For nonprofit leaders, getting worker classifications right isn’t just about legal compliance—it’s about protecting your mission. The line between employees and independent contractors has always been murky, but new guidance from the Department of Labor (DOL), issued in early 2024, helps clarify that distinction.

With nonprofits often relying on a mix of staff and contractors to deliver programs, compliance with labor standards is essential. Misclassification can result in costly penalties and threaten the sustainability of your organization.

Why This Matters to Nonprofits

Understanding whether someone should be treated as an employee or an independent contractor is crucial for staying compliant with the Fair Labor Standards Act (FLSA). The DOL’s final rule, effective March 11, 2024, introduces an updated “economic reality test” to guide these decisions.

As a nonprofit leader, knowing these rules helps you make smarter hiring decisions and avoid legal trouble down the road.

The Six-Factor Economic Reality Test

This test determines whether a worker is economically dependent on the organization, and thus an employee, or if they operate independently. Here’s what it includes:

1. Opportunity for Profit or Loss Based on Managerial Skill
   Independent contractors manage their own expenses and profit margins, while employees typically do not.
2. Investments by the Worker
   Contractors invest in their own tools, equipment, or workspace. Employees rely on employer-provided resources.
3. Permanence of the Relationship
   A long-term or indefinite relationship leans employee; project-based or short-term contracts suggest independent contractor.
4. Control Over Work
   If your nonprofit dictates how, when, and where work happens, it’s likely an employee relationship.
5. Work Integral to the Organization
   If the tasks performed are core to your nonprofit’s mission, the worker may be an employee.
6. Skill and Initiative
   Contractors tend to bring specialized expertise and operate with more autonomy than employees performing routine work.

The Stakes for Your Organization

Misclassifying workers can lead to legal liabilities—back pay, penalties, and even damage to your nonprofit’s credibility with funders. For organizations that already struggle to access affordable legal services for nonprofits, the cost of getting it wrong can be steep.

The rule is currently active, but may still face legal challenges. Staying informed and working with legal experts is the best way to protect your nonprofit.

Action Steps for Nonprofit Leaders

• Review worker classifications: Use the economic reality test to audit your workforce.
• Train your HR team: Make sure they’re up-to-date on the new DOL rule.
• Update contracts: Reflect the true nature of each working relationship.
• Work with legal counsel: Don’t go it alone. Legal guidance can be your strongest asset.

At Our Community Law, we specialize in affordable legal services for nonprofits. Our team can help you stay ahead of regulatory changes and ensure your organization is protected.