New Rules for "Exempt" Employees

More employees may soon qualify for overtime. In newly proposed rules under the Fair Labor Standards Act (FLSA), the Obama Administration aims to substantially increase the minimum salary requirements for qualification as an “exempt” employee.  The new limits should concern both nonprofit and for-profit employers alike, as the current salary threshold is $23,660 and the proposed rules more than double this amount.  Under the proposed rules, an employee must earn at least $50,440 per year to qualify as “exempt” and therefore not be subject to otherwise mandatory overtime requirements.  Exclusions may apply for certain nonprofit activity, but all employers need to understand the proposed rules’ implications and remain attentive to further developments. 

Background:  FLSA Employee Classification – Exempt Versus Non-Exempt

The proper classification of employees for FLSA purposes is an ongoing consideration for many nonprofits.  The FLSA imposes significant requirements for non-exempt employees, including minimum hourly wage requirements, “time-and-a-half” overtime pay obligations for more than 40 hours worked per week, and recordkeeping requirements to comply with the foregoing.  An employer’s misclassification of its employees as exempt can result in serious liability under the FLSA when an employer fails to properly pay overtime wages and related penalties.  Under the Department of Labor’s (DOL) longstanding rules, the test for determining whether an employee is exempt is three-fold. 

First, an exempt employee must perform a specific type of work.  Exempt employees include only executives, administrators, professionals, and certain computer or outside sales employees.  However, title alone does not classify the worker as exempt; the DOL maintains guidelines for exempt classification under each of these types of work.  While factors differ for each, the guidelines generally focus on the employee’s primary duty.

Second, an exempt employee must be salaried.  Workers paid by the hour are generally treated as non-exempt.  An exception occurs only if an employee is highly compensated – that is, receiving compensation of over $100,000 per year when considering certain bonuses and other compensation, with at least $455 per week of this compensation being salary or fees.  In that case, the type of work and salary requirements do not apply.

Checking Up on Work Applicants

 Each summer, thousands of volunteers join with employees at youth-centered nonprofit organizations – running sports camps, leading Vacation Bible School programs, and providing childcare.  Throughout the rest of the year, nonprofits regularly rely on both paid staff and volunteers as the bedrock of their religious, educational, and charitable programs.  Before serving in these positions, many applicants consent to background checks – perhaps by signing an application with only a sentence-long disclosure or by checking a box to mark their assent.  Although these background checks may appear to be simply another administrative step, they are an important element for nonprofits to minimize liability and to make wise hiring decisions.  What background checks are warranted, and how should a nonprofit proceed in carrying them out?  This article explains key distinctions and provides important guidance for handling background checks.

Criminal Background Checks

Criminal background checks are integral for hiring employees and selecting volunteers to work with children or other vulnerable populations.  An organization may be held liable under a "negligent hiring" or "negligent retention" legal theory for harm resulting from a person for whom a criminal background check was warranted but not performed.  Accordingly, nonprofit leaders should consider conducting background checks on a broad scope.  Background checks may vary in terms of time (how many years to check), geography (which states to check, federal checks), and cost, so organizations should follow discernible “industry standard” guidelines as much as possible.   

End of IRS’s Health Insurance Reprieve?

Since the Affordable Care Act (ACA)’s enactment, the IRS and the U.S. Department of Labor have delivered a rather unpleasant surprise to many, namely, that it now treats employers’ reimbursement or payment of employees’ individual health insurance premiums as taxable income to such employees (also known as health reimbursement arrangements or “HRAs”).  This new rule, which essentially is an interpretation of “plan” under the ACA’s so-called market reforms, applies to small employers that are otherwise exempt under the ACA.  The interpretation constitutes an about-face from the longstanding treatment of HRAs as a pre-tax employee benefit.

Transitional relief was granted when the IRS issued a notice in early 2015, providing that employers who provided such pre-tax benefit would not owe any penalties or be required to include such benefit as taxable income – at least through June 30, 2015. Such relief was extremely helpful (even though quite late), since the penalty for noncompliance is extreme: $100 fine per employee, per day (!).  

At this point, no further tax relief for HRAs is on the horizon.  Legislative rumblings of relief developed earlier this year but failed to produce any helpful result.  Now that the U.S. Supreme Court upheld the ACA’s federal subsidy programs in its recent King v. Burwell ruling (and therefore its core elements), perhaps legislators will focus again on modifying such ACA aspects as this HRA issue.   Instituting such relief would be both consistent with the fervent opposition of many politicians and greatly welcomed by many.