Category Archives: Non-Profit Employers
The world is full of eager college students who want to have a chance at “breaking in” to a non-profit job via an internship but need some type of compensation to be able to do the work. There are plenty of non-profit employers willing to pay a stipend to get the best internship candidates and help assure commitment and dedication, but that cannot afford to pay minimum wage for the learning opportunity. Matching these needs through a below-minimum-wage stipend is the common solution – but that can lead to unintended Fair Labor Standards Act (FLSA) and tax consequences unless done correctly.
The use of the word “stipend” is not conclusive of the matter. An intern could receive a “stipend” that, if over $600 and therefore reported to the IRS, changes his or her classification to what the Department of Labor would consider an employee, and the nonprofit could owe back wages constituting minimum wage and back FICA. The question is whether the intern is a trainee on a stipend rather than an employee.
In essence, a “stipend” is compensation for services provided to the nonprofit. Those who perform work in exchange for compensation are normally employees who are paid at least minimum wage and have FICA withholdings and matches (or they are independent contractors under circumstances probably not relevant to the terms and conditions of an internship since the non-profit will probably need to control the intern’s work and work conditions). The significant exception under federal Department of Labor rules is for trainees, who, assuming they qualify, do not have to be paid a minimum wage.
To be considered a “trainee,” the internship must satisfy all six criteria developed by the Department of Labor for distinguishing unpaid trainees from employees who must be paid under the FLSA. The primary requirement is that the internship must benefit the intern – not the employer. The DOL’s criteria can be tough to meet when the non-profit is really trying to get below-minimum-wage employees. The forced solution is often to pay minimum wages but limit hours or structure an actual trainee program with the chief goal to be the benefit of the intern.
Takeaway: Nonprofits that pay interns a stipend below minimum wage should work with their employment counsel to match the internship program to the DOL’s criteria and avoid the unintended consequences of hiring a minimum wage employee rather than an intern on a stipend.
A non-profit employer enjoys the privilege of being tax-exempt – but every privilege brings obligations, of course. For example, the Internal Revenue Code has very stringent and vigorously enforced prohibitions against the higher echelon employees of non-profits (Foundations, Churches, Colleges – about 6% of US GNP and 10% of the national workforce) receiving compensation beyond marketplace norms.
This prohibition against “excess benefits” and “private inurement” extends to all forms of compensation, including salary, benefits and severance pay. It applies to “disqualified persons” and can result in “intermediate sanctions” against the “ non-profit managers.” But don’t worry, if you do certain things, you can obtain the protection of the “rebuttable presumption of reasonableness”!
Behind this legalese is the basic concept that an employee in a position to influence a non-profit should not receive a benefit from a tax-exempt entity beyond the market value of his or her services. The IRS and the Minnesota Department of Revenue require that non-profit employers use specific legal procedures to demonstrate that senior executives have their compensation set based on market data and without personal influence. Otherwise, substantial penalties can ensue.
Takeaway: Following these procedures to determine the compensation limits for higher echelon non-profit employees can be somewhat complex. Non-profit employers should proceed with awareness of these prohibitions and obtain counsel to assist in determining if the prohibition applies to a particular executive compensation question. If so, the non-profit should set up the processes necessary to make sure that compensation determinations are consistent with the privileges of non-profit status.
As a general rule, most non-profits must be completely nonpartisan – they cannot engage in political campaigning. The rules concerning non-profit lobbying are complex and must be followed carefully. This restriction is the fair price of tax-exempt status and most non-profits are acutely aware of coming within a “legal mile” of illegal campaigning, ballot initiatives or lobbying. The penalties and consequences to tax exempt status and donor relations are quite significant.
But what about the political activities of a non-profit’s employees? Are they also prohibited from such partisan activities? In an election year that is a common question for a non-profit employer, especially when many non-profit employees are politically active, public-minded citizens and many candidates and political initiatives would like the prestige of being associated with a foundation, important service agency, hospital, college or school.
The answer is that the whole is greater than the sum of its parts – the employees can be partisan so long as they are not on employer time, using employer resources or leading others to believe they speak for the non-profit. To preserve this legal distinction requires that the non-profit develop an employment policy “wall” between the employee’s personal time public activities and public actions that are or give the appearance of being on behalf of the non-profit or using non-profit resources. Such a “wall” will address matters such as requiring that political activities not occur during paid working time (except when using PTO) and allowing the employee to identify his or her place of employment at a campaign event so long as they also make clear that they are not participating as a spokesperson of the non-profit.
There are several other developed norms that should be addressed in such “wall” policies to preserve the balance between personal political activity and the important prohibition against partisan political activities by a corporation that has been accorded the privilege of tax-exempt status.
Takeaway: A non-profit employer should have a “Political Activity” policy that builds the necessary wall between employee personal political activities and work-related activities. The policy should be written to be specific to the non-profit’s mission, the work of its employees, and the nature of their potential political or lobbying activities. This will avoid otherwise legal employee partisan political actions being attributed to the non-profit and thereby becoming illegal – Ah Democracy!