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Risk Alert: Payment of Workers with “Stipends” Creates Risk of Wage and Hour Litigation

6 Mar 2017 1:41 PM | Anonymous

Many nonprofits struggle to meet the needs of their programs with limited funds and look to creative methods to staff operations. Occasionally someone suggests that workers be paid a “stipend,” generally a flat sum of money per week or month, rather than paying workers based on hours worked. However, under federal and some state wage and hour laws, stipends would not be lawful for workers except those lawfully classified as “interns” which we will discuss below. These laws are to protect workers and establish minimum employment standards, including minimum wage and overtime, based on hours worked. Wage and hour laws cannot be waived by any type of agreement with the worker.

Individuals who perform work for nonprofit employers fall into one of four categories of worker: Employee, Independent Contractor, Volunteer or Intern. The only exception is AmeriCorp workers who are subject to a federal law that specifies their compensation structure. When considering whether a particular worker is an “employee,” the legal analysis starts with the presumption that the worker is an employee, and if a worker classification is questioned by any administrative agency, it is the employer’s burden to prove that the worker is appropriately classified otherwise. We know stipends cannot be used for “non-exempt employees” because under the law these employees need to record time, and be paid minimum wage and overtime for each hour worked. Overtime exempt employees have to be paid on a “salary basis” that would likewise prohibit payment by stipends.

Independent contractors” are workers or businesses that are economically independent from the hiring business as they are considered in business for themselves. A number of factors are reviewed by the federal Department of Labor (DOL) to determine if a worker is appropriately classified as an independent contractor under the Fair Labor Standards Act (FLSA). Independent contractors are paid a contractually agreed amount to perform a service or produce a product, preferably pursuant to a written agreement.  These independent businesses thus are paid by contract terms, and not a stipend.

The DOL Wage and Hour Division has recognized that a person may volunteer time to religious, charitable, civic, humanitarian, or similar nonprofit organizations as a public service and not be considered an “employee” covered by the FLSA or wage and hour laws. Such a person volunteers freely for such organizations without compensation or expectation of compensation. For nonprofits engaged in commercial activity that serves the public, such as thrift stores or restaurants, the US Supreme Court has held that such workers must be classified as employees. Because there can be no compensation provided to volunteers, these workers also cannot receive a stipend under the law. While there are DOL opinion letters relating to volunteers receiving stipends, those cases relate to the public sector, not nonprofit volunteerism. Volunteers can however, be reimbursed for expenses, like mileage, protective clothing, or other costs associated with volunteering.  Nonprofits should also be aware that the FLSA prohibits employees from “volunteering” to do their regular job, as this is essentially waiving their rights under the law, which is against public policy.

The last possible classification of a worker is that of “Intern”, typically students receiving educational credits and training, some of it on-the-job. The DOL established a 6-factor test to determine if a worker can appropriately be classified an “intern.”  Since interns are not employees covered by the FLSA, they can be paid a stipend. This is seen in the educational sector with graduate students, or other vocational educational programs. It is important to remember that there are also state laws the govern wage and hour matters, and some states, such as California, have adopted their own test for determining intern status. Thus, if your nonprofit is contemplating classifying a worker as an “intern,” and paying a stipend rather than wages, you must satisfy both the state and federal definition of “intern.”

These rules also apply if a worker is a former client. For instance, house managers or resident managers of nonprofit client living environments who receive free room and board, which can be considered a form of compensation or other monetary remuneration should be classified as “employees” if they perform any work for the nonprofit. While it is possible for former clients to be volunteers, they can only be reimbursed for expenses related to volunteering and not paid additional sums as such payments can jeopardize their status as “volunteers.”

To avoid liability for a wage and hour claim, make sure that all your workers are appropriately classified and paid in accordance with the law.  If you’ve purchased a Directors and Officers (D&O) policy including Employment Practices Liability from the Nonprofits Insurance Alliance Group, your policy carries a defense-only limit of $250,000 for wage and hour claims. Contact your broker if you have any questions about your insurance coverages.

Risk Alerts are provided as a resource to nonprofits insured by the Nonprofits Insurance Alliance Group to help create awareness about possible areas of exposure to their organization.We are a group of insurance cooperatives, insuring 16,000 other 501(c)(3) nonprofit across the country. If you are with a 501(c)(3) nonprofit organization and would like to get a quote for coverage, Get a Quote here!

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