Improperly classifying a worker as an independent contractor can be costly to your nonprofit. Employees are entitled to protections such as minimum wage, overtime, unemployment insurance, and benefits. If you improperly classify a worker as an independent contractor, you are opening your nonprofit up to liability should the classification be challenged by the worker or a governmental agency. If the other party prevails, you will owe back wages, benefits, your portion of payroll taxes, and in some cases, penalties and fines.
Every state and several federal agencies have tests for determining if a person is an employee or independent contractor. While each test is slightly different, the core issue is how much control you exercise over the worker and how the work is completed. There is no bright line test and the final determination for each position will depend on the specific facts and circumstances surrounding the work. For simplicity’s sake, we will only consider the Colorado Department of Labor’s test.
In Colorado, there is a presumption that all workers are in fact employees. This means the burden is on the employer to establish that the relationship is in fact one of an independent contractor. To do this, an employer should always have a written contract in place with the independent contractor. Within the contract, the Colorado Department of Labor requires, at a minimum, ten contract clauses which must be adhered to by both parties. The required clauses are located here and cover the following areas:
- The individual does not work exclusively for the nonprofit
- The nonprofit does not instruct the individual on how to complete the work
- Payment is through a fixed or contract price
- Termination of the relationship is not allowed unless the individual breaches the contract
- Training is not provided to the individual
- The nonprofit does not supply tools or any benefits to the individual
- The time of performance is not dictated by the nonprofit aside from a completion schedule agreed upon by both parties
- The nonprofit pays the individual through the individual’s trade or business name
- Business operations of the nonprofit and individual are not combined in any fashion
- Disclosure that the individual is not entitled to unemployment insurance benefits and is responsible for paying all payroll taxes
If the parties have a contract in place with the required terms, a presumption of an independent contractor relationship is created. The burden then shifts to the worker to prove the relationship is in fact an employee-employer relationship.
The Colorado Nonprofit Legal Center is available to provide specific legal advice for your organization.