Legal Obligations for Hiring an Executive Director of a Nonprofit

Hiring an executive director is an important step for any expanding nonprofit. In addition to practical considerations in finding a good match for your organization, you must also consider the role and duties of the board of directors in selecting an executive director. Additionally, both the federal and state government provide rules on compensation of nonprofit employees.

Before beginning the process of hiring an executive director for your nonprofit, the board should establish a hiring strategy. For a position such as an executive director, it is appropriate for the board of directors to be involved in the decision. However, the board may also decide to create a search committee composed of other volunteers in the organization, or hire a hiring manager to recruit the right person for the organization. The strategy will determined by the preferred time period and resources available to your organization.

Members of the board of directors involved in the hiring process must keep in mind their legal obligations to maintain their duty of loyalty and care to the nonprofit and to avoid conflicts of interest. The board members must always act in the best interest of the nonprofit throughout the hiring process. Further, members must disclose any potential financial conflicts of interest that may arise, such as a family member being considered for the executive director position. Generally speaking, the executive director should not also be a board member, to avoid any appearance of conflicts of interest.

The Internal Revenue Service provides that nonprofits may not pay employees more than "reasonable compensation." To determine a reasonable salary, the board should consider the employee's background and experience, the size of the business, the economic conditions, the amount paid by similar organizations in the same area to executive directors and similar factors. When evaluating compensation, you should also consider other types of compensation, such as contributions to profit-sharing plans, use of the organization's facilities, or rent. Organizations that are recognized by the IRS as 501(c)(3) nonprofits could lose if more than reasonable compensation is paid to to the executive director.

In addition to considerations about reasonable compensation, you must consider state and federal wage and hour considerations when hiring new employees. For example, some nonprofits may attempt to save money by hiring the executive director as an independent contractor instead of an employee, but this is likely in violation of the Federal Fair Labor Standards Act. You should consult your state's wage and hour division to determine if there are requirements for compensation for training, travel time or overtime.