As a new non-profit organization grows and begins to hire employees, nonprofit leaders often have “employment contracts” as a task to accomplish on their long to-do list. This is a natural impulse that comes along with the desire to formalize and professionalize the organization. In most cases of non-executive employees, however, a nonprofit employment contract provides more structure and rigidity than is necessary and could create unwanted legal limitations. There are several other options to explore that provide more flexibility and can protect the organization more broadly if implemented correctly.
When an Employment Contract May be Needed
The organization wants to lock in a key employee.
A primary concept guiding employment law in the United States is at-will employment. This means that either the employee or the employer can terminate the relationship at any time for any reason as long as it is not an illegal reason. It also means that the termination of employment can happen with no notice. This can create anxiety for the board of a nonprofit organization that may rely heavily on key employees like an Executive Director, Director of Operations or Director of Development. An employment contract can include provisions requiring advance notice of resignation, which can give a nonprofit board some comfort in continuity of operations.
The contract can also provide different scenarios based on the reasons for termination. For example, it can provide for immediate termination in the case of fraud or embezzlement by the employee (i.e. termination for “cause.”)
A key employee was promised extra incentives as a recruiting tool.
A sought-after candidate may negotiate for better benefits than are offered to other employees, like extra paid time off or a vehicle allowance. A best practice is to include these benefits in an employment contract with the new employee to minimize confusion and provide a defense against claims of discriminatory treatment from other employees. In addition, nonprofit organizations should be sure to ask their CPA about the tax consequences of certain additional benefits.
The organization wants to place restrictive covenants on a key employee.
Employment contracts can contain provisions like noncompetition agreements and nonsolicitation agreements that prevent former employees from recruiting donors, employees and community partners. With many key employees developing deep relationships with these individuals as part of their work, the organization may want to attempt to protect its connections by limiting the contact an employee can have post-termination. In addition, it is worthwhile to include language protecting the confidentiality of the nonprofit’s information, even though there are already some protections under applicable trade secret law.
While there has been some recent chatter in the news about noncompete agreements due to President Biden’s executive order requesting that the Federal Trade Commission create a rule about non-compete agreements, no such rule exists yet and any rule that is drafted is likely to exclude executive-level employees. From commentary from the administration, it appears that the focus of such a rule will likely be on lower-level, lower-paid employees for whom non-compete agreements are often unwarranted anyway.
Alternative Options to an Employment Contract
Many nonprofit organizations, particularly when they are new, may not yet have an employee handbook in place. Organizations may feel that this is unnecessary or unduly burdensome when they only employ a few employees. An employee handbook is a vital tool for a nonprofit organization and more useful and far-reaching than an employment contract.
While an employment contract only applies to the employee who signs it, an employee handbook applies to all employees, whenever they are hired. It can serve as an important part of the employer’s defense against a claim of discrimination, such as sexual harassment or racial discrimination. Under Arizona law, employers with as few as one employee can be subject to claims of sexual harassment and failing to have a policy in place that prohibits harassment can jeopardize the organization’s ability to defend itself against claims.
Adopting a compliant employee handbook can also provide reminders about important concepts like paid sick leave and overtime rules for operational staff who may not be completely familiar with employment laws. Just as in a sexual harassment situation, having these policies in place can serve as a building block in a defense for an employee’s claim.
Organizations can pair the employee handbook with a strong offer letter for each employee. We previously discussed the distinction between offer letters and employee handbooks in this blog post. While the employee handbook supplies the policy framework for employment, the offer letter gives the specific terms of employment for each employee.
We generally discourage employers from requesting that employees sign their offer letters. Requiring signature can create the mistaken assumption in the employee’s mind that the offer letter is a contract and can undermine the employer’s claim that the employment was at-will. Employers often ask how they can prove that the employee accepted the terms of the offer letter if it isn’t signed. Proof that the letter was sent and that the employee showed up to work on the first day is generally sufficient proof that the employee accepted the terms of the offer letter.
Employment law can be intimidating and nonprofit organizations may attempt to gain certainty through the use of employment contracts, but leaders should be discerning about when it is appropriate to use an employment contract and should ensure that they have the important foundation of an employee handbook and a strong offer letter in place for all employees.
Jen Ward is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Arizona. Jen advises nonprofit and socially responsible businesses on corporate, tax, employment, and fundraising regulations nationwide. To schedule a consultation with Jen, call 602-456-0071 or email us through our contact form.