Are Nonprofits “Commercial Enterprises”?
(Note: “Part 1: Charging Trainees and Intern Employees for Supervision” also
appears in this issue of The Therapist)
David G. Jensen, JD
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 interns 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 interns in non-profit charitable organizations,1
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:
- 29 U.S.C. § 203 does not contain an express or implied exception for
commercial activities conducted by religious or other nonprofit organizations.
- 29 CFR §779.214 states that “Activities of eleemosynary,
religious, or educational organizations may be performed for a business purpose.
where such organizations engage in ordinary commercial activities, such as
operating a printing and publishing plant, the business activities will be
treated under the FLSA the same as when they are performed by the ordinary
- The legislative history of 29 U.S.C. § 203 indicates that proposed
amendments to include a blanket exception for “charitable” organizations
from compliance with the FLSA were rejected.
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 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:
- Whether the activities of the nonprofit serve the general public?
- Whether the nonprofit competes with other commercial enterprises?
- Whether the nonprofit derives an unfair advantage over others because
it does not have to comply with Wage & Hour Laws?
The questions are simple to formulate. It is the application of them to a
particular nonprofit that gets complicated. However, in general, if a nonprofit
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 registered interns, 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 isgoing 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 IRS 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.
David Jensen, JD, is a staff attorney at CAMFT. He is available to answer
regarding legal, ethical, and licensure issues.
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
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).