Is nonprofit executive director an independent contractor or employee?

Whether the executive director of a nonprofit is an independent contractor or an employee is a frequent question for organizations and executives.  An employee must have withholding taxes held and may be eligible for minimum wage and overtime payments under the Fair Labor Standards Act. An independent contractor does not have withholding for the individual’s services, pays his or her own taxes, and is paid only the agreed contract amount.  An organization that treats an employee (as ultimately determined by the U.S. Department of Labor) as an independent contractor and fails to withhold the required taxes or pay the minimum amounts can be subject to serious fines and penalties for the misclassification.

The Department of Labor has set out a series of considerations for determining how to classify the worker.  Classification depends on “the economic realities” of the relationship, the DOL says. “The goal of the test is to decide if the worker is economically dependent on the employer for work or is instead in business for themself.”

The criteria include: (1) the opportunity for gain or loss depending on the managerial skill; (2) investment by the worker in equipment for the job: (3) degree of permanence in the working relationship and whether the worker has power to determine the jobs the worker will do; (4) the nature and degree of control over the work and hours of work; (5) the extent that the work is an integral part of the employer’s business; and (6) the skill and initiative provided by the worker in carrying out the work.  No single criterion is dispositive.

Throughout the examples, the DOL repeatedly raises the question of whether the worker provides similar services for others, whether the worker uses their own tools and equipment, and whether the worker treats the work as part of a business that the worker is developing.

There are, for example, individuals who manage multiple nonprofits at the same time, such as a manager of smaller private foundations.  We had a client years ago who hired its executive director while the individual was managing several other similar small nonprofits.  When the work expanded so that the executive gave up the other gigs, the DOL took the position that he had become an employee whose work was under the control of the organization.

The ultimate determination is very fact specific. Take a look at the DOL examples to see how your E.D. fits within the descriptions.

By the way, these rules apply to all employers, whether or not tax-exempt, and whether or not exempt as a public charity described in section 509(a)(2) of the Tax Code that generates most of its revenue from fees for services.