Why Nonprofits Shouldn’t Fret Over the New Proposed Overtime Rules

President Obama recently announced a major overhaul of the rules governing the payment of overtime to salaried employees. These changes are long overdue and will finally align the overtime exemption for salaried employees with common sense and the original intention of the law—to ensure that all workers receive overtime protection except those with such high salaries or such substantial responsibilities that they don’t need the protections.

Since the president’s announcement, opponents of the proposal have made a number of questionable claims. One claim in particular—that nonprofit organizations providing services to the poor and the disadvantaged will see a crippling increase in personnel costs—is demonstrably false.

The Fair Labor Standards Act (FLSA) is based on a few basic principles. First, most employees in the United States are entitled to the minimum wage, currently set at $7.25 per hour at the federal level, for all hours worked, and “time-and-a-half” for all hours worked over 40 in a workweek. These rules, first enacted in 1938, have proven to be a simple but important protection for workers and the labor market, guaranteeing workers at least a minimal level of wage protection.

The second principle, however, is that FLSA coverage does not extend to all employees or all employers. There are number of exemptions and exclusions from minimum wage and/or overtime embedded in the FLSA. Unless coverage is established for the employer or employees, the protections of the FLSA, including the proposed overtime rule changes, simply do not apply.

Coverage is determined in one of two ways. First, employers who are engaged in business that generates annual business or sales revenues of at least $500,000 per year are covered by the FLSA and must pay the minimum wage and overtime, unless another of the many exemptions in the law applies. Importantly, the key criterion for this provision is business or sales revenue. Most nonprofitsincluding the charitable organizations providing free meals to the hungry and nonprofits providing addiction or mental health services are not engaged in business, they are providing charitable services and therefore their employees are not typically covered by the FLSA.

The other way the FLSA could extend to employees of nonprofits involves only those employees whose work regularly involves them in commerce between states (“interstate commerce”), which for our purposes means individual workers who are “engaged in commerce or in the production of goods for commerce.” Employees covered as individuals include those who produce goods, such as a worker assembling components in a factory or a secretary typing letters in an office that will be sent out of state, regularly make telephone calls to persons located in other states, handle records of interstate transactions, travel to other states on their jobs, or do janitorial work in buildings where goods are produced for shipment outside the state. But again, the key is that the employee is engaged in commerce between the states. Most nonprofit organizations do not typically engage in this activity and if they do, can manage this interstate commerce activity so only a few employees are affected.

There are certainly some nonprofits that, in addition to their core charitable activities, also manage revenue-producing activities that may bring that part of the organization, and only that part, within the scope of the FLSA. For instance, a drug rehab center that as part of its program builds and sells office furniture to businesses. If this side business produces revenues of at least $500,000 annually, or if its employees are involved in interstate commerce as described above, those employees engaged in that covered commercial business or those employees engaged in interstate commerce are entitled to the protections of the FLSA, including the proposed overtime changes. But that is only fair—if a nonprofit is also competing with for-profit businesses it should be held to the same employment standards as the for-profit businesses. Leveling the playing field among employers was and remains a major policy objective of the FLSA, and requiring nonprofits that compete with commercial enterprises to comply with the same employment standard serves that policy goal.

The overtime changes proposed by President Obama are not burdensome for any employer. But they will have very little impact on organizations providing charitable services. A nonprofit organization, unless it is also engaged in commercial activities, will not be deemed a covered enterprise, and only those individual employees engaged in interstate commerce will be covered. There is nothing to preclude these organizations from bringing their standards up to those proposed by the president (and I hope they will), but there is nothing in the FLSA that requires it. It is easy enough to see that most nonprofits and their employees will not be covered by the FLSA and, consequently, not affected by the proposed overtime change.1

1. Certain organizations that may be a nonprofit are covered by the FLSA by operation of law. These include Federal, state or local government agencies; hospitals (establishments primarily engaged in offering medical and surgical services to patients who generally remain in the establishment overnight, several days, or for extended periods); residential care facilities primarily engaged (50% or more of income attributable to) in the care of the sick, the aged, the mentally ill or developmentally disabled who live on the premises; and preschools, elementary and secondary schools (as determined under state law) and colleges.

Michael Hancock is the former Assistant Administrator for Policy at the Department of Labor’s Wage and Hour Division. He is currently in private practice.