There has been a growing number of misclassification suits filed within a myriad of industries, the non-profit industry included. Although legislation has made an attempt to make compliance easier for employers, worker classification is still a major issue that many nonprofit organizations face due to its complex landscape. For those looking to gain a better understanding of non-profit worker classification, we break down the implications of classifying workers as independent contractors, exempt employees, and non-exempt employees.

Why Is Worker Classification Important?

Employee classification is a hot topic among nonprofits nationwide due to its complex nature. Because many nonprofits hire independent contractors (also known as 1099s) rather than employees, it is important for nonprofits to be attentive when classifying workers as employees or independent contractors. To correctly classify each worker, nonprofits must distinguish whether a worker is an independent contractor or an employee. If a worker is classified as an employee instead of an independent contractor, they must further be classified as exempt or non-exempt – a crucial step in determining their eligibility for overtime pay and meal and rest breaks.

The proper classification of workers, whether independent contractor, exempt, or non-exempt, is determined by state law and in some states, the Department of Labor (DOL) and the Fair Labor Standards Act (FLSA) govern. Keep in mind that wage/hour regulations differ drastically by state, which makes worker classification even more ambiguous for some employers, especially those who have offices in multiple states. If workers are not accurately classified, you can incur a misclassification lawsuit that can cost hundreds of thousands of dollars. As such, non-profit organizations must make sure that all their admins are classified correctly in order to prevent IRS penalties and violations of federal and state wage and hour laws.

Independent Contractor VS Employee

To prevent misclassification suits, nonprofits must accurately determine whether their workers are independent contractors or employees. According to Assembly Bill 5 (AB5), in California, employers must use the ABC Test to determine worker classification in wage-order claims. The employer must show that the worker satisfies all three factors of the ABC Test to successfully prove that he/she is an independent contractor:

A. The worker is free from control and direction in the performance of services;
B.The worker is performing work outside the usual course of the business of the hiring company; and
C. The worker is customarily engaged in an independently established trade, occupation, or business.

If the nonprofit has misclassified the worker, the nonprofit can be responsible not only for unpaid wages, including overtime, but also state/federal withholding taxes, as well as potential penalties and attorney fees. To stay in compliance with AB5, non-profit employers should implement policies that ensure their independent contractors are properly classified.

Exempt VS Non-Exempt

When a worker is classified as an employee, one could either be an exempt employee or a non-exempt employee. To determine this type of employee classification, employers should perform an assessment based on three factors:

1. How much money one earns;
2. The type of work one does; and
3. One’s specific responsibilities and job duties.

The main difference between the two is that non-exempt employees are protected by federal and state labor laws, which include minimum wage laws, required rest periods, meal breaks, and overtime pay. Wrongful misclassification between the two can lead to lawsuits and penalties for the employer.

Exempt Employees

Most exempt employees work in management level positions, such as executive positions, but other occupations are also classified as exempt, such as outside sales. Exempt status is considered advantageous to employers because they do not have to comply with the strict timekeeping rules and payment of overtime required for non-exempt employees.

Non-Exempt Employees

Employees are considered non-exempt unless they qualify for an exemption under federal and/or state law. Generally, non-exempt employees must be paid minimum wage plus overtime if they work more than 8 hours in a day or 40 hours per week. If a non-exempt employee works overtime, it must be paid at 1.5x the regular pay rate. Non-exempt employees are also entitled to meal and rest break premiums.

Key Takeaways

To stay compliant, nonprofits must re-examine whether their workers are properly classified as employees and independent contractors first and then as exempt or non-exempt employees. It is important to remember that the job must meet the requirements of the exempt position; employers may not override this requirement just because they do not want to pay overtime. If you need assistance with non-profit employee classification, please don’t hesitate to contact Hackler Flynn & Associates.

DISCLAIMER: Content within this post should not be considered legal advice and is for informational purposes only. Communications made through this post do not create an attorney-client relationship. Hackler Flynn & Associates is not responsible for any content that you may access from third-party resources that may be accessed through or linked to this post. Hackler Flynn & Associates is only licensed to practice in California.