Are Board Members Independent Contractors

Many people assume that board members are paid employees of a non-profit or for-profit company, but this is not true. Decades ago, it was considered common for board members to receive a pension and other benefits typically associated with employees, but times have changed. The treatment of board members as employees is now considered a conflict of interest. The abolition of independent sourcing as we know it in California by AB 5 will have significant legal consequences for companies operating in California. While we believe board members will miss its reach, companies with advisory boards should proceed with caution. If a not-for-profit or for-profit organization pays a board member more than $600 in fees in a given year, it must file Form 1099 with the Internal Revenue Service because the board members are acting as independent contractors. In fact, a little-discussed provision of AB 5 that adds Section 2750.3 to the California Labor Code provides the unique legal status for board members by stating that despite the introduction of the ABC test to determine employee status, the existing split in the Uid Insurance Act will be preserved. Since Article 622 of the Labour Code expressly provides that a company manager is not an “employee” of the company, AB 5 retains this legal status. Unlike directors, board members should not breathe a sigh of relief so quickly.

Board advisors, such as board directors, are typically industry experts who equip companies with unique talents and skills to enhance the company`s mission, whether it`s product development, business area expansion, or other much-needed business advice. However, article 622 of the Unemployment Insurance Code does not deal with the classification of the employment of the members of the advisory council. Therefore, despite the similarities with board members, advisory board members must separately qualify as independent contractors under AB 5`s ABC test if the company compensates them. The structure of the Board of Directors consists of the President, Vice-President, Secretary, Treasurer and specialized headquarters composed of experts in areas such as law, marketing or customer service. Typically, job descriptions are provided to candidates and current board members, outlining their role on the board, the number of hours per month they must attend, and the meetings they must attend. In nonprofits, it is common for board members to give or give a certain amount of money per year to retain their seats. Misclassification of workers is one of the most common mistakes made by nonprofits, resulting in IRS penalties and, more commonly, violations of federal and state wage and labor laws that result in payment arrears and associated penalties. In recent years, the IRS has strengthened the enforcement of employee classification, creating a compelling reason for nonprofits to reconsider whether workers are properly classified as employees and independent contractors, as well as exempt or non-exempt workers.

The basis of the policy, which allows for tax exemption for public charities, is that the funds raised are used for “exclusively non-profit and educational purposes.” The IRS wants to ensure that none of the tax-exempt dollars collected by the nonprofit will benefit the directors. The prohibition of private profit distracts us from hiring “interested persons” to provide services for a fee. That said, it is possible to resolve the obvious conflict of interest you describe by following the conflict of interest policy adopted by your board of directors. In most cases, it is not illegal for an organization to do business with an insider. The fact that there is a conflict does not necessarily mean that the organization should not proceed with a particular action or transaction. In these circumstances, it is rather important to ensure that these transactions are reviewed to determine whether the action or transaction is in the best interest of the organization. In general, a conflict policy uses a combination of “disclosure” and “independent review and approval” to assess potential conflicts. Also keep in mind that even if your organization correctly follows your conflict of interest policy, contracting with a board member can raise issues in the community. In general, if you don`t want to read about it in the newspaper, don`t do it.

The Board of Directors meets regularly to review the organization`s finances, monitor the PERFORMANCE OF THE CEO, determine budgeting needs, and organize programs. Specialized committees hold additional meetings outside of the general meetings of the board of directors to meet needs such as budgeting, taxes, fundraising, investments, etc. The Board has policies and procedures in place for the regular rotation of members to and from Board seats, as well as for the hiring of a new CEO if necessary. When deciding to “hire” a board member to provide a service for a fee, the board should be guided by the following question: What is in the best interest of the organization? We have also seen this “tax identity” issue arise because a number of special districts offer tax-free health insurance to their board members while treating them as independent contractors for withholding tax purposes. As we have already explained, only regular employees of an employer are entitled to tax-exempt social benefits such as health insurance and life insurance. An independent contractor is not eligible to participate in another employer`s group health care plan in most cases. .