One of the most common pitfalls for new nonprofits is mischaracterizing employees as independent contractors. Classifying workers correctly is a legal requirement, not a choice. If your nonprofit hires people to do work, you must determine whether they are employees or independent contractors (or true volunteers!) under both federal and Oregon law.
The federal and state governments provide tests to help assess whether the role you are seeking to fill in your organization should be an employee, independent contractor, or volunteer. It can be tempting to label workers as independent contractors rather than employees, especially in smaller or new organizations, due to the lower burden on the organization, i.e., no payroll, taxes, less paperwork, handbooks, benefits etc. However, the organization must follow state and federal laws and regulations to avoid any negative consequences upon the organization if labor laws are found to not be in compliance.
Why Classification Matters
Employees must be:
- Paid at least minimum wage
- Covered by workers’ comp and unemployment insurance
- Reported to the IRS and Oregon agencies
- Protected by workplace laws (anti-discrimination, sick leave, etc.)
Independent contractors:
- Are not employees
- Must pay their own taxes and self-employment insurance
- Are not eligible for employee benefits
- Are not covered by wage/hour or employment laws
Federal Law: Economic Realities Test
The U.S. Department of Labor considers six key factors to determine if a worker is truly independent:
- Opportunity for profit or loss depending on their managerial skill
- Worker’s investment in tools, training, and materials
- Degree of permanence in the relationship
- Control over work hours, method, and schedule
- Whether the work is integral to the organization’s operations
- Skill and initiative required to perform the work
Oregon Law: Right-to-Control Test
Oregon’s Bureau of Labor and Industries (BOLI) uses similar but stricter criteria. Key questions include:
- Does the organization control how, when, and where the person works?
- Who provides the tools or equipment?
- Is the person paid by the job or by the hour?
- Can the person work for others or hire helpers?
- Can the person be fired without cause?
If the organization directs the work and sets the schedule, the person is likely an employee, even if you only need them part-time or temporarily.
Practically, consider whether the worker is free to be hired by other entities, whether they have a highly specialized skill, purchase their own tools and equipment, are dependent on the organization as their primary income source, etc. For example, you want to hire a web designer to set up your website. You are hiring them for just one project – creating your website, they use software that they personally have invested in, they aren’t relying on this particular job as their primary income, and they have other clients they offer their services to. They would be an independent contractor.
Risks of Misclassification
Penalties of misclassifying an employee as an independent contractor include:
- Backpay of state and federal payroll taxes
- BOLI may investigate the situation as wage theft, and pursue penalties for violations of wage and employment laws
- IRS audit and back taxes
- Unemployment insurance back payments
- Workers’ comp liability
- Jeopardization of the organization’s tax-exempt status
- Potential loss of public trust and funding
Best Practices
- Do not base classification on what the person “wants” or what seems cheaper
- Use written contracts for all contractors, signed by both the organization and the contractor
- Revisit classifications annually or when duties change
- Complete all legally required paperwork for employees and contractors
- When in doubt, seek legal guidance
