The Employee Misclassification Hazard for Social Service Organizations

While nonprofit social service organizations may be able to operate outside certain tax functions, such as paying sales tax and property tax, misclassifying employees can land them in the same kind and amount of trouble as for-profit companies.

A new standard of classifying employees has made it more difficult for for-profit and nonprofit organizations alike to justify the classification of being an independent employee as stated on a W2. Misclassifying an employee could bring major fines to a non-profit or even cause someone to spend time in prison for the most egregious of misclassification problems.

Classifying Workers

When it comes to classifying independent contractors who help run a non-profit social services operation, there are several ramifications that come up. There are many differences baked into what constitutes a regular employee compare to a contracted employee, such as the responsibility of wage orders, health care requirements, payroll taxes, social security, workers’ compensation, and more. And while nonprofits, such as social services programs, don’t usually generate a lot of money, they are still under the same laws that govern all employers in the country.

When it comes to non-compliance, this could mean costly penalties including 1.5 percent of the wages, fines for each unfiled W-2 form, and criminal penalties of up to $1,000 per worker.

If an employee at a nonprofit is classified as exempt when they are actually non-exempt, the nonprofit in question would owe the employee reimbursement for overtime and then go on to pay the IRS additional penalties.

What to Do About Classification

Nonprofit social services programs can keep penalties at bay or limited if mistakes are made either on purpose or by accident. First, they can review and update job descriptions to make sure no mistakes are made. If an employee meets or is above the salary threshold they may in fact still be authorized to earn overtime pay.

Next, nonprofits should also provide time records for their categorized non-exempt staff. And finally, investing in specialized social services insurance programs can help to pick up the pieces following a claim. Even if a mistake is made by accident and honestly, dealing with the financial fallout from going through litigation can add up fast. Having social services insurance programs will protect a nonprofit and supply their financial needs for legal representation.

Getting It Right

There is also a myriad of other responsibilities that nonprofits face when they classify an individual correctly. When a nonprofit classifies an employee correctly, the nonprofit is responsible for withholding and managing tax compliance correctly, provide the employee a W-2 form, file all correct payroll and compliance forms, ensuring all payroll and forms conform to regulations, and more.

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