5K fun run in order to raise funds for its free services. In past years, the office manager also spent time on race day working by registering runners the morning of the run. The non-profit clinic may permissibly choose to utilize more volunteers this year to register runners instead of tasking the office manager with that assignment (provided all the conditions for bona fide volunteers are met), thus avoiding the accumulation of overtime hours in that week for the office manager.
Example
Using the same facts as above, many other individuals from the community volunteer on race day. The volunteer activities, such as packet pickups, course marshaling, water distribution, and staffing food tables at the finish line, are activities that are not typically performed by employees of the medical clinic. Based on these facts, the individuals are likely bona fide volunteers.
As mentioned above, volunteer work is performed without the expectation of compensation.
Conclusion
The applicability of these provisions of the Fair Labor Standards Acts (“FSLA”) to religious organizations remains not entirely clear. While church legal advisors generally contend that the FSLA applies to churches, there is authority from the Department of Labor that lists clergy and religious workers as one of six categories of occupations exempt from the FLSA’s overtime provisions. It is anticipated that further guidance will be provided by the time the updated regulations go into effect (December 1, 2016).