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Employee or Employee or Independent Independent Contractor?Contractor?
Making the Proper Making the Proper Determination in Determination in Your NonprofitYour Nonprofit
February 2, 2005February 2, 2005
Classification ChallengesClassification Challenges
Regulatory interpretations differ
Court decisions (trial and appellate) may give different view
No single definition; no single test
The nature of the Nonprofit World—time constraints, mission focus, lack of HR expertise
Statutory Definitions?
May be of little help:Title VII and the ADA-
Congress adopted a circular definition of “employee” — an employee is an “individual employed by an employer.”
What’s the difference?
Practical:Independent contractors require less of
an administrative burdenpayroll processing and taxesworkers’ compensationwhat else?
Flexibility is greater with contractors; no expectation of continuing relationship
What’s the difference?
Liability Risk:Liability risk is less
(e.g. federal anti-discrimination laws don’t apply)
Consequences of an Error
Key: choosing IC over employee statusback-taxes on wagesfinancial penalties and interestadditional wages due (e.g. FLSA)workers’ compensationliability for wrongful employment
practicesattorney’s fees
How does a Nonprofit Employer get caught?
Targeted investigation? Employee whistleblower Application for unemployment
benefits Harassment or discrimination
complaint with the EEOC IRS audit INS audit
Learning to distinguish employees from independent contractors
IRS 20-Factor Test
Labor Department’s Economic Reality Test
Common Law Control Test
IRS 20-Factor Test
No factor is determinative Document that your independent
contractors, consultants and free-lance workers meet these criteria
1. Control2. Responsible for hiring and
supervising others
IRS 20-Factor Test
3. Reimbursement4. Separate business address5. Work not typically performed by
employees6. Significant investment7. Other clients?8. Where will the work be performed?
IRS 20-Factor Test
9. Economic dependence10. Need for specialized instruction11. Participation in in-house training12. Specialized skill13. Own tools, equipment14. Unsatisfactory performance-is
payment due?
IRS 20-Factor Test
15. Is full-time status required?16. Method of payment17. Entitlement to fringe benefits?18. Regular or set hours?19. Authority to hire or supervise the
nonprofit’s staff?20. Continuing relationship
Labor DepartmentEconomic Reality Test
Total activity or situation controls. Significant factors include:
degree to which services are integral to employer’s business
amount of contractor’s investment in facilities and equipment
nature and degree of controlcontractor’s opportunity for profit and lossamount of initiative, judgment or foresight degree of independent business operation
Common Law Control Test
Anyone who performs services for you is employee if you can control what will be done and how it will be done. Key: right to control.
Facts that provide evidence of control:behavioral controlfinancial controltype of relationship
Proceeding with care
Examine duties and position in light of 20-factors.
When employing contractors, seek most qualified for the job and established business
Always negotiate a written contract before the work begins
Never use employees and contractors to perform the same task.
Independent Contractor Cases
Lerohl v. Friends of Minnesota Sinfonia
Appellate Court ruling:independent contractor may be
required to work to exacting specifications of the hiring party
persuasive evidence? Musicians could choose whether or not to perform at concerts sponsored by the Sinfonia
Independent Contractor Cases
Woolf v. Mary Kay Cosmetics Insurance agency manager case Compassion versus deviating
from policy and practice Classify with care Punitive damages: company
acted with “oppression or malice”
Nonprofit Risk Management Center
Please call or email for free technical assistance
(202) 785-3891 [email protected]
Check out the resources on our web site: www.nonprofitrisk.org
