Does a Nonprofit Executive Director or CEO Need an Employment Contract?

I’ve had a very interesting and challenging couple of months this summer!  I supported the board of a mid-sized nonprofit in their efforts to find a new executive director.  I’ll share more about the process, what we learned, where the problems were and how we overcame them in a future blog post.

One of the most challenging parts of this process came right at the end. It involved drafting and negotiating the employment agreement (it is a contract but is usually called an “agreement”) with the successful candidate in the search and selection process.

The big question is “Should an ED/CEO have a contract?” This question applies equally to newly hired EDs and to EDs who’ve had years or decades in their roles.

It appears that the default and long standing answer for most nonprofits has been “no contract required”.  This is because it feels daunting for board volunteers, time consuming, expensive (lawyers are involved) and perhaps even unnecessary (we are a trust-based sector are we not?).

Truth is, the vast majority of long serving EDs have never had a contract and likely feel that it is wholly unnecessary to create one after five, ten or even twenty years. Contracts appear to be more common among very large nonprofits, some of which have a national or international scope.

While “no contract” is the most common practice in the sector, it certainly does not represent best practice ( which is what we are moving toward).  Anecdotal data suggest that new EDs are asking their boards to negotiate a contract.  Some long term EDs are also asking their boards for employment contracts as well.

Contracts for employment should not be confused with “contracted employees”, who may be self-employed, interim, acting or temporary in their roles, and “contractors” who perform specific tasks or complete projects or services.

EDs who have a contract or employment agreement are in fact salaried employees who are entitled to normal employee benefits. The agreement or contract spells the details or conditions of employment including important items such as notice or severance if the ED is dismissed without cause.

Without doubt, to ensure that both the employer and the new ED understands what is being negotiated and agreed to , contracts should be in plain language. However, during my most recent experience, it was not easy to find legal counsel with expertise in employment law who also understood how to craft a plain language contract. It would be folly for anyone without legal expertise to attempt to draft a plain language contract.  I also drew a blank when I contacted several executive directors whom I knew had signed contracts recently – none came close to meeting a plain language expectation.

My advice is pretty simple:

  • To anyone who is considering a new position as a nonprofit ED, ask for an employment agreement and carefully read, seek independent legal counsel and negotiate any clauses to protect your best interests.
  • To any nonprofit board who is hiring a new ED, spend a little money (a decent traditional agreement should cost no more than $1,500.00 to draft) to protect the interests of your organization.
  • To any organization, board of directors and current EDs (regardless of your years’ of service), open a conversation with each other about whether an employment agreement could be mutually beneficial and whether it could prevent misunderstandings or legal issues down the road.

In my next blog, I will share with readers a few of the lessons learned from the ED search and selection process I helped out with this summer. Stay tuned!

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