Can an HOA have employees?
By OurHOA · General information · Revised
Yes. The first hire makes the association an employer: classification, payroll filings, federal unemployment tax despite nonprofit status, and state rules.
Yes, and the real question is what the association becomes when it hires
A community association is almost always a nonprofit corporation, and a nonprofit corporation can hire people. Small self-managed associations do it more often than the industry admits: a groundskeeper who mows the common areas every Thursday, a gate attendant, a summer pool monitor, a part-time on-site manager, occasionally a bookkeeper. Nothing in the governing documents usually forbids it, and nothing about being a nonprofit exempts the association from any of what follows. The moment a person performs services under the association's direction for pay, the association is an employer, and an employer is a regulated thing with registrations, filings and deadlines attached. Boards get into trouble in one of two ways. Either they hire someone and treat the arrangement as a favor between neighbors, paying cash with no paperwork, or they label the person a contractor because the paperwork for a contractor is lighter. Both come apart in the same places: a workplace injury, an unemployment claim filed after the person is let go, or a state agency matching payments against filings. The honest way through is to decide, before the first day of work, which kind of relationship the association actually wants, and then to carry the obligations that belong to it.
Employee or contractor is not a label the board gets to choose
The classification follows the facts of the relationship, not the words on the agreement. The Internal Revenue Service applies a common-law test organized under three headings: behavioral control, meaning whether the payer controls or has the right to control what the worker does and how the work is done; financial control, covering how the worker is paid, whether expenses are reimbursed and who supplies the tools; and the type of relationship, covering written contracts, benefits and how permanent the arrangement is. The agency is explicit that there is no magic or set number of factors that makes a worker an employee or an independent contractor, and that the whole relationship has to be weighed, with attention to the extent of the right to direct and control. When the facts are genuinely unclear, Form SS-8 asks the IRS to make the determination, although the IRS warns the answer can take at least six months. Apply those headings to the association's own facts rather than to a template. A landscaping company that brings its own crew and equipment, serves other communities, bids the job and decides how to do it looks like a contractor. A person the board told to be there at eight on Tuesdays, who uses the association's mower out of the association's shed, who has worked only for this community for three years, looks like an employee whatever the agreement calls them. Our guide on whether an HOA has to send 1099s to its vendors covers the reporting that follows a genuine contractor relationship.
The filings that follow the first hire, including the one nonprofits assume away
Hiring triggers a stack of registrations that arrive all at once. Federally, the association needs an employer identification number if it does not already have one, a Form W-4 from the worker, a Form I-9 verifying work authorization, income tax and FICA withholding deposited on a schedule, and quarterly employment tax returns. New hires also have to be reported to a state directory: under 42 U.S.C. 653a a state sets its own timing but the report must be made no later than 20 days after the date the employer hires the employee, and it carries the employee's name, address and Social Security number, the date services for pay were first performed, and the employer's name, address and identifying number. Then there is the one boards reliably get wrong. Federal unemployment tax, reported on Form 940, applies to an employer that paid $1,500 or more in wages in any calendar quarter, or had one or more employees for at least some part of a day in 20 or more different weeks, at a rate of 6.0 percent on the first $7,000 of each employee's wages with a credit of up to 5.4 percent for state unemployment tax paid. The exemption boards reach for does not fit them: the Form 940 instructions exempt religious, educational, scientific, charitable and other organizations described in section 501(c)(3) and exempt under section 501(a). An association filing Form 1120-H has made an election under section 528 and is not a 501(c)(3) organization, and neither is a 501(c)(4) association. State unemployment insurance registration runs on its own parallel track with its own thresholds.
Workers' compensation is where an unregistered hire actually hurts
Of everything on the list, workers' compensation is the exposure that turns a modest payroll into a serious loss, because it is the one an injury tests immediately and the one a general liability policy is written to exclude. Coverage obligations attach to employers, thresholds vary sharply from state to state, and an association can be pulled in even with no payroll at all when it hires an uninsured contractor whose crew is then treated as the association's responsibility. Our guide on whether an HOA needs workers' compensation insurance works through the state thresholds, the uninsured-contractor trap and where volunteer directors sit. Take one point from it before you hire anyone: get the answer from your insurance agent in writing, naming the specific person and the specific work, before the first day rather than after the first fall. The related trap is compensation creeping toward a volunteer. A stipend to the director who handles the pool chemicals, a monthly payment to the resident who takes the trash bins in, free use of a unit for the person who answers the gate at night. Each of those can convert a volunteer into something a state agency will call a worker, and none of them go through the hiring decision where anybody would have thought about insurance.
The employment laws that reach an association with one or two workers
Most federal employment statutes carry a headcount that a small association will never meet, which leads boards to conclude the area is empty. It is not, because the state layer sits well below the federal one. Title VII defines a covered employer as one with fifteen or more employees for each working day in each of twenty or more calendar weeks in the current or preceding calendar year, and the Family and Medical Leave Act reaches private employers with 50 or more employees in 20 or more workweeks in the current or previous year. An association with a groundskeeper and a pool attendant is outside both. State law is a different matter. California's Fair Employment and Housing Act applies its discrimination and retaliation provisions to employers of five or more employees, but its harassment provisions are prohibited in all workplaces, including those with fewer than five people, and they cover not only employees but applicants, unpaid interns, volunteers and contractors. That combination is worth sitting with, because an association with exactly one paid worker and a rotating cast of volunteers is squarely inside it. Several other states set their discrimination thresholds at one employee. So the practical rule is not that small associations are unregulated, it is that they are regulated by their state rather than by Washington, and the board that looks only at the federal numbers will find the wrong answer. Check your own state's labor department and civil rights agency before you conclude a rule does not apply.
What to settle at the board meeting before anyone starts work
Treat a hire the way you would treat a construction contract, because it is a longer commitment than most of them. Decide it by board motion at an open meeting, not by the president deciding alone, and record the position, the pay, the hours and the budget line in the minutes, since a recurring payroll cost belongs in the budget the owners see. Write a short job description before you interview, because the scope of direction the association intends to exercise is exactly what will determine the classification later. Name one supervisor and put it in writing, because the fastest way to make a working arrangement fail is to have five directors giving a groundskeeper different instructions. Price the real cost honestly: wages plus the employer share of payroll taxes, unemployment tax, workers' compensation premium, and whatever payroll service you use, which for a small association is usually cheaper than a board member doing quarterly returns by hand and far cheaper than filing them late. Decide how overtime will be handled for a job whose hours move with the weather. Keep the employment file separate from the association's official records, because personnel records are usually protected from owner inspection while the association's general records are not, and mixing them creates a problem at the first records request. Finally, compare the whole figure with a contractor bid or a management proposal for the same scope before you commit to being an employer at all.
Sources
- IRS: independent contractor or employee, the common-law behavioral, financial and relationship factors and Form SS-8
- IRS Instructions for Form 940: who must file, the $1,500 quarterly wage and 20-week tests, the 6.0 percent rate on the first $7,000, and the section 501(c)(3) exemption
- 42 U.S.C. 653a: new hire reporting, the 20-day outer deadline and the required data elements
- 42 U.S.C. 2000e(b): the Title VII definition of employer, fifteen or more employees in twenty or more calendar weeks
- U.S. Department of Labor Fact Sheet 28: FMLA coverage at 50 or more employees in 20 or more workweeks and the employee eligibility test
- California Civil Rights Department: FEHA discrimination coverage at five or more employees and harassment prohibited in all workplaces including those with fewer than five
These guides are general education for HOA boards and residents, not legal, tax, or financial advice. Rules vary by state and by your community's governing documents - check with a professional for your situation.