Does a Tennessee nonprofit have to count unpaid volunteer board members or officers toward the four-employee threshold that triggers unemployment insurance premiums?

Subject

Opinion No. 13-13, Unemployment Compensation Premiums for Not-for-Profit Corporations, February 20, 2013

Plain-English summary

A state senator asked whether unpaid officers of a Tennessee nonprofit corporation count toward the four-employee threshold that triggers unemployment compensation premiums under Tenn. Code Ann. § 50-7-207(b)(4)(B). At first read, the statute creates a puzzle. It defines "employment" to include "any officer of a corporation" without distinguishing between paid and volunteer officers. Taken literally, that would sweep every nonprofit's board members into the headcount.

The AG concluded that's not how the statute should be read. Tenn. Code Ann. § 50-7-104(b) requires that Tennessee's unemployment compensation statute be interpreted "in pari materia" with the Federal Unemployment Tax Act, the Federal Social Security Act, and other related federal law. The Federal Insurance Contributions Act and Federal Unemployment Tax Act define "employee" using the same "any officer of a corporation" phrase, but Treasury regulations and federal case law have long carved out unpaid officers performing only nominal duties. Under 26 C.F.R. § 31.3121(d)-1(b), "an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation."

The leading case the AG relied on, United States v. Bernstein (4th Cir. 1949), reasoned that the federal payroll tax was measured by total wages paid. If no wages are paid, no tax is due. So Congress could not have intended an unpaid officer to bump a small employer up into the taxed class while simultaneously not counting that officer in the tax base. Bernstein concluded that unpaid officers were not "employees" within the Social Security Act and emphasized "[w]e do not think [the Social Security Act] was intended to include an officer who received no compensation for his services."

Tennessee's framework runs the same way. Tenn. Code Ann. § 50-7-402 measures the unemployment compensation premium by total wages paid. An unpaid officer doesn't add to the wage base, so counting that officer to push a nonprofit over the four-employee threshold creates the same internal inconsistency the Bernstein court rejected.

The AG also looked at Elgin v. Bryant (Tenn. 1944), the only Tennessee case directly on point under an earlier version of the statute, which excluded an unpaid officer with only nominal duties. The exact scenario of an unpaid officer who performs significant duties beyond the nominal had not been addressed by a Tennessee court, and the AG declined to resolve that edge case definitively. The general principle the opinion endorsed was that uncompensated officers should not be counted.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Tennessee's unemployment compensation statute has been amended in multiple ways since 2013, and the federal regulations and case law on classification continue to evolve. A nonprofit's current employer-status determination should be made under the current Tennessee Department of Labor rules and consulting current federal classification guidance.

Background and statutory framework

Tennessee's unemployment compensation statute targets two related questions for nonprofits: whether the nonprofit is a covered employer at all, and how much it has to pay. The "four or more individuals in employment" threshold in Tenn. Code Ann. § 50-7-207(b)(4)(B) controls the coverage question. The "employment" definition in Tenn. Code Ann. § 50-7-207(b)(2)(A) supplies the headcount measure.

The headcount measure includes "any officer of a corporation," and the literal text doesn't carve out volunteers. But § 50-7-104(b) directs Tennessee courts and agencies to read the chapter in pari materia with the FUTA and Social Security Act. Treasury's interpretation of the parallel federal language has long carved out uncompensated officers who perform no or only minor services. The carveout reflects a structural feature of payroll-based taxes: if the tax is measured by wages and no wages are paid, there's no tax base. Counting the uncompensated officer to push the employer into the covered class produces a strange result, an obligation that has no actual measure.

Elgin v. Bryant, the 1944 Tennessee Supreme Court case, applied that same intuition under an earlier version of the unemployment statute. The court excluded an unpaid corporate officer with only "nominal duties" from the employee count, noting that "the act only applies to and covers individuals who are in employment for wages." The AG read that as consistent with the federal in pari materia framework.

The AG explicitly noted what the opinion did not decide. The "precise issue" of how to treat an unpaid officer who performs more than minimal duties had not been directly addressed by a Tennessee court. The AG didn't propose a bright-line test, but the opinion's overall reasoning suggested that the absence of compensation matters more than the level of duties, since the unemployment statute's structure is anchored to wages.

Common questions

Does this mean a Tennessee nonprofit with three paid employees and several volunteer board members is uncovered?

In the AG's reading, yes, assuming the board members are uncompensated. The four-employee threshold for nonprofit coverage in § 50-7-207(b)(4)(B) measures individuals "in employment." Uncompensated officers don't count in the AG's view, so a nonprofit with three paid workers and an unpaid volunteer board would fall below the threshold.

What if the nonprofit pays the board members a small stipend?

The opinion was specifically about officers "who receive no compensation." A small stipend (even a per-meeting honorarium) would put the officer on the paid side of the line. Whether that nominal compensation makes the officer an "employee" for unemployment purposes would depend on the specific facts and the application of federal classification principles.

What about the executive director who serves as an officer of the board?

That's a different fact pattern, because an executive director who serves "ex officio" on a board is typically a paid employee with operational duties. The AG's opinion is about volunteer officers who perform only minimal duties without compensation. A paid executive director counts as an employee regardless of whether they're listed as a corporate officer.

Does this analysis apply to for-profit corporations too?

The opinion is about nonprofit coverage under § 50-7-207(b)(4)(B). The same statutory definition of "employment" applies to for-profit corporations, but for-profit corporations have a different coverage threshold under different subsections. The opinion's reasoning, that uncompensated officers don't count because the tax is wage-based, would likely apply equally to for-profit corporations, but the AG didn't directly address that question.

Is this binding on the Tennessee Department of Labor?

AG opinions are persuasive, not binding. A nonprofit relying on this opinion to argue non-coverage would want to confirm the current Department of Labor position and any current administrative rules. The federal Treasury regulations and federal case law cited in the opinion are independent authority.

What about the federal unemployment tax?

The federal Treasury regulation at 26 C.F.R. § 31.3121(d)-1(b) excludes uncompensated officers performing no or minor services from FICA "employee" status. Bernstein and the other federal cases extend the same approach to FUTA. So a nonprofit whose only "officers" beyond a small group of paid staff are volunteer board members generally won't see those volunteers counted under either Tennessee or federal payroll-tax rules.

Citations

• Tenn. Code Ann. § 50-7-104(b) (in pari materia construction with federal acts)
• Tenn. Code Ann. § 50-7-207 (employment definition; nonprofit coverage threshold)
• Tenn. Code Ann. § 50-7-402 (premium measured by wages)
• 26 U.S.C. § 3121(d)(1) (FICA "employee" definition)
• 26 U.S.C. § 3306(i) (FUTA "employee" definition)
• 26 C.F.R. § 31.3121(d)-1(b) (Treasury carveout for uncompensated officers)
• Elgin v. Bryant, 181 S.W.2d 329 (Tenn. 1944) (unpaid officer with nominal duties not an employee)
• United States v. Bernstein, 179 F.2d 105 (4th Cir. 1949) (unpaid officers not employees under SSA)
• National Wooden Box Ass'n v. United States, 59 F. Supp. 118 (Ct. Cl. 1945) (same)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2013/op13-013.pdf

Original opinion text

S T A T E O F T E N N E S S E E
OFFICE OF THE
ATTORNEY GENERAL
P.O. BOX 20207
NASHVILLE, TENNESSEE 37202

February 20, 2013

Opinion No. 13-13

Unemployment Compensation Premiums for Not-for-Profit Corporations

QUESTION

Do unpaid officers of a not-for-profit corporation count toward the number of employees for the purpose of determining whether the corporation is required to pay unemployment compensation premiums under Tenn. Code Ann. § 50-7-207?

OPINION

The more persuasive interpretation is that Tennessee's unemployment statute should not include officers who receive no compensation when calculating whether a corporation must pay unemployment compensation premiums.

ANALYSIS

Tennessee's unemployment compensation statute requires not-for-profit corporations to pay unemployment compensation premiums on an employee's wages when the not-for-profit has four or more individuals "in employment." Tenn. Code Ann. § 50-7-207(b)(4)(B). The definition of "employment" includes "any officer of a corporation." Tenn. Code Ann. § 50-7-207(b)(2)(A). This definition of employment does not draw any distinctions between for-profit and not-for-profit corporations. See id. It also does not make any distinctions between paid and volunteer officers. See id.

Tennessee courts have provided limited guidance on the question posed. In Elgin v. Bryant, 181 S.W.2d 329, 331 (Tenn. 1944), the Tennessee Supreme Court found that an unpaid corporate officer with only nominal duties was not an employee for the purpose of calculating the number of employees under a previous unemployment statute. In so holding, the Court noted that "the act only applies to and covers individuals who are in employment for wages." Id. at 330.

The precise issue of whether an unpaid officer who may perform more that a minimal amount of duties counts towards the total amount of employees under Tennessee Code Annotated § 50-7-207(b)(4)(B) or any comparable provision has not been directly addressed by a Tennessee court. See Elgin, 181 S.W.2d at 329-31 (basing its exclusion of a corporate officer from the definition of employee on both her lack of wages and her lack of employment duties).

Tennessee's unemployment statute states that its provisions shall be interpreted "in pari materia" with the Federal Unemployment Tax Act, the Federal Social Security Act and any other related federal law. Tenn. Code Ann. § 50-7-104(b). The Federal Insurance Contributions Act and Federal Unemployment Tax Act both define "employee" as "any officer of a corporation." 26 U.S.C. § 3121 (d)(1); 26 U.S.C. § 3306 (i). Both the United States Department of Treasury regulations and federal case law nonetheless clarify that an officer of a corporation is not per se an employee under this definition. 26 C.F.R. § 31.312(d)-1(b) (stating that "an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation"). See also Yeagle Drywall Co., Inc. v. Comm'r, 54 Fed. Appx. 100, 102 (3rd Cir. 2002); Texas Carbonate Co. v. Phinney, 307 F.2d 289, 291-92 (5th Cir.), cert. denied, 371 U.S. 940 (1962).

The interpretation of the term "employee" in a similar context in the Social Security Act by the United States Court of Appeals is particularly instructive on the question presented. See United States v. Bernstein, 179 F.2d 105 (4th Cir. 1949). In Bernstein, the court considered whether unpaid corporate officers would increase the Social Security Tax burden of their employers. Id. at 109. Because the Social Security tax is measured by total wages, the court held that such officers are not employees for the purpose of the Social Security Act. Id. at 110. The statute defining corporate officers as employees, which is mirrored by Tenn. Code Ann. § 50-7-207(b)(2)(A), was not determinative in the face of the Social Security Act's clear intent:

A very important consideration is the nature of the legislation and the main object sought to be accomplished. In Title IX of the Social Security Act Congress was levying a tax on wages for the principal purpose of providing either directly, or indirectly through State legislation, a fund to relieve unemployment distress. The tax is measured by a percentage of the wages. If no wages are paid by the employer, no tax is due. . . . It is crystal clear that two essential conditions precedent must concur in order that a valid tax may be here levied: (1) There must exist a relationship of employer and employee; (2) wages must be paid by the employer to the employee.

. . . .

"Since the tax was to be measured by the wages paid for the employment, the presumption is that Congress, in levying the tax on one having eight or more employees, had in mind only paid employees. An officer who received no compensation did not increase the tax burden on a corporation subject to the tax, for the tax was measured by the total wages paid. Since in measuring the tax such a person did not count, it would seem inconsistent to count him in order to bring the corporation within the class subjected to the tax. For both purposes it would seem Congress had in mind only persons who were paid compensation."

. . . .

"We do not think [the Social Security Act] was intended to include an officer who received no compensation for his services."

Id. at 110-11 (quoting National Wooden Box Ass'n v. United States, 59 F. Supp. 118, 121 (Ct. Cl. 1945) (emphasis added). See also Fort Dodge By-Products v. United States, 133 F.Supp. 254, 258-62 (N.D. Iowa 1955); Tidwell v. United States, 63 F.Supp. 609, 610-12 (W.D. Tenn. 1945).

Likewise, the Tennessee unemployment compensation statute imposes a premium only on total wages paid. Tenn. Code Ann. § 50-7-402. Here, as in the federal Social Security Act, an unpaid officer will not increase the premium burden on the corporation and will not derive any benefit under the statute from his or her position in the corporation. See United States v. Bernstein, 179 F.2d at 110-11. Accordingly, the more persuasive interpretation is that Tennessee's unemployment statute should not include officers who receive no compensation when calculating whether a corporation must pay unemployment compensation premiums.

ROBERT E. COOPER, JR.
Attorney General & Reporter

WILLIAM E. YOUNG
Solicitor General

JORDAN SCOTT
Assistant Attorney General

Requested by:

Doug Overbey
State Senator
306 War Memorial Building
Nashville, Tennessee 37243