US Nonprofits: How to Distinguish Exempt and Nonexempt Employees

Fair pay and workloads support work-life balance

Nonprofits 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. The law, however, doesn't apply to everyone. To comply with the law and treat your employees fairly, you will 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 is not 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. Income from contributions, membership fees, donations and most dues, however, 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 is also important to note that:

Volunteers aren't considered employees
Employees can't volunteer to provide the same services that they are 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:

Hospitals
Schools and preschools
Government agencies
Businesses providing medical or nursing care for residents

Understand rule changes and how they impact your nonprofit

The U.S. Department of Labor announced a final rule in 2019 that made 1.3 million American workers newly eligible for overtime pay. The final rule revised the earnings thresholds necessary to exempt executive, administrative and professional employees from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime pay requirements. Nonexempt employees covered by the FLSA must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay.

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 ruling has no 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.