What You Need To Know About Paying Contractors

A common mistake nonprofits make is to pay workers as contractors based on an agreement to pay a flat amount for services performed.  This can create liability to the organization.  Liabilities including taxes, interest and penalties will apply when a worker’s pay is misclassified as a contractor instead of an employee.  

The Supreme court has ruled on many cases regarding classification of employees.  Those cases have resulting in 12 factors that can be used to determine when an individual is an employee or a contractor.  I will share the five factors I have found most often help me decide the classification. 

The hiring party's right to control the manner and means by which the product is accomplished.

Does the nonprofit control the manner and means by which the employee delivers their work?  Do you show them how to perform the work?  Do you have a standard, manual or communicated expectation for how they accomplish the job?

The source of the instruments and tools provided to do the job.

If the nonprofit is providing the equipment or space to do the work, it is an employee relationship.  Examples include cafe equipment or classrooms for childcare workers. 

The location of the work.

If the work is performed on the nonprofit’s premises, it supports the employee relationship.

The extent of the hired party's discretion over when and how long to work.

Do the nonprofit’s hours of operation dictate when the individual will be present to perform the duties?  That typically indicates that it's an employee relationship.  

The work is part of the regular business of the nonprofit.

Is the work being performed a normal part of the nonprofit’s operations.  This type of work is normally performed by employees.  Contractors, alternatively provide services on one-time or occasional basis and are not essential part of the nonprofit’s operations.    

This is a good starting point for the decision.  You will also find additional resources on the Department of Labor website as well as your state’s workforce commission or similar agency.