New overtime rules under Fair Labor Standards Act take affect 2020 and will impact churches, nonprofit and business

By H. Robert Showers, Esq.

On September 24, 2019, the US Department of Labor announced the final version of its rule. The major change is that the “standard salary level” is $684 per week, or $35,568 per year which is nearly 50% increase from the current threshold. The US Department of Labor (DOL) is proposing to update and revise the regulations issued under the Fair Labor Standards Act (FLSA) implementing the “white collar” exemption from minimum wage and overtime pay requirements for executive, administrative, professional employees which is set to take effect January 1, 2020.

The proposal will impact churches and nonprofits since they are not exempt from FSLA. Any church or nonprofit employee who is categorized with a white-collar exemption, and normally would not receive overtime pay, will become eligible for overtime pay if he or she earns less than the new threshold amount or has duties that do not fit the long-standing definitions. Note that the duties test will not change, although most organizations do not examine the job duties, and thus do not apply the job duties part of the test.

The DOL’s changes to FLS will likely directly affect church and nonprofit budgets. Church and nonprofit leaders will need to review how their employees are categorized and paid while carefully considering what the rules may mean for clergy.

Key provisions of the proposed rule

The DOL’s new FLSA rule focuses primarily on updating the salary and compensation levels concerning exemption thresholds under FLSA by doing the following:

• Increasing the minimum FLSA salary exemption threshold from the currently enforced level of $455 to $679 per week (equivalent to $35,568 per year).
• Refraining from changing the job duties test (note: many employers already do not adhere to this test, which poses significant risk upon a government audit).

• Increasing the total annual compensation requirement for “highly compensated employees” (HCE) from the current level of $100,000 to $147,414 per year.

• Committing to provide periodic reviews and updates to the salary threshold (with any updates requiring notice and opportunities for public comment)—but no automatic adjustments to the salary threshold.

• Permitting employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to ten percent (10%) of the standard salary FLSA threshold.

Three-Part Test for Exempt White-Collar Employees

The FLSA and related state counterparts require that employers pay overtime wages and provide other benefits to “non-exempt” employees.  Exempt employees are those employees covered by a specific exemption category, including the “white-collar” exemption.  To qualify for this exemption category, an employee must meet the following three elements: (1) the employee must perform executive, administrative, or professional duties; (2) the employee must be salaried; and (3) the employee must receive at least the minimum salary threshold which is now proposed to be over $35,500.  Under many state laws, this three-part test – including the federally prescribed salary threshold – applies equally for purposes of state wage laws.

With respect to employee classification as to duties tests, the white-collar exemption requirements have a number of aspects to focus on. An “executive” employee should be one (a) whose primary duty is managing the organization or a significant part of it, (b) who regularly directs the work of two or more other employees, and (c) who has the authority to hire or fire other employees or whose input on personnel matters is given particular weight. Such employees thus should be primarily engaged in managerial decisions like regularly assigning work, training, budget planning, making major purchases, and handling legal compliance matters.

An exempt “administrative” employee is one (a) whose primary duty is performing office or other non-manual work directly related to the organization’s operations, and (b) who exercises “discretion and independent judgment” in “significant” matters.  The first prong is relatively straightforward but the second prong is much more challenging, since the terms are terms of art and somewhat elusive.

To qualify under the “Professional” employee exemption, the employee’s primary duty must be to perform work either (a) requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or (b) requiring creativity, invention, imagination, originality, or talent in a “recognized field of artistic or creative endeavor.”

With respect to the salary level, currently an exempt employee must be salaried and paid at least $455 per week ($23,660 per year).  This amount has been updated only once since the 1970s – in 2004 and thus the new 2020 update to @$35,500 is dramatic.

Historically, the DOL proposed increasing the minimum salary threshold from $23,660 to over $47,476, more than doubling this amount.  An enormous outpouring of approximately 270,000 objecting comments were publicly filed.  Many nonprofits and churches became quite alarmed, since such change would have imposed drastic financial adjustments to compensate currently exempt employees who work sacrificially long hours for low pay.  In response to the serious concerns, several states sued the DOL in federal court in Texas and gained an injunctive victory.  At that time, the Texas court’s ruling put the DOL’s proposed increased salary threshold permanently on hold. https://www.simmsshowerslaw.com/nonprofit-and-church-alert-court-stalls-new-flsa-rule/

How Should Employers Prepare and Respond?   

As with the DOL’s prior proposal, this prospect warrants careful review of employers’ pay practices, including classification of employees as exempt or non-exempt, compensation amounts, overtime pay compliance, time-keeping requirements, and related legal compliance. We recommend that now is a great time to conduct an employment or HR audit with our firm which will highlight this and other important employment areas.

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 and some nonprofits.

There is no blanket FLSA exemption for non-profits or even churches 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 the church or nonprofit 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 RBC most likely qualifies as a religious institution,[1] 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.”[2]  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.

The US District Court for the Southern District of New York applied this rule in Bowrin, 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:

[T]ypically 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.[3]

This 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.[4]

Unless the church or nonprofit serves exclusively one state’s families and communities, this test would most likely apply to nearly all of the church or nonprofit’s employees, since they most likely regularly rely on mail, email, phone calls, and travel to connect with members, vendors, speakers, and guests who live outside of the state, Even more significantly for any church or nonprofit, the non-profit or non-business nature of an employee’s work is 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.[5]

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 RBC 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.

Assuming, then, that FLSA applies to most if not all employees, employee classification must be carefully structured, since significant changes are coming down the pipeline in 2020.  This means that currently exempt employees making less than $35,500—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.[6]  Employers will have the option of either reducing the hours of reclassified employees to avoid paying overtime or increasing salaries to reach the minimum threshold.  For ordained ministers, even if they are below the salary threshold, they may still qualify for a different exemption from FLSA.

Of course, if the employee is covered by FLSA (either by enterprise or as an individual who regularly and recurrently uses the telephone, internet, or mails for interstate communication or receives, prepares or sends written material across state lines) and also meets the threshold salary amount discussed above, there are three other criteria to review concerning whether they could be exempt from FLSA. As discussed above, FLSA exempts executive, administrative, or professional employees who perform specified duties to qualify for these exemptions.  Since this is a case by case basis much like the individual who impacts interstate commerce is reviewed, it is beyond this higher level review to assess such case by case situations but we would be glad to review such categories for any nonprofit, church or business. ^[7]

When determining whether compensation satisfies the FLSA salary threshold, the following must be considered:

• Cash wages,
• Non-discretionary (i.e. earned) bonuses of up to ten percent (10%) of the threshold, and
• Commissions

Unfortunately, however, employee fringe benefits—such as payment of health insurance premiums, retirement contributions, and provision for lodging and meals—cannot be counted. Thus, employers with employees below the FLSA salary threshold may wish to rethink employee benefits. One strategy to avoid reclassification would be to offer at least several employees increased wages (albeit with resulting employment tax consequences).

Another consideration for non-exempt overtime pay compliance is to examine the actual work. For example, consider a non-exempt employee who occasionally performs duties away from the office or at a work site that is not the employee’s principal office. These duties may include responding to email and making telephone calls. In such event, the employee’s performance of these job duties likely must be counted toward the maximum 40-hours per week amount. Often, depending on the time and amounts, travel time is considered as part of this calculation. To the extent that the performance of these job duties, coupled with the employee’s other work, exceeds 40-hours per week, the Employer must pay overtime wages.  As a result, Employers should revisit time reporting methods and records, and establish with employees clear expectations about work hours.

Obviously, these changes to the FLSA catalyze difficult budget and operational decisions. Questions around this issue may be as follows:

• Should certain exempt employees’ salaries be increased in order to keep exempt employees as exempt?
• Is additional staffing warranted for positions that normally require more than 40 hours for one employee and are paid at levels lower than the newly proposed salary threshold?
• Are there certain operational areas that could be made more efficient?
• Should certain (or all) employees be encouraged to work no more than 40 hours per week?

A couple other considerations should be mentioned. Under wage and hour laws, employees “volunteering” for overtime is not an option. As a legal matter, extra time that employees spend on the job for the same type of work as they regularly perform cannot be treated as volunteer service. While nonprofit organizations often have highly dedicated and skilled nonprofit workers who work long hours, these hours may result in overtime wage obligations.

Ignoring wage laws is also not a good option.  Employees whose rights are violated may generate extensive organizational liability, especially if a now-positive employment relationship later erodes and that employee sees an easy way to retaliate at the organization. Penalties are extremely high for violations, including possible personal liability for directors and officers.

What about ministers and religious order workers?

The FLSA does not explicitly exempt ministers from the overtime pay and minimum wage protections but note that “professional employees” are exempt from the FLSA which could include ministers so long as they meet the minimum salary test. Can churches or religious nonprofits be compelled under religious liberty clauses to pay overtime pay to ministers or religious workers who earn less than the minimum salary test and thus do not meet the definition of an exempt professional employee; Interestingly, the official “economic report” accompanying the final DOL overtime regulations contains the following statements:

“Most employees earning less than $455 per week ($23,660 annually) who are exempt under the existing regulations will be entitled to overtime pay under the final regulations (there are some workers, such as teachers, doctors, lawyers, and clergy, who are statutorily exempt or whose exempt status is not affected by the increased salary requirement in the final rule).” “Clergy . . . are not covered by the FLSA.” “The Department excluded [in making its coverage predictions] the 14.9 million workers not covered by the FLSA, such as the self-employed and unpaid volunteers, and the clergy­­­­. . . .” “Of the 499 occupation codes in the CPS [current population survey] . . . two are assigned to clergy and religious workers (codes 176 and 177) who are not covered by the FLSA . . . .”

Moreover, Table 3-1 in the final regulations lists “clergy and religious workers” as one of six categories of “Occupations Exempt from FLSA’s Overtime Provisions.” Thus, it appears that the official position of the DOL is that clergy and religious order workers may not be subject to the minimum wage and overtime pay requirements of the FLSA no matter what they are paid.

At least two federal court cases have held that the FLSA does not apply to ministers due to the ministerial exception doctrine. Ministerial exception is a judicially recognized bar that prevents civil courts from reviewing employment disputes between churches and ministers. In 2012, the United States Supreme Court in the Hosanna Tabor case unanimously affirmed the ministerial exception doctrine. The two federal cases—Alcazar v. Corporation of Catholic Archbishop of Seattle, 2006 WL 3791370 (W.D. Wash. 2006) and Shaliehsabou v. Hebrew Home of Greater Washington, 363 F.3d 299 (4th Cir. 2004)—are binding precedent only in the states of Maryland, North Carolina, South Carolina, Virginia, Washington, and West Virginia. In legal jargon, these federal court decisions are persuasive, but not binding, precedent in other states.

Therefore, in other states this issue is unresolved. However, the final DOL regulations (quoted above) may provide some basis for concluding that the FLSA minimum wage and overtime pay requirements do not apply to ministers. Definitive answers for each individual state must be sought by the church contacting an expert attorney well versed in this complicated area of the law.

What’s Next with the Salary Threshold Increase? 

Note that the salary increase at this point is only proposed but likely to go into effect January 2020. In addition, more litigation may be in store. The prior injunction suit, based on the DOL’s earlier salary threshold proposal, is currently on hold with the federal Fifth Circuit Court of Appeals pending the DOL’s issuance of its final rule. Because the increase is less drastic this time around, it seems more likely to pass legal muster. Alternatively, the Court of Appeals could continue the injunction, requiring the DOL to then further lower the proposed salary minimum or for Congress to affirmatively set any new salary threshold for exempt employees.

In the meantime, wise employers should consult a knowledgeable attorney to review their pay practices, ensure that exempt employees are properly categorized, and consider making financial and operational adjustments in anticipation of this proposed employment law change in January 2020.

Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should 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 H. Robert Showers, Esq. at hrs@simmsshowerslaw.com for legal advice that will meet your specific needs.

[1] See Jacobs v. N.Y. Foundling Hosp., 483 F. Supp. 2d 251, 266 (E.D.N.Y. 2007) (holding that a non-profit hospital was not subject to enterprise coverage).

[2] Bowrin v. Catholic Guardian Soc’y, 417 F. Supp. 2d 449, 465 (S.D.N.Y. 2006), citing 29 C.F.R. § 779.103.

[3] Bowrin v. Catholic Guardian Soc’y, 417 F. Supp. 2d 449, 468 (S.D.N.Y. 2006), citing 29 C.F.R. § 776.10.

[4] United States Department of Labor, Wage and Hour Division, Field Operations Handbook, 11n01.

[5] Bowrin v. Catholic Guardian Soc’y, 417 F. Supp. 2d 449, 467 (S.D.N.Y. 2006) (internal citations omitted).

[6] Since the salary element of the non-exempt test has not been raised in many years, it is very likely that these regulations will be implemented as the final rule starting in 2020.

[7] There are various exemptions available under FLSA.  Some, such as a teaching professional, do not have a salary basis threshold (see 29 CFR 541.303) while others, like the academic administrative personnel exemption (see 29 CFR 541.204, et seq.) are based on an alternative salary basis threshold that allows the salary to be commensurate with the starting salary for a teacher at the educational institution. There are also exemptions available for ministers who are performing religious duties, as well as exemptions for those performing true administrative functions.  Some of these are blanket exemptions, others are salary-based.  These exemptions are fact specific and should be carefully applied on a case-by-case basis, in consultation with legal counsel.