New Federal Rules For Classifying Nonprofit Workers

August 4, 2016       Melanie Herman      

Nonprofit leaders are taking notice now that a proposed change in the overtime eligibility threshold has been finalized. It’s time to stop grumbling about the potential financial impact, and get ready by doing what all employers should have been doing all along. You need to classify employees as “exempt” or “non-exempt” based on permitted reasons, and not on the desire to avoid tracking employee time and paying eligible staff overtime.

Properly classifying nonprofit staff is eminently do-able. Here’s how to do it.

Step 1: Does the Position Meet the Salary Level and Salary Basis Tests?
Salary Level and Salary Basis Tests: Beginning December 1, 2016, the Fair Labor Standards Act (FLSA) regulations provide that a position for which you pay more than $913 per week may be exempt from overtime, if paid on a salary basis. An employee whose annual earnings are $47,476 or less — regardless of how they are paid — must be classified as non-exempt. Remember, the title, position, authority or role of the employee are of no consequence in determining whether a position meets the salary level and salary basis tests.

What has changed? Prior to December 1, 2016, employees paid less than $455 per week or $23,660 annually were required to be classified as non-exempt, and were thus eligible for overtime pay. To help nonprofit managers understand this new rule, the U.S. Department of Labor has released several publications, including a fact sheet on the Overtime Final Rule, and a guidance document for nonprofit organizations.

A confusing issue for some employers is that the predetermined salary basis amount cannot be reduced because of variations in the quality or quantity of the employee’s work. If your nonprofit makes deductions from an employee’s predetermined salary due to variances in workload, that employee is not being paid on a true “salary basis.” For information on the circumstances under which a salaried employee may receive less than full salary for any week in which the employee performs any work, see DOL Factsheet #17G.

Step 2: Does the Position Meet the Duties Test? Which Exemption Category Applies?
Duties Test: Although the duties test remains unchanged this year, it is more complicated than the other tests. The Duties Test provides that a position that is eligible for exempt status because it meets the salary level and salary basis tests can only be classified as exempt if the position’s duties meet the parameters of an allowed exemption category.
The most common exemption categories are discussed briefly in the next few sections. Keep in mind that other exemption categories, such as technical and creative, exist as well. Consult the Wage and Hour Division website (www.wagehour.dol.gov) for information about other exemptions.

Executive Exemption

Fact Sheet #17B offers information on the exemption for executive employees under the FLSA. Eligibility for the executive employee exemption is limited to positions:

* Whose primary duty is managing an enterprise, or managing a customarily recognized department or subdivision of the enterprise;
* Whose customary duties include supervising the work of at least two or more other full-time employees; and,
* Whose authority includes the ability to hire or fire other employees, or whose recommendations as to the change of status of other employees are given weight.
Classification Tip: Some nonprofit managers erroneously believe that anyone who supervises two or more employees is automatically “exempt.” This is not true.

Administrative Exemption

Eligibility for the administrative employee exemption is limited to positions:

* Whose primary duty is the “performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers”; and,
* Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Classification Tip: Some nonprofit leaders try to avoid non-exempt classification by claiming that all employees use discretion and judgment. In reality, a minority of employees at the typical nonprofit use discretion and judgment, such as when they are expected to depart from or change procedures without supervisory intervention.

Professional Exemption

Positions that may be exempt under the professional exemption category include those where:

* The primary duty is work requiring advanced knowledge, defined by DOL as “work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment”;
* The advanced knowledge required for the position is in a field of science or learning; and,
* The advanced knowledge required for the position is acquired through a “prolonged course of specialized intellectual instruction.”
Classification Tip: Some nonprofit leaders regard all of their staff as “professionals,” however the requirements listed above should make it clear that the professional exemption applies in only rare instances.

Final Thoughts

It is important to realize that to be exempt from overtime pay requirements, an employee must not only meet the federal test for exempt status, but must also meet any state requirements that might be more stringent than the federal exemptions.

Review the relevant requirements by visiting your state Department of Labor website and additional information from the DOL website. Always consult an experienced employment attorney licensed in your state who can advise you before you change employee classifications.

Finally, some nonprofit leaders mistakenly believe that nonprofit status gives the sector a “pass” on the FLSA. This is not correct. Nonprofits with annual revenue less than $500,000 from purely charitable activities may be exempt from the FLSA. But any employees engaged in interstate commerce are covered on an individual basis. It is the view of many experts that the latter provision extends coverage to most nonprofits. Interstate commerce includes:
* Making out-of-state phone calls;
* Receiving or sending interstate mail or emails;
* Ordering or receiving goods from an out-of-state supplier; and,
* Handling any transactions, including basic bookkeeping tasks, to support out-of-state commerce.

Proper employee classification may seem a daunting task, but your mission-driven employees deserve to be classified and paid correctly. Don’t spoil the lifeblood of your nonprofit with stinginess or hesitation. Resolve to review and — if needed — reclassify your employees immediately.
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Melanie Herman is executive director of the Nonprofit Risk Management Center. She welcomes your questions about employee classification and other risk management issues. Her email is Melanie@nonprofitrisk.org