Managing Nonprofit Employees

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True or false? "Employment laws are different for nonprofits."  False: It's a myth that nonprofits are “exempt” from state and federal employment laws!

The National Council of Nonprofits encourages all nonprofits to be familiar with the employment laws that apply to employees in states where the nonprofit operates. State associations of nonprofits frequently offer educational programs and highlight best practices in their newsletters about managing employees and volunteers.

Because employment laws are complicated and subject to change, it is helpful for every charitable nonprofit to have a resource on hand to consult when questions arise about employment issues. Access to expertise on employment laws and human resource management practices is much more prudent than trying to "go it alone" in this highly regulated area.

Practice Pointers

  • Ask your insurance broker/agent for employment law guidance and/or resources. Why? Insurance companies want to limit their exposure for legal claims made against their insureds. Your nonprofit's provider of Director and Officer liability insurance should be willing to serve as a resource on employment practices, and may even offer educational materials or programs about managing employees and drafting prudent personnel policies.
  • Be aware that just as you would not ask your dentist to take out your appendix, your well-meaning board member who is a real estate attorney may not be familiar with all the details you need to know about employment law issues!
  • Distinctions between employees and independent contractors are critical issues to be aware of because of the potential exposure for mis-classification. This is an area that the IRS and state departments of labor enforce, potentially resulting in serious penalties and back-tax payments. A typical misclassification scenario is that a nonprofit classifies a worker as an independent contractor when in fact the IRS or state law would define that same worker as an employee. Learn more about classifying workers correctly 
  • If your nonprofit hires a consultant or independent contractor and pays him or her more than $600 in a fiscal year, the nonprofit should issue a IRS Form 1099–Msc. to the worker. IRS guidance, Reporting Payments to Independent Contractors, offers information on what your responsibilities are when paying independent contractors/consultants.
  • The work product that employees and independent contractors create while employed is generally considered to be owned by the employer/nonprofit under the theory of "work for hire." However, it is wise to address ownership by documenting who owns the work product created by workers - otherwise a consultant may end up "owning" the work product instead of the nonprofit that paid for it.
  • The hiring process is fraught with potential legal pitfalls (for instance, here are 10 things not to do in the hiring process), so it's useful to familiarize yourself with what NOT to do and to always use consistent procedures with every applicant.

Don’t neglect to withhold taxes for employees

Did you know that if a nonprofit fails to withhold income taxes from employees' wages, the board of directors may be held responsible for back withholding taxes and also penalties? As the New York State Attorney General's publication, Right from the Start explains on page 3, if the nonprofit has employees, it will be responsible for withholding taxes for state, federal, and potentially local income taxes owed by employees. When nonprofits fail to make these withholdings, the IRS has the authority to hold those with fiduciary responsibility for the organization (board members) responsible.

Volunteers are not employees!

The law treats volunteers differently than employees. Volunteers are workers who voluntarily choose to provide services to a nonprofit without any expectation of compensation. Read more about volunteers and interns.

Resources

FAQs – Nonprofit Employment Issues

Q: Does our nonprofit need personnel policies/employment manual?

A: Most professional advisors to nonprofits in the area of human resources are adamant that providing employees with written guidance in the form of a human resources handbook or "employee manual" is a good idea. A written manual is helpful for three reasons: (1) a manual offers guidance for supervisors to treat employees consistently and fairly; (2) written policies help answer common questions which can save time and ensure that everyone is on the same page by managing expectations, and finally, (3) a handbook clarifies what policies apply to the workplace and sets standards for employees to follow. Many nonprofit employers ask all newly hired employees to sign to acknowledge that they have received a copy of the nonprofit’s personnel policies. Having a signed acknowledgment on file can help support a nonprofit when an employee claims s/he was not aware of the nonprofit’s policies.

Compensation: Did you know that a prudent practice is to adopt a written policy that the board will review the performance and compensation of the executive director/CEO? 

Q. What kinds of insurance does our nonprofit need relating to employees?

A. Your nonprofit will need workers compensation insurance and should seriously consider Directors’ and Officers’ ("D&O") liability insurance that includes employment practices liability (“EPL”). Employment law claims are the most common of all claims made by nonprofits under D&O insurance policies. Many D&O insurance policies provide access to a hotline or legal counsel who will offer assistance to policy holders at no charge. Check with your insurance professional to determine whether your nonprofit's policy includes this service. It’s not uncommon for D&O carriers to assist nonprofits in the early stages of a potential legal claim for an employment related issue by providing legal counsel in an effort to avoid liability.

Q. Can a nonprofit offer its employees a bonus?

A. It’s not unusual for nonprofit employers to give employees a bonus. Nonprofit compensation must be “reasonable and not excessive” according to the IRS. If a nonprofit can justify why an employee deserves a bonus, and the account is not excessive, giving a bonus is acceptable.

Q. Do nonprofits have to withhold income tax from employees’ paychecks?

A.  Yes.  And board members may be personally liable if the nonprofit doesn't! 

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