There are three payroll-related issues, really labor-related issues, that get nonprofits in trouble. They are: managing interns, exempt versus non-exempt, and contract services versus employees.
Let’s start with contract services. The financial difference between contract services and an employee is whether you pay payroll taxes or not. That’s not the only difference, but that tends to be the primary difference nonprofit leaders consider. It’s cheaper to hire contract service employees because the agency doesn’t have to pay the payroll taxes.
The challenge is that it’s not always legal to hire contract services employees. If you want someone to do direct service, if you want to control where they work, how they work, or the actual (not number of) hours that they work, you’re going to have to put them on the payroll. Contract services staff cannot be controlled in any of those matters. They can’t have a desk, they can’t have office hours (as defined as hours you expect them to be in the office), and you can’t control the work that they do.
You can give them a goal, and let them work towards the goal, but if you want to control how they get that work done, you’re going to have to pay them as an employee. This is also how nonprofits get into trouble with interns.
Nonprofits – and for-profits- primarily get into trouble with interns when trying to use interns to displace actual workers, inaccurately distinguishing unpaid interns from volunteers, or inappropriately classifying paid interns as contract services. Here is the Department of Labor’s updated fact sheet.
Interns working for nonprofits can either be paid or unpaid, but they can’t be contract services. See the work requirements listed above for why. When you get this wrong, the Department of Labor can come in and require you to pay back taxes for every intern (employee) that was incorrectly classified.
May I add that unpaid internships are an equity issue in that the only people who can work in unpaid internships are being subsidized externally or working an additional job. I ask you to consider if that’s aligned with your organizational values. It’s not enough for organizations to defend their values, we also have to live up to them.
Exempt and Non-Exempt actually means the exact opposite of what you think it’s going to mean. Exempt means exempt from the overtime law. Non-exempt means not exempt from the overtime law.
The laws are about job responsibilities and overtime- how people work, the roles they fill, how much control they have over that work (how independently they work) and their minimum salary and supervisory responsibilities. Leaders often confuse this with salary and hourly, and while that’s usually close enough to right, it’s not precisely right. You can still be salary and a non-exempt employee. You can still be hourly and an exempt employee. That’s not generally material to the issue, but it’s true.
The material difference, which is why and how nonprofits confuse it, is whether you’re responsible for paying overtime or not. Overtime is required to be paid for hours that are worked over 40 hours for an hourly non-exempt employee. In other words, vacation, sick time and holidays don’t count. You have to work more than 40 hours in one week to get overtime, but only if you’re non-exempt. As long as I’ve been in the field, nonprofit leaders have been confusing exempt and non-exempt staff and who can serve as which.
The Obama administration’s goal of raising the salary of exempt staff to the lower $50ks further complicated the issue but that didn’t pass and it’s not the law right now. The current law requires a minimum of $684 per week (which is $35,568 and appallingly low, even for us) for exempt staff and still requires you to meet a set of criteria and have independent control over decisions and time. Direct service program staff, other than some supervisors, generally do not meet the threshold of non-exempt.
Here’s a fact sheet which includes the invitation to “see other fact sheets in this series for more information on the exemptions for executive, administrative, professional, computer and outside sales employees, and for more information on the salary basis requirement.”
When you get non exempt wrong, the Department of Labor can come in and require you to provide back pay for overtime for every employee classified incorrectly.
There are many lessons we have to learn the hard way, but this is not one of them. Do your homework, review your team, assess if people are in the right spots and if they’re not, move them. Better you do it now, than pay the price of doing it later.
What other payroll issues do you see? What have you gotten wrong? Please use the comment box or hit the follow button. A rising tide raises all boats.
NON PROFIT EVOLUTION 