Breaking down your nonprofit's obligation to pay overtime

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The federal rules on overtime pay have been in flux since 2015, and new regulations could be proposed in 2018. Nonprofits must understand and comply with existing federal Fair Labor Standards Act regulations (and state wage and hour laws) governing overtime compensation. Learn about classifying employees correctly. To help your nonprofit comply, we’ve scoured available resources from proven experts to develop the following multi-step analysis – full of useful flowcharts, straightforward worksheets, and other tips.

Step #1: Is our nonprofit, or are any employees, covered by the FLSA?

The very first step in the analysis is to see whether the federal Fair Labor Standards Act (FLSA) applies to (a) your nonprofit or (b) any of its employees.

Does the FLSA cover our nonprofit? (“Enterprise coverage.”) The initial question to resolve regarding federal wage and hour compliance is to determine whether your nonprofit is an enterprise covered by the FLSA. Certain nonprofit workplaces are automatically covered as “named enterprises,” such as schools, pre-schools, hospitals, mental health centers, and residential care facilities. Other covered enterprises are those that have earned income via interstate commerce resulting in gross revenues over $500,000. Income from charitable activities does not count towards the $500,000 – so contributions, membership dues, in-kind donations, and proceeds from fundraising special events are not counted. (See DOL Questions and Answers from webinar June 7, 2016.)

Does the FLSA cover any of our employees? (“Individual Coverage.”) Caution: Even if your organization is not a covered enterprise under the FLSA, the law still covers many individual employees whose job responsibilities put them under the protection of the law because they are “engaged in interstate commerce.” In a 2016 webinar, just for nonprofits, the federal Department of Labor (DOL) gave the clear indication that it thinks just about everything employees do these days involves interstate commerce – ranging from sending and receiving emails to counting supplies that come in from out of state. Therefore, a nonprofit employer could easily be responsible for paying overtime for some individual employees, even if the organization is not covered as an “enterprise.”

To help you with the initial FLSA coverage determination, we are providing a flowchart created by former judge Mary McClatchey, president of WorkSmart partners in Colorado, who consults with nonprofits on employment law compliance, human capital management, and flexible work programs. She created this flowchart to help nonprofits determine whether they are covered by the FLSA overtime provisions. If, after reviewing the flowchart, you believe that the FLSA applies to your nonprofit and/or at least one employee, then move on to Steps #2 and #3 to determine which employees may be eligible for overtime under the FLSA if they work over 40 hours in a single work week. After going through Step #1, even if you believe that the FLSA doesn’t apply to your organization or any of your employees, then – before you completely relax – see whether your state or local laws provide even greater protection to employees than does federal law. If so, follow state law.

A special note on the interplay between federal, state, and local laws: As stated by the federal DOL, “The Fair Labor Standards Act (FLSA) is the federal wage and hour law that applies nationwide. Its coverage principles (including the $500,000 annual dollar volume threshold to establish enterprise coverage) and the criteria for the ‘white collar’ overtime exemptions are the same in all 50 states. However, some states or localities may have their own wage and hour laws that are more protective of workers.” In other words, nonprofits also need to know whether state law is more generous towards workers, and if so, follow those laws.

Step #2: Have we classified our employees correctly?

Workers are either volunteers, employees, or independent contractors. Only non-exempt employees are entitled to be paid for overtime. So each position needs to be evaluated. How many and which employees will be classified as “non-exempt” from overtime under the new FLSA definitions? The default should be that every position is non-exempt - unless it falls into one of three "white collar' exemptions. You may want to start by eliminating those positions that are definitely exempt from overtime. Remember that state law may require you to include additional employees in the "non-exempt" category. Here are three worksheets to use to determine whether your workers qualify for a bona fide ‘white collar’ exemption from overtime – administrative, executive, or professional. If not, they are non-exempt workers.

Once you've conducted this analysis it’s a good idea to list the classification (exempt or non-exempt) of every employee right on the position description. This disclosure helps to manage employees’ expectations about whether they are entitled to be paid for overtime and is a good reminder for management, too. Remember only employees are entitled to overtime. Your nonprofit may have other types of workers:

  • Volunteers are workers who do not anticipate being paid, and in fact are not compensated for their labor. However, be careful: Some employees are so enthusiastic (and community needs are so great) that they offer to "volunteer" beyond their regularly scheduled work hours. If so, make sure their volunteer responsibilities are completely different from their responsibilities as an employee – otherwise their volunteer hours, when added to their regular work hours, may push them over 40 hours in a single week. It’s a good idea to document in writing the nature of their volunteer work, AND that they voluntarily agreed to provide services for the nonprofit with no expectation of being paid for their volunteer service. Have them sign the documentation in order to protect the nonprofit from overtime liability.
  • "Interns" may be either volunteers (unpaid) or employees (paid), so document each intern's classification. Interns can sign a memo or letter acknowledging their status. Do your volunteer interns receive a stipend? If so, a stipend is inconsistent with “volunteer” status. Know the IRS rules about "trainees" and unpaid interns; otherwise, the state or federal DOL may decide that your “volunteer” intern is actually an employee.
  • Americorps and VISTA workers are neither employees nor volunteers. They are "participants" and special rules apply.
  • Independent contractors are workers whose hours and work responsibilities are not controlled by the nonprofit. Think plumber: when a repair is needed, you hire a plumber to provide his/her expertise. The plumber brings his/her own tools and schedules the work at his/her convenience. You don't supervise the plumber or put the plumber on your payroll. You also don't pay the plumber's insurance, withhold taxes, or provide benefits. Instead, the plumber completes the repair and sends you an invoice. When independent contractors receive over $600 annually, the nonprofit must file an IRS Form 1099 to report payments to the independent contractor. Use a written agreement to underscore independent contractor status. Remember that independent contractors don't receive overtime - Instead they are paid whatever the written agreement obligates the nonprofit to pay. Be sure to note whether your state’s law follows federal definitions or treats independent contractors differently.
  • Employees: The IRS defines employees  as “anyone who performs services for you if you can control what will be done and how it will be done.”  Unless they are exempt, employees who work over 40 hours in a single work week are entitled to overtime.

IRS Publication 1779 can help you distinguish between employees and independent contractors and help you understand your nonprofit’s tax obligations for employees. Learn more about the risks of not classifying workers correctly and practice pointers for working with consultants and independent contractors.

Practice Pointer

It’s prudent to document your analysis, just in case your nonprofit’s classification determination is challenged, such as by a disgruntled or former employee who complains to an attorney or the state or federal DOL that s/he should have received overtime pay.

Step #3: Will we need to pay any of our employees overtime?

In Step #1 you identified which of your nonprofit’s workers are covered by the FLSA, and in Step #2 you identified which positions are non-exempt and thus entitled to overtime for work over 40 hours in a single work week under either state law or the FLSA. In Step #3, identify which of the non-exempt positions are likely to require the nonprofit to pay overtime, consider the work patterns throughout the year, and get as full a picture as possible of what it will cost to pay those employees overtime –  considering also that there may be some employees who could work overtime, even if not regularly scheduled to do so. Include those employees in your analysis, just in case. Now you have a picture of whether your nonprofit is likely to owe overtime payments and to which employees/job positions.

Compliance is not optional

The National Council of Nonprofits urges nonprofits to understand and comply with the law of the land, in all matters. Nonprofit leaders – board and staff – need to recognize that the DOL has offices across the country, as does the IRS, which has highlighted this area as an enforcement priority in the nonprofit sector for the last several years. State attorneys general also have been active in enforcement of wage and hour laws. And of course individual workers can seek representation by private attorneys. Just because your nonprofit has a charitable mission will not insulate it from enforcement or exposure in the media for failing to follow the law.

If you have lingering questions about FLSA coverage, we recommend an excellent written analysis produced collaboratively by three state associations of nonprofits, with expert guidance from lawyers who understand nonprofits and have expertise in employment law. The Connecticut Community Nonprofit Alliance, Center for Non-Profits (NJ) and the Nonprofit Coordinating Committee of New York, teamed-up with the dedicated lawyers of Pro Bono Partnership, the Lawyers Alliance of New York, and Jackson Lewis, PC, to draft guidance for charitable nonprofits on how the FLSA overtime provisions apply to nonprofits. We recommend Part I of this guidance for those seeking to understand how and whether the FLSA overtime provisions apply to their nonprofit; we recommend conferring with a lawyer familiar with how nonprofits operate and wage and hour laws for individualized assistance.

Meanwhile, we are on the lookout for the most useful practical guidance to assist charitable nonprofits budget and manage for compliance with the new federal overtime rules. We will be adding resources to our website pages and sharing what we’re learning and hearing on social media, so be sure to follow @buildnpcapacity and @NatlCouncilNPs and send us your ideas, so we can learn from you and share with others.

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