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New Fair Labor Standards Act Changes to Take Effect December 1, 2016

The Department of Labor recently issued significant and sweeping salary threshold changes to the Fair Labor Standards Act (FLSA) through its Final Rule, published on May 18, 2016.  The Rule is set to go into effect on December 1, 2016.  These changes are the result of a Presidential Memorandum issued by President Obama in 2014 to the Department of Labor, which has now published a summary of its actions here.

These 2016 changes significantly raise the salary threshold that are required for executive, professional, and administrative white collar employees, who already perform exempt duties, to remain exempt from overtime under FLSA.  Here are some of the details:

  • The salary threshold for executive, professional, and administrative white collar employees will be raised to $913 per week ($47,478 per year), up from $455 per week ($23,660 per year).
  • The salary threshold for Highly Compensated Employees (HCE’s) will be raised from $100,000, to $134,004.
  • These thresholds will now be reviewed on a recurring basis every three years based on cost of living.

If you suspect that these changes affect your organization’s categorization of its employees under FLSA, you should engage us to either conduct an FLSA mini-audit to target your areas of exposure and recommend tailored solutions.  For example, if your employees who are currently exempt would become non-exempt once the salary threshold rises in December, there are at least three different approaches your organization could consider.  First, the most obvious option is to raise the employee’s salary to meet the threshold (assuming they already qualify based on their duties).  Second, it may be possible for the employee to fit into one of many FLSA exemptions (i.e. ministers, teachers, administrative white collar).  Some of these exemptions may not even require a salary threshold.  Third, it is possible to manage overtime and work duties for the new non-exempt employees so that they are properly compensated while not working non-approved overtime.  This requires care in drafting and implementing an effective overtime management policy, as well as avoiding potentially illegal FLSA practices (such as compensatory time in lieu of overtime).  The Department of Labor has especially addressed this option in its non-profit guidance paper, available here.  Each of these options, as well as other potential solutions, requires careful legal review to ensure FLSA is not violated.

It also is important to remember that employees generally cannot waive their rights under FLSA.  Simply because an employee agrees to an arrangement does not make it legal.  We recommend that you engage legal counsel to discuss specific situations and potential solutions, since they are all fact-specific.

Generally, all employers are subject to the minimum wage requirements and overtime pay requirements of the Fair Labor Standards Act (FLSA).  Thankfully, non-profits and churches enjoy some special exemptions under FLSA, some of which may help exempt churches, schools, and nonprofits in general.  There are general two types of coverage under FLSA:  1) business or similar entities (enterprise coverage”) with annual sales or business of at least $500,000 annually (generally, charitable contributions, membership dues, and donations used for charitable activities are not counted towards the $500k threshold), or 2) individuals who are engaged in interstate commerce or in the production of goods for interstate commerce.

There is no blanket exemption for non-profits from FLSA.  This is primarily because the FLSA can apply to protect an employee in one of two ways.  First, the FLSA can apply to protect all employees of an employer who qualifies as a “business enterprise” that has $500,000 or more in annual gross receipts.  Generally, this includes for-profits who are conducting business, such as running a store, manufacturing goods, providing services, etc.  Unless a non-profit is engaging in similar business-like activity that produces $500,000 or more in annual gross receipts, it will most likely be exempt from enterprise coverage.  Although many churches, religious schools, and nonprofits may likely qualify as religious educational institution, it may still be subject to enterprise coverage due to the operation of its business, providing services in a similar manner as a for-profit business would.

Second, even if the employer is not covered by FLSA as an “enterprise,” the FLSA may protect all those employees who work in interstate commerce as a substantial part of their duties.  Although this standard, on its face, appears to apply only to employees who are putting products or services into interstate commerce, its scope is much broader than that.  An employee can be considered to be engaged in interstate commerce when they are “regularly using the mails and telephone for interstate communication, or when regularly traveling across state lines while working.”  This type of activity has to be a “regular and recurrent” part of the employee’s duties, though the Department of Labor has not established strict rules on how this test can be met, since it is a fact-based analysis.  It is clear, however, that de minimis activity, or activity that is not regularly recurring, will not provide an employee with the protection of FLSA’s rules.

As an example, the US District Court for the Southern District of New York applied this rule in case of Bowrin v. Catholic Guardian Soc’y, conducting an “individual coverage” analysis for employees of a Catholic society.  The court explained that while the test for individual coverage is a fact-based test:“typically it is the use of the interstate mails and placement of out-of-state phone calls occurring in the course of conducting an organization’s clerical or administrative business that appear to trigger individual coverage, if ‘regular and recurrent’ and a ‘substantial part’ of the employee’s work.”

The rule is even more clearly stated in the Department of Labor’s Field Operations Handbook, describing what kind of work in nonprofits qualifies for individual coverage: “Employees of educational, eleemosynary, or nonprofit organizations may be covered on an individual basis. . . . In addition, employees, such as office and clerical personnel, whose work involves the regular use of interstate emails, telegraph, telephone, and similar instrumentalities for communication across State lines, are actually engaged in interstate commerce.” [1]

Even more significantly for churches and nonprofits, the non-business nature of an employee’s work is generally not relevant to determining whether or not they are covered individually by the FLSA. The Bowrin court explained this clearly: “To the extent CGS [the Catholic Guardian Society] relies on the non-business/not-for-profit nature of the employer’s activities to support its position that plaintiffs are not covered on an individual basis, it is conflating the separate inquiries that apply to enterprise versus individual coverage.  The WHD [Wage and Hour Division of the Department of Labor] clearly recognizes that individual employees of nonprofit organizations who do not engage in substantial competition with other businesses may be covered on an individual basis.”

In other words, as long as the employees meet the test for performing acts in interest commerce regularly enough as part of their required duties, the fact that their employer is a non-profit, or engaged in non-business activities, is irrelevant.

In sum, employees are covered by FLSA’s protections when they take part in, as a substantial and regularly recurring part of their duties, interstate channels of communication.  Despite a church or nonprofit potentially being exempt from FLSA’s enterprise coverage, it would be responsible to comply with FLSA requirements for all employees who are subject to the rules for individual coverage.

Under the 2016 salary threshold changes, currently exempt employees making less than roughly $47,500—even if their job responsibilities would otherwise qualify them to be exempt—would have to be reclassified as non-exempt.  Employers would then be required to pay overtime to these employees; at least once these regulations would become finalized.

Nonprofits and churches have a unique role to play in this discussion, because of their extensive use of volunteers.  Due to the salary changes, it may be prudent for nonprofits and churches to substitute volunteers on tasks instead of their paid staff, if the task would cause the employee to suddenly lose his or her exemption (for example, if the task dealt with interstate donations and shipments of merchandise).  Since volunteers tend to be the backbone of nonprofit work, this may be another creative way for nonprofits to re-categorize without running afoul of the salary threshold changes.

As these changes near implementation, Simms Showers LLP will continue to bring you up-to-date analysis of major developments and recommendations.  For more information on these FLSA changes may affect your organization, as well other matters relating to nonprofits, contact Simms Showers through their website at http://www.simmsshowers.com/.

Simms Showers has written a more extensive FLSA paper explaining all the exemptions in detail with descriptions which are free to our clients and $25 for others who email us at the website or to one of the author-attorneys.

 

Disclaimer: This memorandum is provided for general information purposes only, is not legal advice, and is not a substitute for legal advice particular to your situation.  Recipients of this memo should not act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel.  Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum.  Please contact Robert Showers at hrs@simmsshowerslaw.com, Daniel Hebda at djh@simmsshowerslaw.com for specific legal advice on this issue for your needs.

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