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The Frankenstein Effect: Risky Transformations between Employees, Volunteers & Independent Contractors

Melanie  Lockwood  Herman703.777.3504Melanie@nonprofitrisk.org

Key Issues• Volunteer or

employee?

• Independent contractor or employee?

• Frankenstein Effect scenarios

• Preventing the Frankenstein Effect

What does ‘volunteer’ mean to you?

‘When  I  use  a  word,’  Humpty  Dumpty  said  in  rather  a  scornful  tone,  ‘it  means  just  what  I  choose  it  to  mean—neither  more  nor  less.’

‘The  question  is,’  said  Alice,  ‘whether  you  can  make  words  mean  so  many  different  things.’

Lewis  Carroll,  Through  the  Looking  Glass

Volunteer or Employee?DOL  FLSA  6-­‐Question  Test  (to  determine  who  is  a  volunteer)1. Is  the  entity  that  will  benefit/receive  services  from  the  volunteer  a  

nonprofit  organization?  

2. Is  the  activity  less  than  a  full-­‐time  occupation?  

3. Are  the  services  offered  freely  and  without  pressure  or  coercion?  

4. Are  services  of  this  kind  typically  associated  with  volunteer  work?  

5. Were  regular  employees  displaced  to  accommodate  the  volunteer?  

6. Does  the  worker  receive  (or  expect)  any  benefit  from  the  entity  to  which  he/she  is  providing  services?  

Fair Labor Standards Act (FLSA)

• The  FLSA is  a  federal  law  that  outlines  employment  standards

• Administered  by  the  Department  of  Labor  (DOL)

•When  state  laws  differ  from  the  FLSA,  employer  must  comply  with  the  standard  most  protective  to  employees.

Classifying Employees Correctly

• IRS – “anyone who performs services for you is your employee if you can control what will be done and how it will be done.”

• www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employee-(Common-Law-Employee)

What is an Employee?

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Exempt versus Non-Exempt

Depends on the specifics of the job.

NOT:• The  organization’s  ability  to  pay• The  title  of  the  job  or  position• The  whim  of  the  organization

Three  Factor  Test• How  much  the  employee  is  paid• How  the  employee  is  paid• The  kind  of  work  duties  performed  by  the  employee

•YES – your  employee   is  non-­‐exempt

•NO – go  to  Test  #2

Doe s  your  emp loyee  make  le s s  than  $455  per  week?  

Test  #1:  Salary  Level

Is  you r  employee  paid  on  a  s alary  basis?Test  #2:  Salary  Basis

Employee  receives  a  predetermine  amount  of  compensation  each  pay  period  on  a  weekly,  or  less  frequent  basis.  That  amount  cannot  be  reduced  based  on  the  quality  or  quantity  of  the  employee’s  work.  

(exceptions:  www.dol.gov/whd/overtime/fs17g_salary.htm)

•NO – your  employee  is  non-­‐exempt• YES – go  to  Test  #3

• To  be  exempt,  an  employee  must  generally   meet  the  criteria   for  one  of  the  specific  exemption  categories

• Remember,   a  job  title  doesn’t  necessarily  put  your  employee   in  one  category  or  another

Care fully  consider  the  s pecif ic  du tie s  your  employee  undertakes…

Test  #3:  Duties

1. Executive• Manages  organization  or  subsection  of  it• Supervises  employees;  ability   to  hire  &  fire

2. Administrative• Responsible  for  primarily  office  work• Exercises  discretion  &  judgment  on  important  matters

3. Professional• Advanced  specialized  knowledge• Intellectual  work,  with  consistent  exercise  of  discretion  &  judgment

Common  Duties  Exemptions

• The payer has the right to control or direct only the result of the work and not what will be done and how it will be done.

What is an Independent Contractor?

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1. Instructions2. Training3. Integration4. Services   rendered   personally5. Control  over  assistants6. Continuing  relationship7. Work  schedule8. Full-­‐time  required9. Work  premises10. Work  order   set

IR S  20-­‐FACTOR  TEST  (NO  FACTOR  I S  DETERMINATIVE)

Employee  or  Contractor?

11. Regular   reports12. Payment  by  hour,  week,   month13. Payment  of  travel   expense14. Providing  tools  and  materials15. Significant  investments16. Realization  of  profits  &  losses17. Working  for  multiple  employers18. Availability  to  general   public19. Right  to  discharge  (employer)20. Right  to  terminate   (employee)

No   regulatory  risk  for  classifying   contractor as  employee

Possible   risks:• Cost• Respondeat superior  liability• Workers  compensation  claims• Paperwork  burden• Discrimination  claims

SIGNIFICANT  regulatory  risk  for  classifying  employee as  contractor  • Employment  taxes  for  that  worker  (and  penalties)• See  IRS  Code  section  3509

Does  it  Matter?

Employee• Regular funding available• Minimum educational and experience requirements• Requires availability, hands-on, willing to take on new duties• Professional development and promotional opportunities

Volunteer• No regular funding• Flexible in terms of skills, background, requirements• Equal or greater reward to volunteer

Independent Contractor• Short term + Special expertise + Results of project are main value

Which Role Makes Sense?Wage and Hour Compliance

In  2013  alone,  WHD  handled  over  33,000  cases  of  compliance,  and  ordered  the  payment  of  approximately  $250  million in  back  wages  to  nearly  270,000  employees.

These  cases  were  split  nearly  equally  between  minimum  wage and  overtime  violations,  but  over  75%  of  back  wages  recovered  were  for  overtime  violations.

Source :  The   U.S.   Department   of  Labor’s  Wage   and  Hour  Divisions  Fiscal   Year  Statistics  for  WHD   for  2013,  found  at:  http://www.dol.gov/whd/statistics/

Review current positions in your organization:• Does documentation match the classification decision? • Do employees have job descriptions?

• Is exempt/non-exempt classification supported by salary & duties?

• Do all independent contractors have a contract?• Do volunteers have a volunteer agreement or

volunteer position description?

Assess & Analyze

RISK TIPS: Preventing the Frankenstein Effect

•How   did   the  misclassification   occur?  Was   it  intentional   or   accidental?

•What   is  the   potential   legal  exposure  to  the   organization?

•What   time/effort/cost   will  be  required   to  remedy   the   errors?

•What   does   your   labor   lawyer  say?

Remedying  Misclassification

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If  you  have  six  months,  and  you  still  need  help  making  a  classification  determination…

Complete  and  file:   Form  SS-­‐8,  Determination  of  Worker  Status   for  Purposes  of  Federal  Employment  

Taxes  and  Income  Tax  Withholding

The  organization  or  the  worker  can  file  this  form.  The  Department  of  Labor  will  make  an  official  determination.

Last  Resort  Help!

Factors:

1. Behavioral – How  and  What  and  When

2. Financial  – How  paid?  Reimbursements?  Supply

3. Type  of  relationship –Contract?  Benefits?  Temporary?

TWO  PR IMARY  ISSUES:  (1)  CONTROL;  (2 )  INDEPENDENCE

Classifying  as  Contractors

Permissible  circumstances:

• Absent  for  1+  full  days  for  personal  reasons  other  than  sickness  or  disability

• Absent  due  to  sickness  or  disability  if  aligned  with  policy  or  practice

• For  penalties  for  violating  safety  rules  of  major  significance• For  disciplinary  suspensions  for  conduct  violations

Exempt  employ ees  can  generally  not  be  dock ed  pay

Docking  Employee  Pay

•Volunteers – should  have  agreement

•Contractors – expectations  should  be  outlined  in  contract

Applying  the  Employee  Handbook  to  ALL  Workers

Gifts for VolunteersNon-­‐cash  gifts  are  best!• Under  $100  per  year• Avoid  cash  substitutes• Try  no-­‐additional-­‐cost  services

Standardize  your  gifts  • Avoid  unfair  perceptions• Don’t  alter  gifts  based  on  productivity  or  hours

Volunteer  Reimbursements• Must  be  documented &  legitimate  business  expenses

• Travel   to/from   distant   volunteering   sites;   long   distance   travel,   meals,   &  lodging   costs

• Office  costs   (postage,   telephone   calls,   copying,   etc.)

• Equipment   or  protective   clothing

• Attendance   at   training   events/courses   (related   to  volunteer   role)

• Have  a  clear   reimbursement  policy!

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Other  Benefits:  Meals  &  LodgingGenerally  exempt  from  taxes  IF:• Meals:  provided  for   the  NP’s   convenience   &    served   on  the  program   premises

• Lodging:   provided   to  volunteers  who   are  required  to  accept   the  lodging   as  a  condition   of  their  service

Other  Benefits:  Big  Prize  Perks• Taxable   income  for  volunteer• Nonprofit  must  report

Other  Benefits:  ScholarshipsAs  qualified   scholarships:• Based  on  merit/need• Used  for  permitted  purposes

As   tax-­‐free   fringe  benefit:• If  the  class/course  improves  volunteer’s  skills,  or  is  required  by  NP  or  by  law

Other  FAQs:  Unpaid  Interns?DOL/FLSA  Standards:1. Experience  must  be  similar  to  that  offered  in  an  educational  setting

2. Internship  must  be  for  the  intern’s  benefit

3. Intern  must  not  displace  regular  employees  and  work  under  close  supervision

4. Employer  should  derive  no  immediate  advantage  from  intern  

5. Intern  should  not  necessarily  be  entitled  to  a  job  at  the  end  of  the  program

6. Both  the  employer  and  intern  must  clearly  understand  that  the  intern  is  not  entitled  to  wages

Unpaid  interns  should  be  trainees!

TAKE THE HIGH ROAD.Never  base  classification  

solely  on  your  ability  to  pay.

Melanie Lockwood Herman703.777.3504 | Melanie@nonprofitrisk.org

Thank You!