Four Rules for Tax-Exempt Organizations

Rule #1 ' Do Not Pay Volunteers in Cash or in Kind

Reimburse expenses only according to a written “accountable plan.”

Rule #2 ' Have Them Sign a Volunteer Agreement

Among other things, it says that you will not pay them. Other potential provisions discussed herein include waivers of liability and the acknowledgment and acceptance of the nonprofit's workplace, data privacy and other applicable policies.

Rule #3 ' Get Insurance Going Both Ways

Have appropriate volunteer accident and volunteer liability policies, and consider opting into workers' compensation insurance for volunteers, if available.

Rule #4 ' Screen and Supervise

Know who they are, know what they are doing, and provide them with a safe working environment.

Wage and Hour Laws: Characterization As Interns,
Volunteers or Employees

The numbers of unpaid interns are skyrocketing, and the federal Labor Department and California, New York, Oregon and other state regulators have begun
investigations and levied fines against employers with “interns” that they believe should be treated and paid like employees. Recently, two men who worked among dozens of other interns on the movie “Black Swan” filed suit in federal court claiming that the production company had violated minimum wage and overtime laws.

Some questions you may want to ask and answer include: Do you owe your volunteers or interns the minimum wage for their time? Could you be liable for back pay, interest, penalties and damage awards, unpaid taxes, unemployment contributions and possibly face criminal charges for your executives?

Volunteers and interns may want to file for unemployment compensation benefits when they are “released.” They could pursue a wrongful termination suit or seek access to the health and retirement benefits you offer to employees. A volunteer's descendants (i.e., greedy kids) may want to sue for the life insurance benefits you offer to employees.

Volunteers for Nonprofits

To reduce the risk that individuals who volunteer or donate their services to nonprofits become characterized as employees subject to wage and hour laws, federal and California laws appear to require that those individuals serve: 1) freely and not under pressure; 2) without being compensated in cash or in kind (see Rule #1); 3) without anticipation of compensation (see Rule #2); 4) for public service, religious or humanitarian objectives (see Rule #2 again ' this is one of the “other things” that a volunteer agreement could set forth); and 5) not in a commercial enterprise. There are special rules, discussed under “Paid employees who also 'volunteer' for their nonprofit employers” below, that address employees who provide volunteer services to their nonprofit employers.

Federal Law: The Fair Labor Standards Act (FLSA)

The FLSA specifically provides that the “term 'employee' does not include individuals who volunteer their services solely for humanitarian purposes to private non-profit food banks and who receive from the food banks groceries.” Note that the FLSA would need to apply in the first place. The law generally applies to individuals and enterprises engaged in a business activity connected to interstate commerce. However, its coverage is quite broad and it appears somewhat rare for the law not to apply.

While this exception is quite narrow, the Supreme Court has stated that the FLSA was not intended “to stamp all persons as employees who without any express or implied compensation agreement might work for their own advantage on the premises of another.” (Walling v. Portland Terminal Co., 330 U.S. 148 (1947).) The U.S. Department of Labor (DOL), in administering the FLSA, has provided that it “follows this judicial guidance in the case of individuals serving as unpaid volunteers in various community services. Individuals who volunteer or donate their services, usually on a part-time basis, for public service, religious or humanitarian objectives, not as employees and without contemplation of pay, are not considered employees of the religious, charitable or similar non-profit organizations that receive their service.”

In short, the DOL “recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation for religious, charitable, civic, or humanitarian purposes to non-profit organizations.” (U.S. Department of Labor, Wage and Hour Division, Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act (April 2010), or the Fact Sheet.) “For example, members of civic organizations may help out in a sheltered workshop; men's or women's organizations may send members or students into hospitals or nursing homes to provide certain personal services for the sick or elderly; parents may assist in a school library or cafeteria as a public duty to maintain effective services for their children or they may volunteer to drive a school bus to carry a football team or school band on a trip. Similarly, an individual may volunteer to perform such tasks as driving vehicles or folding bandages for the Red Cross, working with disabled children or disadvantaged youth, helping in youth programs as camp counselors, scoutmasters, den mothers, providing child care assistance for needy working mothers, soliciting contributions or participating in benefit programs for such organizations and volunteering other services needed to carry out their charitable, educational, or religious programs.” (U.S. Dept. of Labor, elaws Advisors, Fair Labor Standards Act Advisor, Volunteers, available at www.dol.gov/elaws/esa/flsa/docs/volunteers.asp.)

Note that different rules apply to individuals volunteering for public agencies, and for students volunteering to do certain work for the school they attend or participating in certain activities as part of the overall educational program, including activities in connection with student publications, radio stations, athletics, etc.

It is not enough that volunteers consider themselves as such. The U.S. Supreme Court has found that individuals who received food, clothing and shelter (but no money) from the nonprofit they worked for were not volunteers, regardless of their emphatic declarations that they were.

California Law

The California Labor Code defines “volunteer” as “an individual who performs work for civic, charitable, or humanitarian reasons for a public agency or corporation qualified under Section 501(c)(3) of the Internal Revenue Code as a tax-exempt organization, without promise, expectation, or receipt of any compensation for work performed.” “An individual shall be considered a volunteer only when his or her services are offered freely and without pressure and coercion, direct or implied, from an employer.” “An individual may receive reasonable meals, lodging, transportation, and incidental expenses or nominal nonmonetary awards without losing volunteer status if, in the entire context of the situation, those benefits and payments are not a substitute form of compensation for work performed.” See Rule #1 and Rule #2.

A letter issued by the Legal Section of the California Division of Labor Standards Enforcement (DLSE) indicates that “[i]n determining whether one is a volunteer or an employee, the [DLSE] takes the position that the intent of the parties is the controlling factor. If the person intends to volunteer his or her services for public service, religious, or humanitarian objectives, not as an employee and without contemplation of pay, the individual is not an employee of the religious, charitable, or similar nonprofit corporation which receives the services.”

The letter further provides that “when religious, charitable or nonprofit organizations operate commercial enterprises which serve the general public, such as restaurants or thrift stores, or when they contract to provide personal services to businesses ' volunteers may not be utilized.” “If the person performing the service is an employee, that person must be paid pursuant to the [Industrial Welfare Commission, or IWC] Orders. If the person is truly a volunteer, with no expectation of any pay, and is not performing services of a commercial nature, the person is not covered by the IWC Orders.”

Interns

To avoid employee status, interns generally must be engaged primarily for educational purposes, rather than to assist the company they are interning for. While the definition of “intern” is quite narrow in a commercial context, unpaid internships (see Rule #1) for nonprofit charitable organizations, where the intern volunteers without expectation of compensation (see Rule #2), are generally not treated as employees. Nonetheless, to ensure that interns are treated as such, nonprofits should understand the applicable federal and state tests for interns generally, especially if it is at all unclear whether the intern meets the above-mentioned preferential rule for nonprofit charitable organizations.

Federal Law

With respect to whether interns must be paid the minimum wage and overtime for their services to private sector employers, the FLSA defines the term “employ” very broadly as including to “suffer or permit to work.” However, the Fact Sheet provides that “[u]npaid internships in the public sector and for non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible. [The DOL's Wage and Hour Division] is reviewing the need for additional guidance on internships in the public and non-profit sectors.” Without such additional guidance, it can be difficult to rely on the preferential rule in certain situations. As a result, nonprofits should understand the applicable tests for interns generally, and may wish to seek to meet the established criteria.

Generally, the DOL requires that all six of the following criteria be satisfied for an individual to be deemed an “intern” and not an employee under the FLSA.

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment;
3. The internship experience is for the benefit of the intern;
4. The intern does not displace regular employees, but works under close supervision of existing staff (see Rule #4);
5. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
6. The intern is not necessarily entitled to a job at the conclusion of the internship, and the Fact Sheet indicates that the “internship should be of a fixed duration, established prior to the outset of the internship” (see Rule #2 ' one of the “other things” an internship agreement could cover); and
7. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship (see Rule #1 and Rule #2).

California Law

In a 2010 Opinion Letter, California's Division of Labor Standards Enforcement, “in view of the similar purposes for the State and Federal minimum wage law generally,” found it “reasonable to look to federal interpretations as guidance for purposes of enforcing the State's minimum wage and overtime provisions where there is no inconsistency.”

“In the past, DLSE has articulated an '11-factor test' which consisted of the six factors from DOL's criteria interpreting federal law, plus five additional factors ' ” However, the additional factors “ do not appear to be based upon any source statute or regulation from which they derive nor are the additional factors identified with specific case law.”

As a result, it appears that California's DLSE now adheres to DOL's six-factor test for determining whether interns must be treated as employees subject to California's wage and hour laws. Nevertheless, it seems prudent for the internship period to be fairly short, such as a maximum of three to six months; interns should not displace employees or substitute for them; and the hiring of interns as employees should not be overdone.

Paid Employees Who Also 'Volunteer' for Their
Nonprofit Employers

Federal Rules

According to Labor's Field Operations Handbook, although volunteer services to nonprofits that meet the federal criteria described above “are not considered to create an employment relationship, the organizations for which they are performed will generally also have employees performing compensated service whose employment is subject to the standards of the [FLSA]. Where such an employment relationship exists, the [FLSA] requires payment of not less than the statutory wages for all hours worked in the [workweek].” Generally, those regular employees of a charitable organization must be compensated pursuant to the FLSA and cannot “volunteer” services on an uncompensated basis to handle his or her usual tasks.

“However, there are certain circumstances where such an employee may donate services as a volunteer, and the time so spent is not considered to be compensable 'work'.” One example provided is where an office employee of a hospital volunteers to sit with a patient during off-duty hours as an act of charity. Another example is where an office employee of a church volunteers to perform non-clerical services in the church preschool during off-duty hours as an act of charity.

Pledge drives are one situation where volunteers are often utilized. The Field Operations Handbook warns that “this [exception] does not mean that a regular office employee of a charitable organization can volunteer services on an uncompensated basis to handle correspondence in connection with a special fund drive or to handle other work arising from the exigencies of the operations conducted by the employer.”

California Rules

In a 1998 Opinion Letter, with respect to employees of nonprofits who also volunteer for the nonprofit, California's DLSE takes the position that the intent of the parties is the controlling factor:

In certain circumstances, a regular employee of a religious, charitable, or nonprofit organization may donate services as a volunteer. However, these may not be the usual services of that employee's job.

However, when religious, charitable or nonprofit organizations operate commercial enterprises which serve the general public, such as restaurants or thrift stores, or when they contract to provide personal services to businesses, such enterprises are subject to the Industrial Welfare Commission Orders and volunteers may not be utilized.

If the person performing the service is an employee, that person must be paid pursuant to the IWC Orders. If the person is truly a volunteer, with no expectation of any pay, and is not performing services of a commercial nature, the person is not covered by the IWC Orders.

As you will note, except for the occasional situation where a bona fide employee volunteers services of a humanitarian or religious nature, the term “employee” and “volunteer” are at odds with each other since there is no expectation of payment by a volunteer.

Similar to the federal rules, it appears that the employee may not volunteer to perform his or her usual services, and volunteered services generally must be of a humanitarian or religious nature.

Follow the Four Rules

The use of volunteers and interns by nonprofits comes with legal risks that may be reduced by following the four basic rules stated above.

Part Two of this article focuses on injuries to volunteers, injuries caused by volunteers, and reimbursing the expenses of volunteers. It will provide further background and explanations of these four rules, with the goal of minimizing the legal risks associated with the use of volunteers by nonprofits.

Ofer Lion is a tax-exempt organizations attorney in the Los Angeles office of Mitchell Silberberg & Knupp LLP. He has served as an adjunct professor at the UCLA School of Law, teaching a course in tax-exempt organizations. He can be reached at [email protected]. The author thanks Steven Schneider for his helpful comments to an earlier draft of this article, which represents the views of the author only, and does not necessarily represent the views of Mitchell Silberberg & Knupp LLP. Phone: 310-312-3237.

The use of volunteers and interns by nonprofits comes with legal risks, particularly from potentially applicable wage and hour laws and from harms caused by or happened upon the volunteers and interns, risks which may be reduced by following four basic rules. Those nonprofits fortunate enough to have people willing to serve without compensation should consider carefully the possible legal implications. This article discusses both federal and California state law.

Part One herein focuses on wage and hour laws. The forthcoming Part Two focuses on injuries to volunteers, injuries caused by volunteers, and reimbursing the expenses of volunteers.

The Rules

Rule #1 ' Do Not Pay Volunteers in Cash or in Kind

Reimburse expenses only according to a written “accountable plan.”

Rule #2 ' Have Them Sign a Volunteer Agreement

Among other things, it says that you will not pay them. Other potential provisions discussed herein include waivers of liability and the acknowledgment and acceptance of the nonprofit's workplace, data privacy and other applicable policies.

Rule #3 ' Get Insurance Going Both Ways

Have appropriate volunteer accident and volunteer liability policies, and consider opting into workers' compensation insurance for volunteers, if available.

Rule #4 ' Screen and Supervise

Know who they are, know what they are doing, and provide them with a safe working environment.

Wage and Hour Laws: Characterization As Interns,
Volunteers or Employees

The numbers of unpaid interns are skyrocketing, and the federal Labor Department and California, New York, Oregon and other state regulators have begun
investigations and levied fines against employers with “interns” that they believe should be treated and paid like employees. Recently, two men who worked among dozens of other interns on the movie “Black Swan” filed suit in federal court claiming that the production company had violated minimum wage and overtime laws.

Some questions you may want to ask and answer include: Do you owe your volunteers or interns the minimum wage for their time? Could you be liable for back pay, interest, penalties and damage awards, unpaid taxes, unemployment contributions and possibly face criminal charges for your executives?

Volunteers and interns may want to file for unemployment compensation benefits when they are “released.” They could pursue a wrongful termination suit or seek access to the health and retirement benefits you offer to employees. A volunteer's descendants (i.e., greedy kids) may want to sue for the life insurance benefits you offer to employees.

Volunteers for Nonprofits

To reduce the risk that individuals who volunteer or donate their services to nonprofits become characterized as employees subject to wage and hour laws, federal and California laws appear to require that those individuals serve: 1) freely and not under pressure; 2) without being compensated in cash or in kind (see Rule #1); 3) without anticipation of compensation (see Rule #2); 4) for public service, religious or humanitarian objectives (see Rule #2 again ' this is one of the “other things” that a volunteer agreement could set forth); and 5) not in a commercial enterprise. There are special rules, discussed under “Paid employees who also 'volunteer' for their nonprofit employers” below, that address employees who provide volunteer services to their nonprofit employers.

Federal Law: The Fair Labor Standards Act (FLSA)

The FLSA specifically provides that the “term 'employee' does not include individuals who volunteer their services solely for humanitarian purposes to private non-profit food banks and who receive from the food banks groceries.” Note that the FLSA would need to apply in the first place. The law generally applies to individuals and enterprises engaged in a business activity connected to interstate commerce. However, its coverage is quite broad and it appears somewhat rare for the law not to apply.

While this exception is quite narrow, the Supreme Court has stated that the FLSA was not intended “to stamp all persons as employees who without any express or implied compensation agreement might work for their own advantage on the premises of another.” ( Walling v. Portland Terminal Co. , 330 U.S. 148 (1947).) The U.S. Department of Labor (DOL), in administering the FLSA, has provided that it “follows this judicial guidance in the case of individuals serving as unpaid volunteers in various community services. Individuals who volunteer or donate their services, usually on a part-time basis, for public service, religious or humanitarian objectives, not as employees and without contemplation of pay, are not considered employees of the religious, charitable or similar non-profit organizations that receive their service.”

In short, the DOL “recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation for religious, charitable, civic, or humanitarian purposes to non-profit organizations.” (U.S. Department of Labor, Wage and Hour Division, Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act (April 2010), or the Fact Sheet.) “For example, members of civic organizations may help out in a sheltered workshop; men's or women's organizations may send members or students into hospitals or nursing homes to provide certain personal services for the sick or elderly; parents may assist in a school library or cafeteria as a public duty to maintain effective services for their children or they may volunteer to drive a school bus to carry a football team or school band on a trip. Similarly, an individual may volunteer to perform such tasks as driving vehicles or folding bandages for the Red Cross, working with disabled children or disadvantaged youth, helping in youth programs as camp counselors, scoutmasters, den mothers, providing child care assistance for needy working mothers, soliciting contributions or participating in benefit programs for such organizations and volunteering other services needed to carry out their charitable, educational, or religious programs.” (U.S. Dept. of Labor, elaws Advisors, Fair Labor Standards Act Advisor, Volunteers, available at www.dol.gov/elaws/esa/flsa/docs/volunteers.asp.)

Note that different rules apply to individuals volunteering for public agencies, and for students volunteering to do certain work for the school they attend or participating in certain activities as part of the overall educational program, including activities in connection with student publications, radio stations, athletics, etc.

It is not enough that volunteers consider themselves as such. The U.S. Supreme Court has found that individuals who received food, clothing and shelter (but no money) from the nonprofit they worked for were not volunteers, regardless of their emphatic declarations that they were.

California Law

The California Labor Code defines “volunteer” as “an individual who performs work for civic, charitable, or humanitarian reasons for a public agency or corporation qualified under Section 501(c)(3) of the Internal Revenue Code as a tax-exempt organization, without promise, expectation, or receipt of any compensation for work performed.” “An individual shall be considered a volunteer only when his or her services are offered freely and without pressure and coercion, direct or implied, from an employer.” “An individual may receive reasonable meals, lodging, transportation, and incidental expenses or nominal nonmonetary awards without losing volunteer status if, in the entire context of the situation, those benefits and payments are not a substitute form of compensation for work performed.” See Rule #1 and Rule #2.

A letter issued by the Legal Section of the California Division of Labor Standards Enforcement (DLSE) indicates that “[i]n determining whether one is a volunteer or an employee, the [DLSE] takes the position that the intent of the parties is the controlling factor. If the person intends to volunteer his or her services for public service, religious, or humanitarian objectives, not as an employee and without contemplation of pay, the individual is not an employee of the religious, charitable, or similar nonprofit corporation which receives the services.”

The letter further provides that “when religious, charitable or nonprofit organizations operate commercial enterprises which serve the general public, such as restaurants or thrift stores, or when they contract to provide personal services to businesses ' volunteers may not be utilized.” “If the person performing the service is an employee, that person must be paid pursuant to the [Industrial Welfare Commission, or IWC] Orders. If the person is truly a volunteer, with no expectation of any pay, and is not performing services of a commercial nature, the person is not covered by the IWC Orders.”

Interns

To avoid employee status, interns generally must be engaged primarily for educational purposes, rather than to assist the company they are interning for. While the definition of “intern” is quite narrow in a commercial context, unpaid internships (see Rule #1) for nonprofit charitable organizations, where the intern volunteers without expectation of compensation (see Rule #2), are generally not treated as employees. Nonetheless, to ensure that interns are treated as such, nonprofits should understand the applicable federal and state tests for interns generally, especially if it is at all unclear whether the intern meets the above-mentioned preferential rule for nonprofit charitable organizations.

Federal Law

With respect to whether interns must be paid the minimum wage and overtime for their services to private sector employers, the FLSA defines the term “employ” very broadly as including to “suffer or permit to work.” However, the Fact Sheet provides that “[u]npaid internships in the public sector and for non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible. [The DOL's Wage and Hour Division] is reviewing the need for additional guidance on internships in the public and non-profit sectors.” Without such additional guidance, it can be difficult to rely on the preferential rule in certain situations. As a result, nonprofits should understand the applicable tests for interns generally, and may wish to seek to meet the established criteria.

Generally, the DOL requires that all six of the following criteria be satisfied for an individual to be deemed an “intern” and not an employee under the FLSA.

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment;
3. The internship experience is for the benefit of the intern;
4. The intern does not displace regular employees, but works under close supervision of existing staff (see Rule #4);
5. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
6. The intern is not necessarily entitled to a job at the conclusion of the internship, and the Fact Sheet indicates that the “internship should be of a fixed duration, established prior to the outset of the internship” (see Rule #2 ' one of the “other things” an internship agreement could cover); and
7. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship (see Rule #1 and Rule #2).

California Law

In a 2010 Opinion Letter, California's Division of Labor Standards Enforcement, “in view of the similar purposes for the State and Federal minimum wage law generally,” found it “reasonable to look to federal interpretations as guidance for purposes of enforcing the State's minimum wage and overtime provisions where there is no inconsistency.”

“In the past, DLSE has articulated an '11-factor test' which consisted of the six factors from DOL's criteria interpreting federal law, plus five additional factors ' ” However, the additional factors “ do not appear to be based upon any source statute or regulation from which they derive nor are the additional factors identified with specific case law.”

As a result, it appears that California's DLSE now adheres to DOL's six-factor test for determining whether interns must be treated as employees subject to California's wage and hour laws. Nevertheless, it seems prudent for the internship period to be fairly short, such as a maximum of three to six months; interns should not displace employees or substitute for them; and the hiring of interns as employees should not be overdone.

Paid Employees Who Also 'Volunteer' for Their
Nonprofit Employers

Federal Rules

According to Labor's Field Operations Handbook, although volunteer services to nonprofits that meet the federal criteria described above “are not considered to create an employment relationship, the organizations for which they are performed will generally also have employees performing compensated service whose employment is subject to the standards of the [FLSA]. Where such an employment relationship exists, the [FLSA] requires payment of not less than the statutory wages for all hours worked in the [workweek].” Generally, those regular employees of a charitable organization must be compensated pursuant to the FLSA and cannot “volunteer” services on an uncompensated basis to handle his or her usual tasks.

“However, there are certain circumstances where such an employee may donate services as a volunteer, and the time so spent is not considered to be compensable 'work'.” One example provided is where an office employee of a hospital volunteers to sit with a patient during off-duty hours as an act of charity. Another example is where an office employee of a church volunteers to perform non-clerical services in the church preschool during off-duty hours as an act of charity.

Pledge drives are one situation where volunteers are often utilized. The Field Operations Handbook warns that “this [exception] does not mean that a regular office employee of a charitable organization can volunteer services on an uncompensated basis to handle correspondence in connection with a special fund drive or to handle other work arising from the exigencies of the operations conducted by the employer.”

California Rules

In a 1998 Opinion Letter, with respect to employees of nonprofits who also volunteer for the nonprofit, California's DLSE takes the position that the intent of the parties is the controlling factor:

In certain circumstances, a regular employee of a religious, charitable, or nonprofit organization may donate services as a volunteer. However, these may not be the usual services of that employee's job.

However, when religious, charitable or nonprofit organizations operate commercial enterprises which serve the general public, such as restaurants or thrift stores, or when they contract to provide personal services to businesses, such enterprises are subject to the Industrial Welfare Commission Orders and volunteers may not be utilized.

If the person performing the service is an employee, that person must be paid pursuant to the IWC Orders. If the person is truly a volunteer, with no expectation of any pay, and is not performing services of a commercial nature, the person is not covered by the IWC Orders.

As you will note, except for the occasional situation where a bona fide employee volunteers services of a humanitarian or religious nature, the term “employee” and “volunteer” are at odds with each other since there is no expectation of payment by a volunteer.

Similar to the federal rules, it appears that the employee may not volunteer to perform his or her usual services, and volunteered services generally must be of a humanitarian or religious nature.

Follow the Four Rules

The use of volunteers and interns by nonprofits comes with legal risks that may be reduced by following the four basic rules stated above.

Part Two of this article focuses on injuries to volunteers, injuries caused by volunteers, and reimbursing the expenses of volunteers. It will provide further background and explanations of these four rules, with the goal of minimizing the legal risks associated with the use of volunteers by nonprofits.

Ofer Lion is a tax-exempt organizations attorney in the Los Angeles office of Mitchell Silberberg & Knupp LLP. He has served as an adjunct professor at the UCLA School of Law, teaching a course in tax-exempt organizations. He can be reached at [email protected]. The author thanks Steven Schneider for his helpful comments to an earlier draft of this article, which represents the views of the author only, and does not necessarily represent the views of Mitchell Silberberg & Knupp LLP. Phone: 310-312-3237.