A recently published report from GuideStar looks at how the “Great Recession” has affected the salaries and benefits of executive employees in the nonprofit sector.  The 2011 GuideStar Nonprofit Compensation Report is the only large-scale analysis which relies on data reported by the Internal Revenue Service, and it includes an executive summary showing trends in gender, budget size, program area, and geography.  As you might expect, the report shows that the downturned economy has undoubtedly played a role in lessening compensation for nonprofit leaders.  You can read more about the report here.

In these difficult economic times, we continue to hear from church leaders who are looking for ways to reduce expenses or bring greater cost efficiencies to the operations of their church or ministry.  One common theme has been to try to change the status of employees. Specifically, changing a worker’s status from “employee” to “independent contractor” and thus not offer that worker the same benefits that an employee receives or to attempt to avoid wage and hour regulations.

Regarding classification of a worker as an employee or contractor, the IRS employs a “right-to-control” test, meaning the more control a company exercises over how, when, where, and by whom work is performed, the more likely the worker is an employee, and not an independent contractor.  The IRS has adapted a twenty point test to make the determination, with those points being: (1) level of instruction on how to do the work, (2) amount of training on how to do the work, (3) degree that the worker’s services are integrated into the business operations, (4) extent that the services are personal meaning does the particular worker need to do the work or could it be assigned to someone by that worker, (5) level of control of any of the worker’s assistants, (6) how long has the worker had a relationship to the employer, (7) flexibity of schedule, (8) whether the work is full-time, meaning the worker devotes most of his/her effort to the employer, (9) does the worker need to do the work on-site, (10) is the worker required to perform the work in a particular sequence, (11) does the worker have to turn in regular reports, written or oral, on the status of the work, (12) is the worker paid hourly, weekly, or monthly like an employee or as a lump-sum like a contractor, (13) is the worker reimbursed for business or travel expenses like an employee, or not reimbursed like a contractor, (14) does the employer provide the tools or materials to perform the work or does the worker have to bring them, (15) does the worker invest in and maintain their own work facilities (i.e. office), (16) does the worker receive a set fee or is there a possibility to realize a significant profit or loss through their work, (17) does the worker provide services simultaneously to multiple companies, (18) does the worker make his/her services available to the general public, (19) can the worker be terminated at any time or is termination dependent upon contract terms, and (20) if the worker is terminated, does the employer risk liability under any contract terms.

In many, if not most, of these instances, the church runs the risk of violating labor laws.  Churches must continue to be creative in finding ways to be more efficient in their operations, but taking shortcuts as described above have led to wage and hour and tax investigations and in having to pay back wages, taxes, and penalties.  Any change in employment practices should be undertaken with an appropriate level of thought and planning.  And, most importantly, whatever is decided should be well documented.

Tags: church, compensation, economy, employee, GuideStar, independent contractor, IRS, labor laws, nonprofit, recession, wage and hour