Why Nonprofits Shouldn’t Fret Over the New Overtime Rule

President Obama has proposed expanding access to time-and-a-half overtime pay to employees paid less than $970 per week ($50,440 per year). This move—which roughly doubles the salary threshold below which workers are eligible for overtime pay if they work more than 40 hours a week—will create hundreds of thousands of jobs, reduce excessive hours of unpaid work by underpaid employees, and increase salaries for employees earning near the new threshold.

But some nonprofit leaders are raising alarms about what increased pay will mean for nonprofit organizations and the communities they serve.  Paying employees enough to make a decent living will help the communities that they serve. But not all nonprofits are covered by the proposed overtime rule. The Fair Labor Standards Act (FLSA), the law that governs who is eligible for overtime (and the minimum wage), does not extend to all employees or all employers. Unless coverage is established for the employer or employees, FLSA protections, including the new overtime rule change, do not apply.

FLSA 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 overtime and the minimum wage, unless another of the many exemptions in the law applies. Importantly, the key criterion for this provision is business or sales revenue.

Most nonprofits—including 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. Therefore, their employees are not typically covered by the FLSA.

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, consider 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, those employees engaged in that covered commercial business are entitled to FLSA protections, including the new overtime rule. 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.

The second 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.” These employees include those who, on a regular basis, write letters that will be sent out of state, make telephone calls to persons located in other states, handle records of interstate transactions, travel to other states for work purposes, or do janitorial work in buildings where goods are produced for shipment outside the state. But again, the key is that the employee is regularly engaged in commerce between states. Most nonprofit organizations do not typically engage in this activity—and if they do, they can manage this interstate commerce activity so only a few employees are affected.

The new overtime change will not pose an undue burden for nonprofits. Indeed, over 50 law professors who submitted comments about the new rule to the Department of Labor concluded that the impact on the nonprofit sector would be “quite small.” A nonprofit organization, unless it is also engaged in commercial activities, will not be deemed a covered enterprise, and only those individual employees regularly engaged in interstate commerce will be covered. It is clear that most nonprofits and their employees are not covered by the FLSA and, consequently, are not affected by the new overtime rule.

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. 

Morning Consult