Nonprofits’ Guide to Classifying Workers

If you work in HR for nonprofits, you already know that the field comes with a very complex compliance environment. But one challenge in particular can result in costly consequences and penalties if not done properly: classifying workers.

According to the IRS, there are 2 overarching categories of workers: employees and contingent workers. Here are the 3 pieces of criteria that determine which category a worker falls into:

1. Behavioral: Does the employer control or have the right to control what the worker does, including how they do their job?
2. Financial: Does the employer control all financial aspects of the worker’s job? This includes who provides the tools and supplies, how the worker is paid, and if they are reimbursed for expenses.
3. Type of Relationship: Are there written contracts or employee benefits, such as a pension plan and health insurance? Are the tasks performed by the worker integral to the business? How long will the work relationship last? 

To help you further understand the difference between the two, here are some more takeaways: 

• Contingent workers are outsourced by companies to complete specific tasks on a non-permanent and non-employee basis.
• When contingent workers are done with their specific task or project, they move onto their next gig.
• Contingent workers can control how and when they work, while employees have a set work schedule. 
• Contingent workers are not salaried and do not receive benefits, while some types of employees do. 

After determining whether a worker is an employee or contingent worker, you can dive even deeper into those categories. 

Let’s take a closer look:

Types of Employees

Just like every other industry, there are four types of nonprofit employees. The first is full-time. Full-time employees work an average of 40 hours per week. They typically earn an annual salary and receive benefits, such as health insurance. Since the Fair Labor Standards Act (FLSA) does not declare how many hours an employee needs to work in order to be considered full-time, it’s up to nonprofit organizations to define what makes an employee full-time versus part-time.

As for part-time, these nonprofit employees work fewer than 30 hours per week on average. They are typically paid hourly and may not be eligible for benefits.

More commonly found in other industries, like retail, seasonal nonprofit employees are hired based on seasonality. Even though they only work for a designated amount of time, these employees are entitled to Social Security benefits and unemployment.

The last type of nonprofit employee is temporary. Like seasonal, temporary employees are hired for a certain amount of time. What sets them apart though is that temporary employees are hired to work on a specific task or project. These employees are not considered contingent workers because they are hired directly by nonprofits instead of through an agency. This type of employee is also entitled to Social Security benefits and unemployment.

Types of Contingent Workers

Moving onto types of contingent workers, the first consists of independent contractors and freelancers. The terms “independent contractor” and “freelancer” are usually interchangeable. These types of workers independently offer their services to the public. When offering their services, most independent contractors and freelancers are bound by written contracts. The term “freelance” is mostly used to describe contingent workers in creative fields, like graphic design and photography. Since they work independently, these workers are subject to self-employment tax if they make more than $400 during a tax year.

The other kind of contingent workers are independent consultants. After developing expertise in a certain field, consultants may decide to leave their firm and become a contingent worker. Independent consultants are hired by organizations to give them expert advice. From financial advisory to marketing, there are many areas that consultants specialize in. These consultants can charge clients by the hour, by the project, or on retainer.

What About Volunteers & Unpaid Interns?

Not listed under either of the categories above, volunteers and unpaid interns are types of workers that nonprofits often rely heavily on. While critical to the sector, these relationships can put HR teams at risk of violating wage and tax rules if not handled appropriately.

The Fair Labor Standards Act (FLSA) defines a volunteer as “an individual who performs hours of service for civic, charitable, or humanitarian reasons, without promise, expectation or receipt of compensation for services rendered.” While volunteers can be reimbursed for things like travel, giving them “a little something” for their time can pose compliance issues. Compensating a volunteer anything more than $500 per year puts them in paid employee or independent contractor territory, opening a pandora’s box of regulations including the Affordable Care Act, the Family Medical Leave Act, minimum wage rules, and others.

Keep in mind that nonprofits can’t necessarily use volunteers for all tasks. Commercial activities, like working in a museum gift shop, for example, must be handled by paid employees. The only exception here are interns, who are subject to a separate set of rules. 

If your nonprofit makes use of volunteers and unpaid interns, protect your company from potential wage claims or disputes by having them acknowledge in writing that they don’t expect to be compensated. These agreements should also make it clear what duties are expected of the individuals and for how long.

As properly classifying workers continues to be a top priority for nonprofits, what else can we expect to see from them in 2022? From revamping their hiring strategies to focusing on employee engagement, check out our latest eBook to learn what the future of HR for nonprofits looks like.