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The Legal Department articles are not intended to serve as legal advice and are offered for educational purposes only. The information provided should not be used as a substitute for independent legal advice and it is not intended to address every situation that could potentially arise. Please be aware that laws, regulations and technical standards change over time. As a result, it is important to verify and update any reference or information that is provided in the article.
The issue of whether a nonprofit agency must comply with Wage and Hour Laws could hinge on whether the agency is operating a commercial enterprise. Learn more about how the scope of the nonprofit’s activities can determine if it is a commercial enterprise.
David G. Jensen, JD
former Staff Attorney
Reviewed October, 2017 by Alain Montgomery, JD (CAMFT Paralegal)
Nonprofit agencies provide innumerable benefits to the communities they serve, including food, clothing, and shelter, among others, and most important for us, counseling and therapy services. Hence, in addition to helping individuals, groups, and families therapeutically, they also help trainees and associates matriculate through the profession and become competent professionals.
It is not “over-selling” the matter to suggest that nonprofit agencies help hold our modern, fragmented society together. But do the noble deeds that nonprofits perform automatically exempt them from having to comply with state and federal wage and hour laws (“Wage & Hour Laws”)? Some nonprofits have given little thought to this issue and believe they are automatically exempt from such laws because they are recognized by the Internal Revenue Service as charitable organizations. That assumption, however, may be akin to constructing an office building on top of the San Andreas Fault.
While the Fair Labor Standards Act historically has made special exemptions to Wage & Hour Laws for unpaid associates in non-profit charitable organizations1, these exemptions are not absolute. The issue of whether a nonprofit agency must comply with Wage & Hour Laws could hinge on whether the agency is operating a “commercial enterprise.” If the agency is operating a “commercial enterprise,” it must comply with such laws; conversely, if it is not operating a “commercial enterprise,” it does not have to comply with such laws.
So, what is a “commercial enterprise”? That is a great question, but, unfortunately, the answer to it is about as clear as a glass of mud water from the Sacramento River. The answer is going to depend on the scope of the nonprofit’s activities, which can vary tremendously from one nonprofit to another. Thus, one nonprofit may be a “commercial enterprise,” and another may not be one. It all depends on the nonprofit’s activities.
This article will likely not answer the question of whether the nonprofit you work for, or are on the board of directors of, is a “commercial enterprise.” The goal of this article is to give an overview of these issues, and at least point those affected in the right direction. CAMFT encourages anyone affected by these laws to consult with a knowledgeable labor law attorney about the impact of these laws on their particular agency.
What is a “Commercial Enterprise”?
For most nonprofit agencies, the starting point for considering whether a nonprofit agency is a “commercial enterprise” is the United States Supreme Court case of Tony and Susan Alamo Foundation v. Secretary of Labor (1985) 471 U.S. 290.2
The facts behind the case are as follows: Tony and Susan Alamo established a nonprofit religious organization (“Foundation”) to maintain an evangelistic church, which conducted religious services and charitable activities. The Alamo’s Foundation was recognized by the Internal Revenue Service as a 501(c)(3) charitable organization.
The Foundation did not solicit contributions from the public. It generated income to fund its charitable activities by operating a number of commercial businesses, including, service stations, grocery and clothing outlet stores, hog farms, roofing and electrical construction companies, a recordkeeping company, a motel, and companies engaged in the production and distribution of candy.
These businesses were staffed by “associates” of the Foundation, most of whom were former drug addicts or criminals before their conversion and rehabilitation by the Foundation. Although these associates worked for the Foundation’s businesses, they received no cash salaries; rather, they received food, clothing, and shelter.3
In 1977, the Secretary of Labor filed an action against the Foundation, alleging violations of the minimum wage, overtime, and recordkeeping provisions of the Fair Labor Standards Act (“FLSA”), which is the federal law governing Wage & Hour Laws. The Secretary of Labor contended that the Foundation was subject to the FLSA and should have been paying its “associates” at least minimum wage, paying overtime when warranted, and keeping employment records. The Foundation claimed it was exempt from having to comply with the FLSA because it was a 501(c)(3) charitable organization.
The United States Supreme Court (“Supreme Court”) ultimately decided the issue, holding that the Foundation was subject to the minimum wage, overtime, and recordkeeping provisions of the FLSA. The Supreme Court was persuaded that the businesses that the Foundation operated met the definition of an “enterprise” in 29 U.S.C. § 203(r), which defines an “enterprise” as “the related activities performed (either through unified operation or common control) by any person or persons for a common business purpose, and includes all such activities whether performed in one or more establishments or by one or more corporate or other organizational units ….”
The decision of the Supreme Court in Alamo was guided by the following:
Hence, there is no automatic exemption from compliance with Wage & Hour Laws for nonprofits, whether recognized by the IRS as 501(c)(3) charitable organizations or otherwise.
The question is going to be whether a particular nonprofit is a “commercial enterprise.” To make that the determination, the activities of the nonprofit will have to be scrutinized. And, in helping us make such an inquiry, the Supreme Court, via the Alamo case, has given us three questions to consider:
The questions are simple to formulate. It is the application of them to a particular nonprofit that gets complicated. However, in general, if a non-profit draws consumers from wide swaths of society, and such consumers pay for services, especially when some practitioners at the nonprofit charge full fees for some of the work they do, it would likely be difficult for the nonprofit to deny that it was a “commercial enterprise.” On some level, it was competing with other “commercial enterprises,” meaning private practices, professional corporations, or even possibly other nonprofits in the area.
Conversely, if a nonprofit operates a weekend “hotline” that serves a small segment of the general public, and the service is operated free of charge to consumers, it would likely be difficult to contend that the nonprofit was a “commercial enterprise” because services are offered free of charge and there just is not a lot of competition for such services with other commercial enterprises.
A nonprofit, however, could compete with other nonprofits, private practices, or professional corporations through the utilization of unlicensed practitioners, such as associate mfts, social work associates, or psychological assistants. The nonprofit would typically offer such services at a reduced rate, but so would private practices and professional corporations. In the real world, post-graduate practitioners do not charge what licensees charge for the rendering of professional services. If rates for post-graduate practitioners are homogenous between the nonprofit and private practices in the area, for example, arguably, the nonprofit would be competing with that private practice for lower or reduced fee clients.
A corollary issue here asks the following question: does the paying of less than minimum wage or no wages at all, in some cases, give the nonprofit an “unfair advantage” over other commercial enterprises in the area who are complying with Wage & Hour Laws? Common sense suggests that the answer is “Yes.” By not having to compensate employees, a nonprofit would be able to divert funds to other activities that might give that nonprofit some form of “unfair advantage.” Obviously, this is an issue that would be driven by disagreement at the local level, but it is important to realize that another “commercial enterprise,” whether nonprofit or private practice, could lodge a complaint with California’s Department of Labor Standards Enforcement because it believes that a nonprofit has acquired an “unfair advantage” by not compensating its employees.
California’s Wage & Hour Laws
Up to this point we have looked at the FLSA, which is federal law, for guidance on the issue of what is a “commercial enterprise,” but California has its own Wage & Hour Laws too. Like the FLSA, California’s Wage & Hour laws do not contain a blanket exception for nonprofits from compliance with Wage & Hour Laws.
In California, the Division of Labor Standards Enforcement (DLSE) enforces Wage & Hour Laws, and in a DLSE Opinion, dated October 27, 1988, the DLSE explained that when religious, charitable, or nonprofit organizations operate “commercial enterprises” that serve the general public, such as restaurants or thrift stores, such enterprises are subject to Wage & Hour Laws.4
In scrutinizing the issue of whether a nonprofit is a “commercial enterprise,” the DLSE Opinion emphasizes two factors. The first is whether the nonprofit serves the public at large. Hence, the scope of the nonprofit’s activities is going to be a key issue for consideration.
The second concerns the DLSE’s inclusion of a “thrift store” in the Opinion as an example of an activity by a nonprofit that would be considered a “commercial enterprise.” Since thrift stores sell goods at discount prices, the Opinion suggests that the amount paid for an item is irrelevant to the issue of whether that Nonprofit is a “commercial enterprise.” The issue is competition with other “commercial enterprises,” and there might be other thrift stores or pawn shops in the area.
Moreover, the reason behind the endeavor, i.e., providing jobs for the needy, is also not determinative of the issue. What seems to matter most is whether the nonprofit is doing an activity that commonly occurs in the world of commerce, and whether such activity competes with other entities doing the same service.
The test of whether a particular nonprofit is a commercial enterprise is not as clear as we would like it to be, but we can say with certainty that nonprofits, simply by being recognized by the I RS as 501(c)(3) charitable organizations, are not necessarily or automatically exempt from compliance with state and federal Wage & Hour Laws. Based on the Alamo case, the test is likely to be whether a particular nonprofit is operating a “commercial enterprise,” which then raises the subtler issues of the scope of the services being rendered to the public, any competition with other “commercial entities,” and any issues of “unfair advantage.” The Wage and Hour Division of the Department of Labor is currently reviewing the need for additional guidance on internships within the non -profit sectors. Given that additional scrutiny, as well as the complexity of the laws surrounding this area of law, CAMFT recommends that entities consult with wage and hour attorneys before assuming that they are exempt from compliance with state and federal Wage and Hour Laws.
1 Wage and Hour Division Fact Sheet #71
2 A nonprofit agency may also be a commercial enterprise because it offers residential services, or because services are performed in connection with a public entity.
3 On a side-note, the Alamo case holds that the “associates” were really employees of the Foundation because the associates received in-kind benefits of food, clothing, and shelter for the work that they did for the Foundation.
4 Although a DLSE Opinion is not a law per se, a court may follow the Opinion, if the court determines that the DLSE’s interpretation of the law is correct (Gattuso v. Harte-Hankes Shoppers, Inc. (2007) 42 C4th 554, 563).