Is it ethical to hire our executive director on a fee-for-service basis rather than on salary? Does this arrangement help us avoid liabilities such as an unjust dismissal suit if we terminate the individual?

Many organizations do use this method, and sometimes what they do is even legal. Often it is not. Further, if the Canada Revenue Agency reviews the tax return of the executive director, different liabilities may arise.

It is most certainly not ethical to misrepresent the situation to save payroll costs or avoid a lawsuit. If the organization pays someone on a fee-for-service basis, they must treat him or her as a consultant in all ways, and never as an employee.

Before I elaborate on that, let me tell you that I have been a fee-for-service executive director, once, and would never do it again. The original hiring committee of the board understood the legal situation, but the rest of the overly large board never understood at all. They did not comprehend why I had other clients or could not always change my work schedule to meet their needs.

More importantly, the community did not understand. The organization had, like a great many provincial amateur sports governing bodies, been established at the request of government, so they could make grants to umbrella bodies rather than various clubs, regional groups and such. The organizations were formed with a promise of government funding for staff and administrative expenses as well as projects, and about two-thirds of our monies came from an annual provincial grant.

That grantor was quite displeased to find monies they wanted to have spent on payroll going to “a consultant.” I honestly think they would have preferred that we lied in our financial statements! Remember, your members and supporters will learn of the arrangement through the financial statements, if not earlier. That assumes you operate with transparency, a core ethical value for nonprofits.

When one member group wanted a lot of extra services at start-up, mostly to manage a different large government grant, my organization would not free up my time to do that much extra for one member. But since I was part-time, I could offer to work a couple of extra days a month for them and charge my time back to them. Both the member group and their grantor constantly grumbled about paying “a consultant” instead of an employee, despite agreeing in advance in both cases. I was there three years and was repeatedly questioned about my authority, loyalty, and commitment because I was “just a consultant,” not a “real” executive director. My behaviour was that of a senior staff officer throughout.

If you do go ahead, make sure you take great care with the legalities. I am not a lawyer, and recommend you study the CRA’s online guide, Employee or Self-Employed?. This excerpt may help my readers:

“The key determination is whether the two parties intended to enter into a contract of service (employer-employee relationship) or a contract for services (business relationship). The CRA may consider:

• The level of control the payer has over the worker;
• Whether or not the worker provides the tools and equipment;
• Whether the worker can subcontract the work or hire assistants;
• The degree of financial risk taken by the worker;
• The degree of responsibility for investment and management held by the worker;
• The worker’s opportunity for profit; and
• Any other relevant factors, such as written contracts.

Since I was working in an organization when a former employee had his tax return investigated, I can tell you that the CRA also asks about payment of GST and receipt of regular invoices. Also, it is very, very difficult to properly run a business, with multiple clients, while working full-time as a nonprofit executive. The CRA is more likely to find a part-time arrangement believable.

So, is your organization prepared to let the new executive director:

• Be free to work when and for whom he or she chooses (provided there is no direct conflict of interest such as competing for the same funds) and provide his or her services to different payers at the same time (not necessarily giving priority to your organization);
• Refuse work assignments from your organization;
• Sub-contract the work to approved sub-contractors;
• Have enough flexibility in how he or she carries out his or her work to potentially make a profit from working for your organization, and possibly have a loss;
• Charge you significantly more than you would pay an employee, since they must pay their own benefits, cover their business overhead and work without access to such things as EI, Workers’ Compensation and pension;
• Work for you without your expectation of continuity, loyalty, security, subordination or integration in return?

Note that if the CRA finds you to be an employer, you should have withheld taxes. And here is another quote from their site:

“An employer who fails to deduct the required CPP contributions and EI premiums must pay both the employer’s share and the employee’s share of any contributions and premiums owing, plus penalties and interest.”

Trust me, this can add up to quite a bit of cash, since the situation may have gone on for years before the CRA makes a determination. And, of course, if the individual has been terminated by then, they may have an unjust dismissal case! Even without CRA involvement, they can file one, and a court might still rule that you treated them as an employee.

Do you still see the fee-for-service route as a lower risk than a good employment contract and good oversight of the individual? Then be consistent, be mindful of the legalities, and understand that you may be hiring from a different candidate pool.

Since 1992, Jane Garthson has dedicated her consulting and training business to creating better futures for our communities and organizations through values-based leadership. She is a respected international voice on governance, strategic thinking and ethics. Jane can be reached at jane@garthsonleadership.ca.

To submit a dilemma for a future column, or to comment on a previous one, please contact editor@charityvillage.com. For paid professional advice about an urgent or complex situation, contact Jane directly.

Disclaimer: Advice and recommendations are based on limited information provided and should be used as a guideline only. Neither the author nor CharityVillage.com make any warranty, express or implied, or assume any legal liability for accuracy, completeness, or usefulness of any information provided in whole or in part within this article.