Many nonprofits rely on independent contractors for specialized services, project-based work and temporary staffing. But classifying workers correctly remains one of the most challenging compliance issues organizations face. The U.S. Department of Labor (DOL) continues to reevaluate its approach to worker classification, but one thing hasn’t changed: Misclassifying employees as independent contractors can expose employers to back taxes, wage-and-hour claims, penalties and other costly consequences. Here’s what your nonprofit needs to know.

Principles-based approach

The Fair Labor Standards Act (FLSA) relies on the concept of “economic reality” when determining whether a worker is an employee or an independent contractor. Rather than focusing on a single defining characteristic, the analysis examines the totality of the working relationship to determine whether a worker is economically dependent on the organization or is truly operating an independent business.

Although the DOL adopted a six-factor rule in 2024, the agency has since announced it’s reconsidering the rule and has proposed replacing it with a revised framework. In the meantime, DOL investigators generally apply longstanding economic reality principles while the rulemaking process continues. Regardless of the specific federal standard in effect, your nonprofit should avoid assuming that any single factor automatically determines worker status.

Factors that matter

Whether an individual qualifies as an independent contractor depends on the entire working relationship. Among the considerations that federal regulators and courts commonly evaluate are:

• Whether the worker has a meaningful opportunity to earn profits or incur losses through managerial decisions, rather than simply working more hours,
• Whether the worker makes significant business investments, such as purchasing equipment, maintaining office space or marketing services to multiple clients,
• Whether the relationship is ongoing and exclusive or temporary, project-based or performed for numerous organizations,
• How much control the nonprofit exercises over when, where and how the work is performed, including scheduling, supervision and compensation,
• Whether the services provided are central to the organization’s regular operations or instead represent specialized support performed independently, and
• Whether the worker uses specialized skills together with business initiative to operate an independent enterprise, rather than simply applying technical skills under the nonprofit’s direction.

No one factor outweighs the others. Instead, regulators evaluate all relevant facts to determine whether the worker is truly in business for themselves or is economically dependent on the organization.

Important nuances

Some circumstances that appear to favor employee status may not be determinative. For example, requiring a contractor to follow procedures necessary to comply with federal, state or local laws generally doesn’t, by itself, establish the level of control associated with employment. However, imposing extensive policies that exceed legal requirements may indicate an employment relationship.

Likewise, a temporary or seasonal engagement doesn’t automatically make someone an independent contractor. The key question is why the relationship is temporary. If the arrangement reflects the worker’s independent business decisions and the individual regularly provides similar services to other clients, contractor status may be more appropriate.

Review your relationships now

Worker classification remains an active area of regulatory and legal change. So if your nonprofit engages contractors, you should periodically review those relationships. Don’t base classifications solely on job titles, written agreements or long-standing practices. Instead, evaluate the actual working relationship and seek professional guidance when questions arise.

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