When affiliated nonprofits work closely together, it is often cost effective to consider sharing employees. When structuring employee sharing arrangements, it is important to carefully consider and document how costs will be allocated between the organization. Common employee sharing arrangements include employee leasing and employee loan arrangements.
It is common for one entity to serve as the employer of record and to lease employees to its affiliate. Charges for shared employees must be at arm’s length based on reimbursement of each entity’s allocable share of actual salaries and benefits. This type of reimbursement arrangement generally results in lower payroll taxes than having each employee employed part-time by two separate employers.
It is critical for shared employees to keep detailed, contemporaneous time records of their work for each corporation to substantiate the allocation of costs. If possible, shared employees should be paid at the identical rate when working for each entity. This negates any perception that one entity is subsidizing the other which would indicate the relationship is not arm’s length and can create tax violations depending on the entities’ tax status. Finally, employees may participate in the same health and benefits plans if the costs borne by each affiliate are proportionate to the respective time worked for each affiliate.
Where one affiliate is well established and the other is just getting started, affiliates may engage in an employee loan arrangement. In this scenario, the more established affiliate may choose to “loan” certain employees to its affiliate. An employee loan is just an agreement to permit an employee to work on behalf of the affiliate, free of charge, for a portion of their time. It amounts to an in-kind donation from one affiliate to another. Employee sharing arrangements are often structured as loans when a more established organization is incubating a new affiliated entity. By way of example, a trade association that forms a related charity may want to loan a portion of its staff’s time to the new entity until it can afford staff. Sometimes an employee loan can transition into an employee lease when it becomes financially feasible.
When considering employee loans, be sure to consider tax status. For example, a charitable organization cannot lend its employees to a related for-profit as that would result in an excess benefit and private inurement. Generally, charitable organizations should only extend resources without charge to other charitable organizations pursuing programs that further the charity’s tax-exempt purpose.
Compensation from affiliated organizations must be reported on the Form 990 when the total compensation paid by related organizations to the employee exceeds $10,000. A related organization is any entity that owns or controls, or is owned or controlled (directly or indirectly), by the filing organization, or that supports or is supported by the filing organization. A 50 percent test is used for ownership or control. In determining “control,” the rules look at commonality of officers, directors, trustees, and key employees, as well as the power to appoint them.
Employee sharing can be a cost effective way for affiliated or collaborating organizations to reduce cost and increase capacity. Regardless of what form an employee sharing arrangement takes, it should be carefully negotiated and documented taking tax status limitations into consideration.