Issue

The new Department of Labor regulations were released on May 18, 2016.  They will move the minimum compensation for an “exempt” employee from $23,660 per year to $47,476 per year ($913 per week) – might some colleges be exempt because their “unrelated” income is less than $500,000?  (Also, please see “Tax Tips” from April 27, 2016.)

Situation

Troas Bible College (TBC), a private college that is exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  TBC’s CFO called us about the new Department of Labor “overtime” rules that they have been hearing about.  They do not believe that they will be affected because of the “Enterprise coverage” exception and ask us if that is true.

We begin by stating that there is a lot going on in the new overtime rules, but at their core, the new regulations raise the salary level for “exempt” employees from $23,660 per year to $47,476 per year.  With that, even “salaried” workers may be eligible for overtime pay if their pay is less than the $47,476 threshold and they work more than 40 hours per week.  The regulations are set to go into effect on December 1, 2016.

The “Enterprise Coverage” issue – which states that an organization must have “commercial” income of at least $500,000 or the organization’s employees are not covered under Fair Labor Standards Act (FLSA) – does not work for TBC because “institutions of higher education” are “Named Enterprises” under the FLSA rules regardless of the dollar volume of business.

Further, the “Enterprise Coverage” exemption is not “standalone”, organizations must also consider the “Individual Coverage” codicils.

Rules

From “Guidance for Non-Profit Organizations on Paying Overtime under the Fair Labor Standards Act

As a general matter, non-profit organizations are not covered enterprises under the FLSA unless they engage in ordinary commercial activities that result in sales made or business done that meet the $500,000 threshold. Ordinary commercial activities are activities such as operating a business, like a gift shop. Activities that are charitable in nature, however, are not considered ordinary commercial activities, and do not establish enterprise coverage.

Regardless of the dollar volume of business, the FLSA applies to hospitals; institutions primarily engaged in the care of older adults and people with disabilities who reside on the premises; schools for children who are mentally or physically disabled or gifted; federal, state, and local governments; and preschools, elementary and secondary schools, and institutions of higher education. Accordingly, employees at these types of institutions (commonly referred to as “named enterprises”) are entitled to minimum wage and overtime protections unless a specific exemption applies. (Bold added.)

Individual employee coverage is based on the nature of the particular employee’s work activities. An employee who engages in interstate commerce or in the production of goods for interstate commerce is covered by the FLSA. Employees whose work involves or relates to the movement of persons or things across state lines are also considered engaged in interstate commerce. Such activities include:

  • making out-of-state phone calls;
  • receiving/sending interstate mail or electronic communications;
  • ordering or receiving goods from an out-of-state supplier; and
  • handling credit card transactions or performing the accounting or bookkeeping for such activities.

Example: An office manager at a non-profit organization regularly sends e-mails to out-of-state suppliers to purchase office materials and equipment. The employee is individually covered by the FLSA and entitled to its protections, including receiving minimum wage and overtime unless a specific exemption applies.

As you can see, meeting the exemption for “Individual Coverage” would be extremely difficult.  (Do you have out-of-state students?)

As we stated in the April 27, 2016 “Tax Tips”, we suggest colleges:

Identify – those employees who are currently “salaried” (and considered “exempt”) who make less than the minimum exempt salary – $47,476.

Modify – for affected employees the decision should be made to given them a raise, limit hours, pay overtime – and what the cumulative effects of all of that will cost (“rebudget”).

Codify – you should rewrite job descriptions, clearly define “work”, navigate the various discrimination clauses (to be announced) in the final regulations.

Bottom Line

This is a developing issue. The final regulations on overtime have once again smacked a baseball bat into the beehive of the FLSA rules. There are myriad issues with defining “work”, paying 150% overtime, and potential discrimination rules. It makes sense to identify, modify, and codify as soon as possible.

It makes sense to touch base with a qualified tax advisor on these items. He or she will be able to help you navigate which ones may affect your school.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.