August 14, 2024

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As your nonprofit grows, an active board and enthusiastic volunteers quickly become insufficient. Inevitably, you will need to hire employees and independent contractors to accomplish recurrent and specialized tasks. For a host of reasons (such as maintaining your public image, avoiding liability, retaining talent, and using resources efficiently) it is important for you, as a nonprofit leader, to be familiar with the general contours of employment law so you can confidently handle simple matters and recognize the more complex ones that require an attorney’s assistance.

Today, most organizations (both nonprofits and for-profits) rely on a blend of employees and independent contractors, with the desire to engage independent contractors becoming more common than in the past.

While nonprofits are subject to many unique rules and regulations, when it comes to employment law, the same rules generally apply to nonprofits and for-profits alike. This means that, unless an employment law has exemptions or exclusions for nonprofits or religious organizations, your nonprofit’s workplace relationships must comply with the applicable state and federal employment laws.

While many nonprofits and businesses frequently hire with minimal contracts, or none at all, nonprofits should consider using written contracts for employees and independent contractors as soon as they have the resources to do so. Generally, written contracts can set boundaries, establish rules, clarify expectations, and protect confidential information. The existence of written contracts can prevent several types of harm to nonprofit organizations, from employment misunderstandings to, in the worst case, litigation).

Employee vs. Independent Contractors

It is important to understand the difference between who is, according to law, an “employee” versus an “independent contractor,” because getting it wrong can result in a lawsuit.

The definition of “employee” is one of the broadest in American law.  Indeed, one definition simply defines an employee to be “any individual employed by an employer.”¹ Similarly, the definition of “independent contractor” is broadly defined by various legal tests, such as (at the federal level) the “economic reality test,” which focuses on the company’s control of the worker and whether or not that worker is or is not an independent business.  State laws often apply different, and, in some instances, more stringent tests.

Independent contactor status is subject to frequent litigation and regulation. For instance, in March 2024 the Biden administration’s new guidance on determining independent contractor status² went into effect, replacing a previous guidance issued by the Trump administration.

Because the definition of “employee” is so broad, a good rule of thumb is that a worker will be considered an employee, rather than an independent contractor, by default.

For more on the differences between employees and independent contractors, check out Napa Legal’s resource here.

When should a nonprofit have a written contract with an employee?

The old lawyer’s adage that “you should get it in writing” applies to employment relationships in general; is especially important in certain circumstances.

Short of what one would typically think of as an “employment contract,” it is possible to employ someone based on a spoken agreement (which, technically, is an oral contract) or an offer letter (which, technically, is a very short contract with few terms). These are typical among newer and smaller organizations. While such contracts are often an acceptable starting point, they can quickly become inadequate as the organization grows and changes, such as when it loses founding team members, brings on new ones, and begins to require specialists or additional leadership.

Written employment contracts can be complicated, but that is not always necessary. An employment contract can be made generally applicable to many employees by setting out basic terms or it can be made specific to a particular employee or position. Typically, organizations will use both general and specific contracts in different circumstances.

Written employment contracts provide a number of benefits:  

• First, they clarify the terms of the employee’s employment, which avoids the potential misunderstandings that can result from forgetfulness and subjective interpretations of discussions.  

• Second, they create a record of exactly what was agreed to, which protects the organization in the event of a dispute or confusion.  

• Third, they reinforce professionalism and communicate the organization’s culture and values.  

• Fourth, they allow heightened protections for the nonprofit (such as confidentiality provisions, protection of intellectual property, and arbitration provisions).

The best approach will have to be decided on a case-by-case basis within your organization and different organizations will have different primary concerns. For instance, some organizations may not be concerned with keeping internal information confidential, while for others maintaining the privacy of certain information might be critical to the mission. Whatever the case may be, it pays to account for those concerns (and others) in employment agreements.  

The following are some common and important provisions for employment contacts:

• Job Duties. A contract should lay out the employee’s specific and general duties and end with a catchall provision permitting the employer to add additional duties as necessary. For religious organizations, it can be helpful to explain the religious importance behind these duties to help your organization assert RFRA or Ministerial Exception defenses.

• Pay. This is one of the most important, and most variable, terms. For instance, is the employee: hourly or salaried, full-time or part-time, overtime-exempt or not? Pay is heavily regulated at the state and federal levels and is a frequent source of litigation, even for small organizations, due to an employee’s ability to sue for attorneys’ fees.

• Restrictive Covenants. The contract may or may not include restrictive covenants where the parties make agreements on confidentiality, non-solicitation, prohibitions on conflicts of interest, and more. Restrictive covenants too are heavily regulated, frequently litigated, and subject to varying standards. That said, depending on the role of the employee and the organization’s mission, they can be of great value. Restrictive covenants generally require a written contract to be enforced.

• Unique Benefits. This will vary depending on the organization and the role. Benefits do not necessarily need to be included in a contract but may need to be explicitly stated in order to retain or acquire top talent or if the organization is committed to providing certain benefits to their employees. It is often better to provide benefits in a non-binding employee handbook. But if that is not the case, it would need to be addressed in a contract.

• Termination. An understanding of how a relationship ends is very important. “At-will” employment, where either party can end the relationship at any time for any reason (other than a few specific circumstances, such as legally-prohibited discrimination) is the norm in most, but not all states (Montana is not an “at-will” state). If the agreement is not at-will, then there should be a termination date or list of specific events that cause or permit termination or assume abandonment of the job.

• Governing Law. It is not always clear what law should govern a contract, especially when dealing with remote workers or when the organization straddles state borders. This can be clarified by stating in the contract which state’s law governs the contract. That said, employment laws generally apply based on the location of the employee.

• Dispute Resolution and Arbitration. Subject to certain exceptions and limitations (such as the inability in some jurisdictions to arbitrate sexual harassment disputes or sexual assault claims,³ or employers being unable to require employees to share arbitration costs), employers and employees can agree to have disputes resolved in private arbitration (and can require mediation) rather than resorting to state or federal courts. That said, the benefits, costs, and permissibility of arbitration is hotly debated and an evolving area of law. If arbitration is preferable to litigation for your organization, then the provision itself can be tailored to the organization’s interest, governing, for example, whether the arbitration process will be simple or complex.

• Boilerplate Provisions. In addition to those more variable provisions, there are a number of routine “boilerplate” provisions that you will expect to see regarding issues like non-waiver of rights, severability, and more. These provisions help guarantee standard interpretation of the contract and reduce uncertainties in a dispute.

If any of the above provisions stand out as especially important to your organization, a written contract will either be needed to clarify them (such as regarding job duties or pay) or to create them (such as a confidentiality agreement or arbitration provision).

When should a nonprofit have a written contract with an independent contractor?

All organizations should always have written contracts with independent contractors.  

Contracts with independent contractors offer the same benefits that contracts with employees give, but they have an additional purpose: they make it clear that the worker is an independent contractor and not an employee. This is important because employee relationships are substantially more regulated than independent contractor relationships. For example, employers of employees are required to withhold taxes from employees’ pay and adhere to wage and hour laws.  Additionally, because most people are accustomed to working as employees, independent contractor status may be confusing to some and should be spelled out clearly in a written agreement to avoid confusion. Further, since an independent contractor is a contractor, the contract defines the entire relationship, which should not be left unclear or open-ended. At the same time, labeling a worker as an independent contractor in a written contract is not controlling. In all instances, to be an independent contractor, the actual working relationship must comply in fact with applicable federal or state law tests.

As with any contract, an independent contractor agreement should be customized to suit the specific circumstances, but there are certain provisions that are of heightened importance, for practical and legal reasons:

• Services. It is critical to describe what the independent contractor is being hired to do with sufficient clarity. In the event of a dispute, this provision is likely to determine whether or not the job was done correctly.

• Pay. Unlike an employment agreement, this provision can be extremely simple (but, depending on the nature of the agreement, it could also be very complicated). Because independent contractors are subject to far less regulation, pay merely needs to be agreed to—there are rarely additional legal considerations surrounding this term (such as minimum wages, overtime pay, etc.) in an independent contractor agreement.

• Termination. Independent contractor agreements usually are not terminated at any time for any reason. Instead, termination usually occurs subject to certain conditions. Some independent contractor agreements can be terminated with advanced notice, others only for cause. Some terminate upon completion of the services, while others end on a specific date. This should be specified in the agreement to avoid confusion about when and how the relationship will end.

• Restrictive Covenants. The contract may or may not include restrictive covenants where the parties make agreements on confidentiality, non-competition, non-solicitation, prohibitions on conflicts of interest, and more. As discussed above, restrictive covenants are heavily regulated and frequently litigated, but are tested differently when applied to independent contractors. For instance, prohibiting an “independent contractor” from doing similar work for other organizations undermines the very nature of an independent contractor, who usually does work for more than one client.

• Licenses and Intellectual Property. In certain independent contractor agreements, the parties may need to protect intellectual property that is provided, created, or licensed in the course of the services. These considerations can be, but are not always, contentious, because intellectual property rights can be very valuable and cause serious problems if lost. Depending on the nature of the work, it may be critically important to clarify who owns the product being created by the independent contractor.

• Governing Law. The contract may indicate what law should be relied upon when interpreting its terms. Since the relationship is governed by a contract, the governing state’s contract law will potentially be of great importance. That said, an employment misclassification claim will still likely be decided based on the law of the state in which the worker physically works.

• Dispute Resolution and Arbitration. The parties can agree to mediate and arbitrate rather than take a dispute to a court of law. Contractors can be required to split the costs of mediation or arbitration because they are independent businesses and have greater difficulty challenging the enforceability of arbitration agreements.

• Boilerplate Provisions. Independent contractor agreements will also contain the routine, “boilerplate” provisions that promote standard interpretations and reduce uncertainties in the event of a dispute.

An independent contractor relationship is much more flexible than an employee relationship, but as a result, a contract laying out the terms of the relationship is essential.

Conclusion

For nonprofits, the use of written contracts with employees and independent contractors is not just a legal formality; it can be a necessary step in the organization’s development. Clearly defining the terms of employment and independent contractor relationships avoids potential misunderstandings, creates a clear record, promotes professionalism and the organization’s values, allows for specific protections and benefits unique to the specific organization or role, and helps ensure that the working relationship you are creating has the proper, intended legal status. If your organization has grown to the point where it is hiring employees and/or independent contractors, it may be time to assess those relationships and speak to an attorney about crafting agreements to clarify the roles and protect your organization.