What every nonprofit CEO needs to know - Part 2: Employment

Posted by Heidi Forland-Fetty | Feb 11, 2021 | 0 Comments

Employment

Your organization simply cannot function without its people, yet your people (and the laws surrounding their employment) tend to be among the most common sources of litigation against nonprofits. However, with a little knowledge and foresight, it does not have to be that way. Here is a brief overview of what employment laws nonprofit executive directors should know about.

Employment at Will

Employment at will is a foundational doctrine that states an employment relationship is generally terminable by either the employer or the employee for any reason or no reason whatsoever. Employment at will is typically the default position, but employers can create a contract for employment. This can happen when language that explicitly or implicitly states that the employee will be employed for a specific period of time, will only be terminated upon certain conditions, or in any way “guarantees” employment. The employment contract is usually included in an offer letter, email, or other communication to the employee. 

Discrimination

Employment discrimination laws prohibit employers from taking adverse employment actions against employees and applicants based on their membership in a protected class. There is no single source for employment discrimination law. Employment discrimination is prohibited by many federal, state, and local statutes. In general, these laws apply to nonprofit organizations just like they do to for-profit businesses. The primary exception is that some religious organizations may be exempted from certain parts of some discrimination laws.

Title VII of the Civil Rights Act of 1964
  • Title VII prohibits a broad range of discriminatory employer conduct based on race, color, national origin, religion, and sex (including gender, pregnancy, sexual orientation, and gender identity). It applies to most private employers that employ at least 15 employees (including nonprofits, except for bona fide private membership clubs that are tax-exempt under Section 501(c)).
    • Prohibited Employer Conduct:
      • Refuse to hire an applicant
      • Terminate an employee, including constructive discharge
      • Refuse to promote an employee
      • Demote an employee
      • Classify or segregate employees in a way that deprives the employees of employment opportunities or adversely affects their status as employees
      • Refuse or fail to prevent or eliminate harassment or retaliation
    • Religious Exceptions:
      • Ministerial Exception- This is not found in Title VII but the First Amendment. It bars employment discrimination suits against religious employers by employees who qualify as ministers.
      • Religious Organization Exemption- Religious corporations, associations, educational institutions, and societies are specifically excluded from Title VII's prohibition against religious discrimination. It applies to churches, synagogues, mosques, and also other “primarily religious” organizations.
      • Religious Educational Institutions Exemption
Americans with Disabilities Act
  • Like Title VII, the ADA prohibits a broad range of employer conduct including discrimination in hiring, firing, and compensation. Also, like Title VII, the ADA applies to private employers with 15 or more employees.
    • A “disability” is a physical or mental impairment that substantially limits one or more major life activities of an individual. There must be a record of this kind of impairment.
    • To be a qualified individual under the ADA, one must have the skills, experience, education, and other job-related requirements of the position; and be able to perform the essential functions of the position with or without reasonable accommodation.
      • Reasonable accommodation- Employers must provide reasonable accommodations to qualified individuals with disabilities, including both applicants and employees, unless doing so would cause an undue hardship. Examples of accommodation include making the facilities more accessible, restructuring the particular job, and allowing a change in a work schedule.
Age Discrimination in Employment Act
  • The ADEA prohibits the same kind of adverse employment action as prohibited by Title VII, although there is no accommodation obligation as under the ADA. It applies to private employers employing at least 20 individuals (as opposed to 15 under Title VII or the ADA). ADEA covers employees and applicants age 40 and older.
Missouri Human Rights Act
  • The MHRA prohibits employment and other discrimination on the basis of the following protected classes: race, color, religion, national origin, sex (including pregnancy, stereotyping, gender identity, and gender expression), ancestry, age (40-69), and disability.
    • The MHRA applies to private employers with six or more employees in Missouri for each working day in 20 or more calendar weeks in the current or preceding calendar year.
    • Religious Organization Exclusion: This is for corporations and associations owned or operated by religious or sectarian organizations.
    • Private Membership Club Exemption: A bona fide private membership club, other than a labor organization, that is exempt from taxation under 26 U.S.C. Section 501(c) is covered under this exemption.
Kansas Act Against Discrimination
  • KAAD prohibits employment discrimination based on the following protected classes: race, color, religion, national origin, ancestry, sex (does not include sexual orientation, gender identity, etc.), disability, and genetic information.
    • The KAAD applies to private employers with four or more employees in Kansas.
    • Religious Organization Exclusion: Sectarian corporations are excluded from the definition of employer.
    • Private Membership Club Exclusion: Nonprofit fraternal or social associations or corporations are excluded from the definition of employer.

*Age is not covered under KAAD, but under KADEA.

Fair Labor Standards Act

  • The FLSA applies to nonprofit organizations, despite a persistent myth to the contrary! This is because even if the organization itself is not covered under enterprise coverage, it is almost certain that your employees are covered under individual coverage.
  • An employer's primary obligations under the FLSA are to pay nonexempt employees both:
    • A minimum hourly wage that is at least equal to the federal minimum wage (currently $7.25 an hour)
    • Overtime pay for all hours worked over 40 in a workweek at a rate of at least 1.5x the employee's regular rate of pay
  • Exempt or Nonexempt?
    • Employers have the burden of demonstrating that an exemption applies. Simply labeling an employee as exempt is not conclusive, even if the employee agrees to that designation.
    • Exempt requirement: To be exempt one must be paid on a salary basis of at least $684 per week and satisfy the duties of test executive, administrative, professional, and computer professional.

Classification

  • Employee or contractor- Many employers seek to minimize cost and streamline their organizations by utilizing independent contractors instead of employees. While this can be a successful strategy in many circumstances, if done improperly it can result in significant penalties for the organization and its managers.
  • Historically the IRS has used a 20-factor test but in recent years has moved to what it calls the control test, which groups the 20 factors into 3 groups.
    1. Behavioral Control: A worker is an employee when the company has the right to direct and control the worker (not just what the worker does, but how).
    2. Financial Control: whether the company has the right to control the economic aspects of the worker's job (e.g., reimbursement of expenses; provision of tools and supplies; payment by task not by hour).
    3. Type of Relationship: whether the company has the right to control the economic aspects of the worker's job (e.g., reimbursement of expenses; provision of tools and supplies; payment by task not by hour).
  • Penalties for misclassification
    • IRS: The cost is $50 for each W-2 not filed, 1.5% of wages, 40% of employee's FICA taxes (SS and Medicare) that should have been withheld, and 100% of employer's FICA taxes. If misclassification was intentional, then the penalties increase to 20% of wages, 100% of employee's FICA, plus up to $1,000 in criminal penalties, and 1 year in prison.
    • The state also imposes taxes, penalties, and interest.

Employment Taxes

  • Payroll taxes- Tax-exempt organizations must pay federal, state (and in some cases local) payroll taxes. Failure to do so can result in severe penalties on top of payment of back taxes. The IRS can impose the penalties on any “responsible party”, which can include accountants, CEOs/EDs, and even nonprofit board members.

People are often what makes an organization great. It is key to make sure your nonprofit is treating your employees the way they deserve to be treated. Understanding what employment laws apply to your organization will benefit everyone involved. If there are questions about employment exemptions apply to your tax-exempt organization, send us a message and we can chat.

About the Author

Heidi Forland-Fetty

Hi, I am Heidi Forland-Fetty. I am the head paralegal for Mission Counsel. I joined Terry in June 2020 and am excited to help expand the firm. I have strong interests in nonprofit, contract, business, real estate, and intellectual property law. CONTACT US My Story Growing up in the Greate...

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