Legal Obligations for Hiring an Executive Director of a Nonprofit

By Elizabeth Rayne

Hiring an executive director is an important step for any expanding nonprofit. In addition to practical considerations in finding a good match for your organization, you must also consider the role and duties of the board of directors in selecting an executive director. Additionally, both the federal and state government provide rules on compensation of nonprofit employees.

Hiring Strategy

Before beginning the process of hiring an executive director for your nonprofit, the board should establish a hiring strategy. For a position such as an executive director, it is appropriate for the board of directors to be involved in the decision. However, the board may also decide to create a search committee composed of other volunteers in the organization, or hire a hiring manager to recruit the right person for the organization. The strategy will determined by the preferred time period and resources available to your organization.

Duties of the Board

Members of the board of directors involved in the hiring process must keep in mind their legal obligations to maintain their duty of loyalty and care to the nonprofit and to avoid conflicts of interest. The board members must always act in the best interest of the nonprofit throughout the hiring process. Further, members must disclose any potential financial conflicts of interest that may arise, such as a family member being considered for the executive director position. Generally speaking, the executive director should not also be a board member, to avoid any appearance of conflicts of interest.

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Reasonable Compensation

The Internal Revenue Service provides that nonprofits may not pay employees more than "reasonable compensation." To determine a reasonable salary, the board should consider the employee's background and experience, the size of the business, the economic conditions, the amount paid by similar organizations in the same area to executive directors and similar factors. When evaluating compensation, you should also consider other types of compensation, such as contributions to profit-sharing plans, use of the organization's facilities, or rent. Organizations that are recognized by the IRS as 501(c)(3) nonprofits could lose if more than reasonable compensation is paid to to the executive director.

Wage and Hour Considerations

In addition to considerations about reasonable compensation, you must consider state and federal wage and hour considerations when hiring new employees. For example, some nonprofits may attempt to save money by hiring the executive director as an independent contractor instead of an employee, but this is likely in violation of the Federal Fair Labor Standards Act. You should consult your state's wage and hour division to determine if there are requirements for compensation for training, travel time or overtime.

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The Role of an Executive Director of a Non-Profit Organization

References

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Non-Profit Bylaws

The bylaws of a non-profit organization guide its directors, officers, and employees on how to conduct themselves and the business of the organization. If the non-profit wants to maintain its tax-exempt standing, these bylaws must be drafted subject to standards established by the tax code and applicable state law. Although bylaws may be amended, it is important that the rules are drafted well to ensure that the non-profit runs smoothly.

Labor Laws: Exempt Vs. Non-Exempt

For employers, the difference between exempt employees and non-exempt employees can mean thousands of dollars in compensation that's overpaid or underpaid, because the exempt employees aren't entitled to overtime while non-exempt employees are. In addition to the effects exempt and non-exempt status have on compensation, distinguishing between the two is essential for employers to construct accurate job descriptions and assign proper duties to employees.

What Are 501(c)4 Organizations?

Under federal tax law, an organization that promotes social welfare, and operates as a non-profit, can identify itself as a 501(c)(4) for tax purposes. The Internal Revenue Service sets the rules and guidelines for these groups, reviewing their statuses from time to time to ensure they are meeting legal requirements.

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