Fair pay and workloads support work-life balanceNonprofits should understand the critical importance of employee classifications and how to make the determination between exempt and nonexempt employees.
Understanding the Fair Labor Standards Act, which guarantees a minimum wage and overtime pay for many workers in the United States is important for nonprofits. However, the law doesn't apply to everyone. To comply with the law and treat your employees fairly, you'll need to know which employees are exempt and which are not.
Requirements for being considered an exempt employee
Before a worker can be considered an exempt employee — and therefore ineligible for overtime pay under the Fair Labor Standards Act — three factors must be met:
- Salary basis. The employee must be paid a predetermined and fixed salary that can't be reduced based on variations in the amount of work performed.
- Salary level. The employee's salary must meet or exceed a specified minimum.
- Duties. The employee's work must primarily involve executive, administrative or professional duties. Certain computer professionals, salespeople and other highly compensated employees may meet this test as well.
In this context, the fact that an employee receives a salary or has a professional job title isn't enough. To be considered an exempt employee, he or she must meet all three requirements.
All other workers are considered nonexempt employees under the Fair Labor Standards Act — meaning they must receive at least minimum wage (currently $7.25 an hour) and get paid at least one and one-half times the regular rate for any hours beyond 40 in a single working week.
Exempt regulations are the not same for nonprofit vs. a for-profit
Sometimes the term "exempt" is misunderstood to mean that nonprofits are automatically excused from the Fair Labor Standards Act. This isn't true. It depends on whether nonprofits engage in commercial activity — and how much income that activity produces.
Any organization with annual revenue of at least $500,000 from commercial activities must comply with the law. However, income from contributions, membership fees, donations and most dues is considered charitable rather than commercial. This income doesn't count toward the $500,000 threshold.
Consider a nonprofit that raises money from donors strictly to provide free veterinary care, adoption services and shelter for homeless animals. These are charitable — not commercial — activities. The Fair Labor Standards Act doesn't apply to this organization.
Now suppose that this nonprofit decides to offer an additional service — fee-based veterinary care for customers. This is a commercial activity. If revenue from this service is at least $500,000 a year, then the Fair Labor Standards Act applies.
It's also important to note that:
- Volunteers aren't considered employees
- Employees can't volunteer to provide the same services that they're paid to provide
- The Fair Labor Standards Act might apply to nonprofit employees who engage in interstate commerce or produce goods for interstate commerce
In addition, some organizations are covered by the Fair Labor Standards Act regardless of annual sales or nonprofit status, including:
- Schools and preschools
- Government agencies
- Businesses providing medical or nursing care for residents
Understand FLSA 2016 changes and how they impact your nonprofit
A proposed federal rule under the Fair Labor Standards Act called the Overtime Final Rule would extend overtime pay to millions of additional workers.
If all of your employees are already correctly classified as exempt based on salary or duties, you're in the clear. Similarly, if your nonexempt employees routinely work no more than 40 hours a week, the new ruling won't have any impact. If, however, you have nonexempt employees who earn less than the threshold amount who also routinely work overtime, you'll need to assess your options carefully.
For example, you might choose to:
- Increase salaries to meet the exemption criteria
- Pay overtime above a salary
- Reallocate wages between regular salary and overtime pay
- Redistribute workloads to prevent overtime
According to the U.S. Department of Labor, the purpose of these changes is to provide greater clarity for white-collar workers and their employers, including nonprofit organizations, in paying workers and classifying them as exempt or nonexempt.
Beyond these are potential benefits for everyone. With fair pay and workloads, employees gain work-life balance. And with satisfied employees, your organization can remain focused on delivering your mission.