Guidance Clarifies Correct Classification of Employees, Contractors, Volunteers for Nonprofits

Nonprofit employers and staff are getting clearer direction on how to sort workers into employees, independent contractors, exempt or non-exempt staff, and volunteers — distinctions that determine overtime eligibility, taxes and potential legal exposure. National Council of Nonprofits has framed a practical overview for leaders and is urging organizations to help shape Department of Labor guidance that many say does not fit typical nonprofit jobs.

The legal framework rests on multiple authorities. Hackler Flynn & Associates notes that classification often starts with whether a person is an independent contractor or an employee, and adds that “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 Center for Nonprofit Management reminds readers that the FLSA analysis commonly follows a two-step approach: first the salary level and salary-basis tests, then the duties test for exemptions.

Nonprofit work poses specialty problems for those tests. The National Council of Nonprofits warns that “Not many nonprofits operate in a factory environment, but labor-law guidance doesn’t seem to get that,” and that “DOL guidance on the job classifications for exemption is in some ways a relic of the industrial age, and it doesn’t always map onto nonprofit jobs.” Fundraising and development roles, and volunteer management positions, are frequently cited as examples where the duties test may not neatly apply.

Volunteers and interns require careful handling. Venable cautions that while nonprofits may be tempted to classify roles as unpaid to save on wages and taxes, “For the nonprofits that inappropriately classify workers as interns or volunteers, those misclassifications can lead to lengthy governmental investigations or costly lawsuits, including class action litigation.” Venable also explains that employees may serve as volunteers only when the activities occur outside regular working hours and are not similar to their paid duties. Practical steps include Namely’s recommendation that volunteers and unpaid interns acknowledge in writing that they do not expect compensation and that their duties and duration be defined.

The financial stakes are high. Portal Nonprofitrisk warns, “Keep in mind that it is never appropriate to classify employees based solely on their salary, rank, background, or the nonprofit's desire to avoid overtime pay.” Venable lists consequences including back wages, interest, liquidated damages, attorneys’ fees, unpaid taxes, and even potential criminal exposure for decision makers. Hackler Flynn & Associates adds that misclassification lawsuits “can cost hundreds of thousands of dollars,” and that state laws vary widely, complicating compliance for multi-state organizations.

Experts advise nonprofits to re-examine classifications, consult legal counsel before changing a position’s status, and monitor both federal rulemaking and state law developments. The National Council of Nonprofits is inviting input to the DOL as it considers new proposed regulations “this fall” on the salary threshold test and possible duties-test changes. For nonprofit leaders and HR professionals, the next steps are practical: audit job descriptions against salary-basis and duties tests, document volunteer and intern agreements, and get counsel involved to limit exposure as rules evolve.