Unemployment Self-Insurance Fix For Nonprofits

The COVID-19 pandemic has hit U.S. employers and workers hard because of the unprecedented economic chaos along with mandatory stay-at-home orders. In normal times, the unemployment compensation laws and bureaucracy – a federal/state partnership – are a challenge to navigate. 

In all American jurisdictions, 501(c)(3) organizations (along with government and tribal entities) may choose to opt out of the FUTA (Federal Unemployment Tax Act) system in favor of a self-insuring route. Under that alternative, the employer reimburses the state only for actual claims paid out to former workers.” 

Almost half of U.S. nonprofits self-insure because – generally – it achieves substantial cost savings over the FUTA route. But these are not normal times with normal levels of unemployment. And the icing on the cake is a “breathtakingly cruel” federal administrative rule issued in late April 2020 by the United States Department has made the dire self-insurance problem even worse.

Nonprofit leaders raised the alarm right away urging Congress to adopt at least one of several alternative possible fixes.  Congress managed to step up to the plate earlier in July, wrangling bipartisan “unanimous consent” to pass S.4209, the Protecting Nonprofits from Catastrophic Cash Flow Strain Act.

Hailed as a “solid first step” by the nonprofit community, it is an important interim band-aid. This bill, passed on July 9th, finally reached the White House on July 22, 2020, and is expected to signed into law any time now. We’ll update this post to reflect presidential action. 

       Unemployment Insurance & Nonprofits

The American system of unemployment compensation is a federal/state arrangement. The Federal Unemployment Tax Act (FUTA) is the original law that authorizes the government to tax businesses with employees “for the purpose of collecting revenue that is then allocated to state unemployment agencies and paid to [… eligible …] unemployed workers

The state side of this partnership was “developed in each state alongside the federal unemployment tax.  is commonly referred to as SUTA, the State Unemployment Tax Act. While it’s generally referred to as the State Unemployment Tax Act (SUTA), some states have different names for it such as State Unemployment Insurance (SUI) or Reemployment Tax ….” 

SUTA is a “payroll tax employers are required to pay on behalf of their employees to their state unemployment fund.” In most American jurisdictions, “employers are solely responsible for paying state unemployment insurance taxes to fund their state’s unemployment insurance system.” Most employers pay both a Federal and a state unemployment tax.” 

For the U.S. 501(c)(3) nonprofits that are permitted to opt out of this standard unemployment compensation arrangement, there are significant benefits; the main one is “cost savings. While savings numbers vary, most organizations can save between 30-50% a year.” The key is that instead of paying into a tax system in advance, a “reimbursing employer” makes payments of actual employment compensation benefits only when layoffs occur. 

Are there risks to electing this option? Yes, because it “provides no insurance against excessive unemployment claims ….” Normally, in this risk-benefit analysis, it makes financial sense to make this choice. “The self-insured system allows for reasoned risk-benefit determinations and provides protections for different sizes and types of nonprofits….”  

It’s estimated that perhaps almost half of all nonprofits are “reimbursing” employers.” 

       The Pandemic & the Problem 

With the unemployment rates skyrocketing since March, this distinctly not normal employment situation has turned into a financial catastrophe for many nonprofits –  above and beyond the overall COVID-19 disruption being felt all across the American economy. 

“Congress’s initial response to address this issue was to reduce the amounts that self-insured nonprofits owe by half under Section 2103 of the CARES Act.” But “[t]his still creates a considerable hardship,” according to Tiffany Gourley Carter In Don’t Let Senseless Unemployment Policies Sink Nonprofits—Act Now! (May 8, 2020) in The Nonprofit Quarterly.

And in making rules to implement this new law, “the administration made this situation infinitely worse by forcing an unnecessary and burdensome double-reverse reimbursement structure” requiring self-insuring nonprofits to “first pay 100 percent of the costs of unemployment benefits paid to employees no longer working as a result of COVID-19. At some unknown time later, the nonprofits that are able to survive the cash crunch will receive a 50 percent reimbursement.”

Some states had acted to mitigate the hardship, but this DOL “guidance also threatens to penalize states that worked to provide additional assistance to nonprofits—by withholding full federal support. See DOL Issues Breathtakingly Cruel Guidance Inflicting Billions in Immediate Costs onto Charitable Organizations Struggling to Serve Their Communities (April 28, 2020) National Council of Nonprofits 

       The Fix is Fixed … Sort Of

In urging action on this problem, many voices in the nonprofit community urged that the “…simplest, most straight-forward fix would be for Congress to hold self-insured nonprofits harmless for 100 percent of the costs that would be charged of their COVID-19 related unemployment insurance claims.”  That’s why the Nonprofit Community Letter submitted to Congress calls for such legislation.”

And while such “federal, 100 percent coverage is the best and most needed solution to protecting nonprofit employers and the people those nonprofits serve, other intermediary steps may be needed pending a full federal fix.” Options included: (1) conforming state statutes to accept and use federal funding, various “hold harmless” arrangements, and delaying payment deadlines. 

A group of six bipartisan senators introduced the Protecting Nonprofits from Catastrophic Cash Flow Strain Act. The Senate passed it by unanimous consent, followed by passage as well in the House of Representatives. 

The National Council of Nonprofits issued a Statement on House Passage of the Protecting Nonprofits from Catastrophic Cash Flow Strain Act (July 9, 2020) characterizing the legislation this way: “It override[s] the Department of Labor’s misguided, jobs-killing interpretation that was imposing economic burdens on charitable organizations that Congress never intended.” Calling it a “…master stroke of bipartisanship,” NCN further stroked Congress for acting “…to partially reduce the panic that many nonprofits will experience this month when dozens of states send out massive invoices for unemployment compensation costs. With nonprofit resources plummeting and demand for services rising, nonprofits that have already had to lay off employees could not bear the brunt of another huge bill to pay.” 

      Conclusion

Noting that this “…legislation is not a complete solution to the problem of unemployment benefits costs that are dragging nonprofits down and forcing them to reduce services to the public,” the National Council of Nonprofits calls it “a solid half-step toward the full solution needed.” But “[t]here is also still much work to do to ensure that charitable nonprofits – our nation’s third largest employer – can keep their employees on the payroll and can continue serving communities across the country.”

The National Council of Nonprofits will host a briefing on the important matter on Wednesday, July 15, 2020 at 2pm EDT as part of its #Relief4Charities Week of Action. See here for more information.

New State Laws for 2020

2020 Changes in Tax Exemption

With the holiday festivities in the rearview mirror, we now highlight two California laws that became effective on January 1, 2020:

  • New data security and privacy requirements (CCPA)
  • Upward adjustments to the minimum wage laws (and other employment-related provisions)

Although both are California statutes, they reflect and influence significant nationwide trends. 

  California Consumer Protection Act Law

Those annoying pop-ups demanding that we accept cookies are now everywhere on the internet. That’s thanks in large part to the European Union’s General Data Protection Regulations (GDPR) in effect since May 2018 and now California’s law on data privacy and security, the California Consumer Protection Act (CCPA).  

The CCPA was also enacted in 2018 when Jerry Brown was still governor, but the effective date was delayed until January 1, 2020. The law sprang “from a deal in 2018 among legislators, privacy advocates and industry groups that wanted to head off a more sweeping proposal” that had already qualified to be a ballot initiative in an upcoming election. 

Like the GDPR that has become significant beyond the European Union, California’s new data privacy law is now the model American law that other states are, or likely will be, copying.  And while both are directed primarily to large business entities, certain nonprofits may be affected. In any event, cyber security is an issue that all entities that deal in data of any kind should take seriously.

You can’t say we haven’t warned you about this important trend. First up was The EU Data-Privacy Law That May Affect U.S. Nonprofits (GDPR) (March 7, 2018). We posted an update in January 2019: More About GDPR and Nonprofits. Then came Move Over, GDPR: Here Comes CA’s New Data Privacy Law (July 18, 2019). 

The compromise in California that resulted in the CCPA eighteen months ago “has not ended the fight over consumer privacy in California.” In 2019, “tech companies and other industries unsuccessfully lobbied … for measures to fix what they said were serious flaws in the law before it took effect and supporters are already pushing another initiative to expand its safeguards and boost penalties for violations.”

So AB 325, the California Consumer Protection Act, is in effect and the Attorney General has promised aggressive enforcement of this new data law. But the statute as currently written may not be the final word. Stay tuned.

  Minimum Wage and Other Employer Laws

California is just one of many states around the nation with laws on the books that gradually raise the minimum wage over a number of years – with the most recent changes effective January 1, 2020. In certain local areas, there are higher rates. According to the National Employment Law Project, the minimum wage will go up in 72 jurisdictions – (some 24 states and 48 cities and counties) – around the nation at the beginning of this year. Later in 2020, there will be four more states and 23 more cities and counties added to these totals. 

In California, current minimum wage information is at Minimum Wage Order (MW-2019). “Although there are some exceptions, almost all employees in California must be paid the minimum wage as required by state law. Effective January 1, 2017, the minimum wage for all industries will be increased yearly. From January 1, 2017, to January 1, 2022, the minimum wage will increase for employers employing 26 or more employees. This increase will be delayed one year for employers employing 25 or fewer employees, from January 1, 2018, to January 1, 2023.” 

As of January 1, 2020, the rate is $13 for companies with at least 26 employees and $12 for smaller employers. Some California cities are permitted to, and will, have different rates.  Several cities have recently adopted ordinances which establish a higher minimum wage rate for employees working within their local jurisdiction.  “The effect of this multiple coverage by different government sources is that when there are conflicting requirements in the laws, the employer must follow the stricter standard; that is, the one that is the most beneficial to the employee.” The federal rate continues to be much lower than California’s so it doesn’t come into play at all here. 

Nonprofits, like other employers, must generally comply with these new minimum-wage rates. There are a few exceptions:  for “certain learners, regardless of age,” and for “employees who are mentally or physically disabled, or both, and for nonprofit organizations such as sheltered workshops or rehabilitation facilities that employ disabled workers. Such individuals and organizations may be issued a special license by the Division of Labor Standards Enforcement authorizing employment at a wage less than the legal minimum wage. Labor Code Sections 1191” et seq. 

There are also exceptions if a business or organization hires “sheepherders.” Seriously

Another heads-up related to wages: Beginning January 1, 2020, all employers nationwide must also take into account the new federal overtime regulations.  We’ve covered that long and controversial saga regularly since 2016. The matter has recently been settled; see Overtime Regulations: Final … at Last! (October 8, 2019). These rules have “changed the formula that employers – for-profit and nonprofit alike – use to determine which employees are eligible for overtime pay for putting in more than a set number of hours in a day or week.”

As of January 1st, the federal eligibility cut-off number is about $35,568 a year for a full-time employee. We’ve cautioned before, though, that the federal eligibility rate does not preclude individual states from having higher cut-off figures. In California, the state salary threshold has been $41,600, but it’s set to go considerably higher over the next few years much like the minimum-wage law has predetermined increases built into the original legislation. Other states have followed this trend.

    Conclusion

Nonprofit organizations are rightfully focused on compliance with federal laws related to the all-important tax-exempt status. Too often, though, they don’t pay enough attention to the broader rules that affect all employers. But ignoring these rules can have consequences as dire as failure to stay in good standing with the Internal Revenue Service.

In a separate post next week, we’ll discuss California’s new “gig” law that may affect certain nonprofit employers. Simply put, the “gig” nickname of the new law, California AB 5, refers to the most confusing and controversial part of the new rules for determining whether workers are employees or independent contractors.

Food, Faith, and Fair Labor Standards

On the spectrum of the relative excitement of various types of litigation, an employment law, wage-and-hour, case barely registers. Occasionally, though, one of them is a big deal because of the unusual circumstances – or characters – involved.
Three decades ago, in 1985, the United States Supreme Court grappled with a Fair Labor Standards Act (FLSA) lawsuit brought by a colorful cult leader named Tony Alamo. The government won, issuing what has been described as a landmark ruling: Tony & Susan Alamo Foundation v. Secretary of Labor (1985) 471 U.S. 290.
Fast forward to 2017. Another religious organization, Grace Cathedral, has been dogged by huge penalties for violating minimum wage and overtime rules. It is losing once again – so far – based on the Alamo Foundation precedent.  In March 2017, a U.S. District Court in Ohio upheld a significant  FLSA penalties and back-wages award. The case has moved on to the Sixth Circuit, where it is now in the briefing stage.

  Religious Organizations Not Exempt From FLSA

In the earlier case, Reverend Alamo and his late wife, Susan, had led a nonprofit religious organization that went by various names including the Alamo Christian Foundation and the Tony & Susan Alamo Foundation. The Supreme Court described the activities as deriving “income largely from –

the operation of commercial businesses staffed by the Foundation’s ‘associates,’ most of whom were drug addicts, derelicts, or criminals before their rehabilitation by the Foundation. These workers receive no cash salaries, but the Foundation provides them with food, clothing, shelter, and other benefits.

Long story short: The government had other ideas, invoking the worker protections of the federal Fair Labor Standards Act (FLSA). The federal district court, and then the appellate court, sided with the government. The United States Supreme Court, in the 1985 Alamo Foundation case, agreed, ruling that (1) the Foundation was an “enterprise” within the definition of the FLSA, (2) “the Foundation’s businesses serve the general public in competition with ordinary commercial enterprises, and (3) under the “economic reality” test of employment, the associates were “employees” of the Foundation protected by the Act.
The Foundation’s defenses under the Free Exercise and Establishment Clauses of the First Amendment were rejected; there is “no express or implied exception for commercial activities conducted by religious or other nonprofit organizations.”  The FLSA has been “consistently construed … liberally in recognition that broad coverage is essential to accomplish the goal of outlawing from interstate commerce goods produced under conditions that fall below minimum standards of decency.”

  Is Grace Cathedral Subject to the FLSA?

Cleveland-based megachurch Grace Cathedral and its spiritual leader, Rev. Ernest Angley, argue that the “volunteers” at its church restaurant, the Cathedral Buffet, are “doing the Lord’s work” and so should be exempt from the minimum wage and overtime protections of the Fair Labor Standards Act.
The Cathedral Buffet is a for-profit restaurant owned by Grace Cathedral, Inc.

For most of its existence, the Cathedral Buffet relied on church ‘volunteers’ to operate the restaurant. Angley, as president of Cathedral Buffet, was heavily involved in the management and operations, and actively recruited volunteers from the church. The restaurant maintained two classes of workers: employees who were paid an hourly wage and unpaid “volunteers.” The volunteers constituted the bulk of the restaurant’s workforce and performed virtually all the same jobs as the paid workforce.

In 2015, the Department of Labor filed a lawsuit against Cathedral Buffet; the government asked for back wages for the workers as well as “liquidated damages” (a type of penalty) and also requested a permanent injunction against the church-run restaurant. After a bench trial, the district court found – citing the Supreme Court’s 1985 ruling in Tony & Susan Alamo Foundation v. Secretary of Labor – that the Cathedral Buffet, as a commercial, for-profit business, was a “covered employer” under the FLSA.
Reverend Angley was “also found to be an employer and personally liable for the judgment as allowed under the FLSA.” The court looked to the “economic realities,” concluding that the “volunteers” were employees within the meaning of, and entitled to, the protections of the Fair Labor Standards Act.
The defenses presented this time around were similar to those argued 30 years ago; that is, that the First Amendment and the workers’ alleged “motivation” to volunteer their services, were enough to negate the application of the FLSA.
Once again, these defenses were rejected. Liability was imposed “for liquidated damages as well as for acting in bad faith because of previous citations.” Judgment was entered for a total of $388,507.
Angley and the church have appealed the decision to the Sixth Circuit. It argues that FLSA shouldn’t apply because it is owned and run by a tax-exempt church, does not make a profit (even though it’s set up as a for-profit entity), operates with charitable intent, and “volunteers” didn’t expect to get paid and didn’t feel coerced to volunteer. In its recent brief filed with the Sixth Circuit, the Department of Labor sharply disagrees, emphasizing that “the FLSA prohibits the use of volunteer labor at for-profit businesses.” The agency also made clear that it frowns upon the use of “coercion or pressure to procure volunteers,” including the threat of divine retribution.

   Conclusion

The law in place to date is that people who participate in a for-profit entity’s business activities are considered employees instead of “volunteers” under the Fair Labor Standards Act even if there is a purported charitable purpose.  The Sixth Circuit may rule otherwise; we’ll watch for the outcome of this case.  But a win for Grace Cathedral and its restaurant would affect only entities in the jurisdiction of the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee) and the matter could – and likely would – be appealed to the United States Supreme Court. 

Update: Controversial Overtime Rules Temporarily Halted

UPDATE (11/22/16): 

A federal district judge in Texas has issued a preliminary injunction this afternoon temporarily barring implementation of this new overtime rule which had been scheduled to begin on December 1, 2017. The ruling affects all 50 states, not just the 21 states whose attorneys general sued to block the rule. Here is the 20-page order granting the preliminary injunction.

 
On May 18, 2016, the United States Department of Labor announced final overtime regulations that will – if they go into effect as scheduled on December 1, 2016 – dramatically increase compensation for many employees nationwide.
These complex rules apply to the business sector as well as to many nonprofits. Business groups are, predictably, opposed to the new mandate. Reaction in the charitable community has been mixed. While there is support for improving wages and benefits for workers, many nonprofits worry about the financial drain from these new compensation obligations. 
Against this background, there are significant developments on several fronts that could result in halting, or at least delaying, implementation of the new overtime requirements on time.

UPDATE: 

The results of Tuesday’s election will likely mean these changes will be delayed (per a favorable preliminary injunction) or will be repealed in late January 2017.

 

   Congressional Efforts to Block the Regulations

“Three tactics are available to Congress for attempting to prevent the new regulations from going into effect: 1) adopting a resolution of disapproval under the Congressional Review Act; 2) enacting specific legislation, such as the Protecting Workplace Advancement and Opportunity Act (S. 2707 and H.R. 4773), which would nullify the proposed rule, among other things; or 3) attaching a rider to an appropriations bill to block enforcement of the rule for a year. All three actions require either the President’s approval (which is unlikely, given that the proposed rules are coming from his Administration) or sufficient votes (two-thirds of both the House and Senate) to override his expected veto.”

   Bill to Delay Overtime Rule Passes House

On September 28, 2016, a bill related to these overtime regulations – H.R. 6094 – passed the House of Representatives. It delays the effective date until June 1, 2017. Introduced by Rep. Tim Walberg (R-MI) on September 21, 2016, there were numerous co-sponsors. In particular, small businesses expressed support; they argued that the original deadline would cause them to lay people off just before Christmas. H.R. 6094 passed by a vote of 246-177.
On September 28, 2016, Sen. James Lankford, R-Okla., introduced a bill to delay the overtime rule in the Senate.  Separately, on September 29, 2016, H.R. 6094 was received in the Senate and placed on the Senate Legislative Calendar.
The Obama Administration has issued a written statement indicating the President will veto any such legislation that reaches his desk. It does not appear at this time there are enough votes to override the threatened veto.

   Two Lawsuits Seek to Block the Overtime Regulations

Another challenge to the overtime regulations has come in connection with two separate federal lawsuits filed on September 20, 2016. “There are similarities in the plaintiffs’ legal reasoning, but there are also differences.” In both cases, plaintiffs seek to have the Labor Department’s regulations thrown out entirely.
Plaintiffs in the first action are a coalition of 21 states: Alabama, Arizona, Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Texas, Utah, and Wisconsin.  They assert “that Congress does not have the authority to dictate to states how, or how much, they must pay their state employees.” They argue also that “Congress gave too much FLSA rule-making power to the Labor Department.” 
Plaintiffs in the second lawsuit are are business groups.  They assert that the Labor Department was ‘“arbitrary and capricious,” ignoring evidence when designing the rule, and that the new threshold is so high that “it is no longer plausible to satisfy the minimum salary cutoff for many individuals who are otherwise bona fide EAP (executive, administrative, or professional) employees.’”
In order to block the new regulations by the December 1st effective date, the plaintiff-states have filed an emergency motion for preliminary injunction which has been set for hearing in mid-November, 2016. We’ll keep track of this potentially important development.

   Petition Filed by Business Trade Group

A third formal challenge concerning the overtime regulations involves a formal petition by The National Federation of Independent Business (NFIB) to the Department of Labor for an extension of the December 1, 2016 deadline. The trade group asserts there is insufficient time to comply. The Administrator of the Wage and Hour Division at the Department of Labor, Dr. David Weil, quickly rejected the NFIB petition. It’s unclear if the NFIB will pursue the matter further.

Unpaid Intern Rules Turned Upside Down – Again

There’s an important update to the rules about unpaid internships that we discussed last year in “The Crackdown on Unpaid Internships: Do Nonprofits Have to Worry?
Our answer to this question was “yes.”  For the last few years, internships have been a hot topic in the media.
In 2013, a high-profile lawsuit by unpaid interns was brought against Fox Searchlight Pictures (the Black Swan case), alleging that the so-called internships were not educational at all, but were just a cover for having young people around movie sets to do grunt work like getting coffee and picking up dry-cleaning.  A New York federal judge agreed, basing his opinion on a six-prong test developed by the federal Department of Labor Guidelines about when internships were educational enough to be exempted from federal and state minimum wage laws.
Following this ruling that these so-called interns were really employees – entitled to minimum wage pay –  there was a flurry of class-action lawsuits by former interns against media conglomerates including Conde Nast, NBC Universal, and Viacom. Seeing the writing on the wall, these huge companies settled these cases for millions of dollars and retreated from the use of (unpaid) interns. “For a while, it seemed that unpaid internships were about to become relics of history.”

New Development

On July 2, 2015, the U.S. Court of Appeals for the Second Circuit issued a surprise ruling, reversing the lower-court’s ruling in the Black Swan case as well as the decision in a similar case involving magazine publisher Hearst.
The appeals court rejected the Department of Labor’s 6-prong test as too strict, and substituted its own, much more lenient, standard that allows unpaid internships if they are “educational enough.” “Should the ruling stand, it may be all but impossible for former interns to sue their ex-bosses in the future.”
This new decision directly affects employers in the Second Circuit (New York, Connecticut, Vermont), but not necessarily anywhere else – at least for now.

Effect on California Nonprofits

For California employers, including nonprofits, state law doesn’t depend on the Department of Labor six-prong standard. California has an eleven-point test: it approves and incorporates the DOL’s 6 prongs, and adds another 5 on top of that.  The stricter, California, 11-point test remains in force for employers in this state.

Conclusion

We’ll watch for (and report on) any further developments.

A Reminder to Nonprofit Employers

Nonprofit charities get lots of perks: tax savings, deductible contributions, and preferred postal rates, to name just some.

This preferential status lulls many boards and staff into a false sense of believing the rules that apply to regular corporations and regular workplaces don’t apply to them.

The safest approach for nonprofits is to assume that all laws and regulations that apply to businesses and employers generally apply to charities (and other nonprofits) as well.

You’re Still on the Hook for Some Taxes

Perhaps the most common mistake that nonprofits make is to (mistakenly) assume that the prized tax exemption applies to all taxes. It doesn’t. It applies only to income taxes.

A nonprofit’s federal tax exemption refers to federal income tax. The corresponding state tax exemption refers to state income tax. These tax exemptions don’t create any exemption for other federal and state taxes.

That means that a nonprofit employer is still required to report the income of any employee and to withhold the necessary amounts under federal and state tax schedules. It also must withhold social security and Medicare taxes (FICA), and federal unemployment tax (FUTA), unless it is specifically exempt from these obligations pursuant to their determination of exemption. There are state taxation equivalents that apply, too.

Here are the forms and returns that California employers must file:

  • Employee’s Withholding Certificate (Form W-4) for each employee
  • Corporation Federal Quarterly Withholding Returns (Form 941-E) and bank deposits of withheld income taxes and social security taxes
  • Annual Federal Wage and Tax Statement (Form W-2) for each employee
  • California employer Registration Form – California Income Tax Withholding Form (SE-44) – California Unemployment and Disability Insurance (quarterly)
  • Annual Federal Unemployment Tax Return

Failing to withhold and report these amounts is a big deal. There are consequences, including stiff penalties, to the organization, its directors and the employees.

Another common mistake is to misclassify people performing services as independent contractors when in fact they are employees. These rules are tricky and complicated, and innocent mistakes often occur. Sometimes, though, the employer intentionally mislabels the worker. Mistakes are costly; the employer may be personally liable for penalties and damages.

You Have to Follow All Sorts of Labor Laws

Employers must abide by federal and state labor laws that protect the rights and govern the working conditions of workers. These duties – including payment of minimum wage, overtime, and giving required meal- and rest-breaks – generally apply both to for-profit and nonprofit organizations.

Charities, though, are permitted to have volunteers perform certain types of duties without triggering application of these laws.  We’ve previously discussed what is a “bona fide volunteer,” including here. Otherwise, the minimum wage and overtime rules apply to “employees” of charities.

Failing to comply with these rules can trigger actions by labor officials as well as by aggrieved employees, resulting in potentially large damages.

A particular issue that trips up many employers is the classification of employees incorrectly for purposes of determining who is entitled to overtime pay.

In addition to these rules regarding pay and working conditions, there are federal and state anti-discrimination or anti-harassment rules. Generally, nonprofits are subject to these rules, although certain religious organizations may be exempt from some of them.

You Should Dot All the I’s and Cross All the T’s

Like for-profit employers, nonprofits should approach the entire employment relationship in a carefully considered manner.

The days are long gone when employers could “wing it” with employees, hiring and firing workers on the fly, and making up policies along as needed along the way.

In some cases, the employment relationship should be formalized with an employment contract.

Generally, the nonprofit should adopt employment policies and prepare and distribute an employee handbook. It’s a good idea for several reasons: the employer and employee know what to expect from one another, and each worker receives the same information about workplaces rules and procedures. It’s also useful to protect the organization if an employee later sues.

Commonly included provisions include: working hours and attendance policies; salaries and benefits; rules prohibiting drug or alcohol abuse; clearly stated prohibitions against harassment, and rules for reporting it; and procedures for discipline, complaints, and termination.