Every executive director needs an employment contract!
Employment contracts benefit executive directors, boards, and even other staff by providing stability and clarity.
In this article, we’ll look at the elements of an employment contract for nonprofit executive directors as well as why all leaders should insist on putting one in place.
An employment contract spells out the terms of employment for an individual employee. While all workers need greater protections, since the executive director is so central to the impact of a nonprofit organization, we are focusing here only on employment contracts for nonprofit executive directors and CEOs.
A typical executive director employment agreement includes things like the duties of the role, compensation package, severance terms, and protections from being fired without cause. This last part is especially essential.
I have seen countless executive directors lose their jobs without “cause” or walk away from their jobs to protect the organization without any guarantee that they’ll be protected despite the stress and sacrifice of the role.
An employment contract provides stability for the executive director, which in turn increases stability for the organization’s board and staff.
An employment contract satisfies both of these needs.
Every nonprofit executive director employment contract may look different, but there are some basic elements that need to be included.
Disclaimer: Please note that I am not a lawyer. I don’t give legal advice. Use common sense and check with your own in-state attorney when relying on this information to protect yourself with a contract.
Make sure you spell out the broad duties of the executive director job. Like any contract, you want a “scope of work.” That may be some very broad areas, but you should definitely spell out what the role does and even possibly what it doesn’t do.
Note that the actual executive director job description is a separate document that is very specific. The employment contract can reference the job description, which is a document that may evolve over time.
Make sure to spell out the term of the contract. Usually, this is 1-3 years to start. Normally, the contract is assumed to renew itself after every term unless the contract stipulates that it doesn’t renew.
Include all elements of the compensation package: benefits, salary, paid time off, sick time, retirement, insurance, etc. Ensure it details that there will be an annual review and how the results will inform salary increases or possibly bonuses.
The employment agreement should stipulate that the executive director will be reimbursed for organizational expenses required to do the job.
The employment contract should cover death, disability, or discharge for cause and without cause. This section can offer protections to the organization or even benefits to the spouse of the injured or deceased executive director.
If the organization discharges an executive director for no fault of their own (commonly called “without cause”), there should be a penalty for that action. This penalty is usually severance.
A minimum severance for small organizations would be 3-4 months of full salary. If you want to terminate someone for doing nothing wrong, it should be costly because that individual is paying the price for your choice.
A generous severance would be paying out the balance of the contract term. So, if the executive director is fired without cause in month 6 of a 12-month contract, they will get 6 months’ severance.
Many employers acting without a contract may pay one month’s salary for every year of service. So, if the ED worked for 10 years, they would get 10 months. Your employee contract could say that the ED terminated without cause will either get one month of salary for every year of service or paying out the remainder of the contract, whichever one is more money!
The contract should cover how to handle disputes. This may relate to arbitration or what state law will govern the grievance. Arbitration almost always benefits the employer, not the ED.
An employment contract protects executive directors’ careers, incomes, and families. Based on my own experience as a five-time executive director — and after coaching dozens of executive directors — I recommend every executive director insist on an employment contract.
To help more executive directors, I worked with an attorney to create an employment contract template designed to be easily customizable for your state’s laws.
Sean Kosofsky is The Nonprofit Fixer. He is a coach, consultant and course creator and served in nonprofit leadership roles for 28+ years.
