Phase 3

Step 3.01 , Water Fund Legal Mechanism Established


To ensure that relevant actions are taken to ensure the Water Fund is legally constituted.

Key Ideas

Qualified experts should be retained to ensure a Water Fund is legally constituted prior to holding a public launch event.

  • What constitutes the legal creation of a Water Fund?

    The legal establishment of a water fund may occur through various legal mechanisms. The overall complexity of the resultant structure for the Water Fund will vary depending on the mechanisms. For this reason, a Human Resources and Corporate Development Plan is typically included in the Water Fund Strategic Plan to ensure that the proposed water fund meets the anticipated legal needs, as informed by the analyses conducted under the Legal and Institutional Analysis step of the Design Phase.
  • When should the Board of Directors be established?

    The Board of Directors should also be officially established during this step. Board members should be selected strategically based on their ability to both add legitimacy and operational capacity to the management of the Water Fund and based on what was defined on the design phase regarding governance. In most cases, this step provides recognition of those who provided the most support to the Water Fund development process in its early stages and/or those who have been deemed to be necessary for the legitimacy of the Water Fund.


Hiring or Contracting

  • Should a water fund hire or contract for the services it needs?

    Whether to hire or contract for services depends on how a water fund is organized, the services required, and applicable law. It is important to bear in mind that whether a service provider is an employee or a contractor is not solely a matter of choice by the water fund. The laws applicable to the location where the water fund operates may characterize certain service providers as employees, regardless of the intention or agreement of the parties.

  • What are the differences between employees and contractors?

    Local laws regarding employment vary. A water fund should seek advice from an expert in the laws in the place where it operates. At a high level of generality, however, all legal systems recognize a distinction between procuring services from an individual who is an employee, and procuring services from an individual who is an independent contractor. Most legal systems have significant regulations in place to protect employees, including eligibility to work under immigration laws, wage and hour restrictions, health and safety requirements, anti-discrimination requirements, and social insurance and other taxes. By contrast, independent contractors are treated as working for their own businesses. They have more latitude to negotiate contract terms addressing selection of staff, project deadlines, performance requirements, and penalties for termination. A third possibility is for a water fund to procure services from a staffing firm. The individuals are employees with respect the staffing firm, which is an independent contractor with respect to the water fund.

    A water fund should bear in mind that government agencies, insurance companies, and workers themselves, have incentives to characterize relationships as employment relationships in order to obtain tax revenues, insurance coverage, overtime pay, and other benefits associated with employment. In the United States, for example, certain government agencies presume that every worker is the employee of someone, so a contracting party is at risk of being considered an employee unless the worker is part of a staffing organization or another independent business, preferably one that is formally organized as a corporation or other entity. It goes without saying that a water fund should not try to classify workers as independent contractors in order to avoid the application of certain laws, such as immigration laws restricting the employment of foreign workers. Rather, a water fund should verify that independent contractors themselves comply with applicable laws.

  • What factors affect whether a worker is an employee or a contractor?

    There is no single answer to the question of how to distinguish an employee from a contractor. Different government authorities have different definitions. Within the United States Federal Government, the Internal Revenue Service (which administers tax laws) and the Department of Labor (which administers wage and hour laws) use different tests. The Internal Revenue Service has a 20-factor test, whereas the Department of Labor concentrates on economic dependence. Agencies of individual states within the United States have developed their own criteria. Within the European Union, individual countries set the rules that determine whether a worker is an employee or an independent contractor.

    Although the number of variants is disconcerting, there is substantial overlap among the different worker classification tests. Below is a list of factors that indicate an independent contractor relationship.

    Written contract. An independent contractor should have a written contract governing the work. The contract should specify an end date for the relationship and describe the deliverables or services to be performed.

    Limited supervision and control. An independent contractor should be free to determine how to perform the work, with what methods and with what tools and equipment. The written contract should expressly limit the degree of control exercised by the hiring party, and these limits should be observed in practice.

    Reporting. Required oral or written reports suggest an employment relationship.

    Time and place of work. Typically, an independent contractor will choose the time and place to perform the work. By contrast, an employee usually works specified hours on the employer’s premises. An independent contractor should be free to determine the order or sequence in which tasks are performed.

    Own tools and equipment. An independent contractor often provides its own tools and equipment. By contrast, issuing an employee badge or email account suggests an employment relationship.

    Termination of relationship. Whereas an employer often reserves the right to terminate an employee at will, someone who terminates an independent contractor will incur consequences under the contract. Similarly, an employee typically can quit at will, whereas an independent contractor will incur liability for failure to complete a contract.

    Remedies for failure to perform. If an independent contractor fails to achieve the end result, the remedy is breach of contract, not disciplinary action.

    Payment terms. It is better to pay an independent contractor by the project or deliverable, rather than by the hour or other time period. It is also important to comply with taxes and reporting that apply to contractors, such as IRS Form 1099-MISC, not taxes and reporting that apply to employees, such as IRS Form W-2.

    No reimbursement of expenses. An independent contractor should not be reimbursed for work-related expenses.

    Opportunity for profit. An independent contractor should have an opportunity to profit under the terms of the contract. Often, an independent contractor has made a significant investment in its business.

    Non-exclusivity. An independent contractor typically will have multiple work relationships and will offer services to the general public. The contract should not require exclusivity.

    Duration. The longer a relationship last, the more likely it is to be viewed as employment.

    Work Schedule. Full-time work indicates an employment relationship.

    Staffing. An independent contractor typically is free to designate who will perform the work, including subcontracting the work to others. By contrast, an employee does not hire, supervise, or pay assistants. A requirement to perform services personally indicates an employment relationship.

    Expertise. An independent contractor often will have a professional degree or other specialized expertise related to the work to be performed. By contrast, an employer often provides job training or detailed instructions to its employees.

    Services integration. An independent contractor typically is free to designate who will perform the work, including subcontracting the work to others. By contrast, an employee does not hire, supervise, or pay assistants. A requirement to perform services personally indicates an employment relationship.

    Comparable workers. Workers who have similar job duties should be classified in the same way. It is a red flag if an independent contractor is paid to do work similar to work performed by employees. This inconsistency is acute if the employees and independent contractors work for the same entity. But, it is also a concern if other entities in the same sector, such as competitors, classify workers performing similar duties as employees rather than as independent contractors.


Assuring Proper Labor and Employment Practices

  • What government regulation typically apply to employment?

    The discussion below identifies factors that are generally significant in labor and employment practices of liberal democracies countries. Labor and employment practices of socialist or dictatorial regimes are outside of the scope of this summary. Even among liberal democracies, there are significant differences at the national and local levels. Accordingly, the following analysis should be used more as a roadmap for further investigation, than as a final plan for execution.

    A Water Fund that is organized as an independent entity is more likely to have its own employees than a water fund that is the initiative of a another non-profit entity, or a contractual arrangement among governments or other parties. A water fund that chooses to hire employees should research local law and pay attention to applicable tax and accounting requirements. For example, many jurisdictions require “withholding at the source,” which obliges an employer to withhold income taxes from an employee’s pay and remit them directly to the government. Many liberal democracies impose social welfare taxes on an employee’s wages, which the employer must collect or pay. In certain situations, failure to do so will cause the employer to be liable to pay the taxes. Employers may have obligations to provide sick pay, vacation pay, worker’s compensation insurance, unemployment insurance, health insurance, pension contributions, or other benefits to employees.

    Bear in mind that the act of hiring employees may make a water fund subject to local laws, taxes, and even lawsuits, by creating “nexus” with the jurisdiction where the employees work. Once nexus is established, a water fund can be subject to regulations such as income and sales tax reporting, even if the water fund itself is organized and funded from elsewhere. Generally speaking, the location of where work is performed controls which jurisdiction’s labor laws apply. So-called “choice of law” provisions in a contract that state that the laws of a different jurisdiction apply are often unenforceable.

    Some jurisdictions, such as the United Kingdom, require a written employment agreement with employees. Depending on the number of employees hired and the conditions of employment, a water fund might want to consider whether they might unionize.

  • What are the differences between employees and contractors?

    In general, fewer government regulations apply to independent contractors than apply to employees. Some jurisdictions, such as the State of California, may have filing requirements, such as the DE-542 required by California’s Employment Development Department.

    The United States Internal Revenue Service requires an annual filing by anyone who pays more than $600 to an independent contractor in a calendar year, Form 1099 MISC. Other jurisdictions may have similar requirements. It is important to comply with these requirements not only to reduce risk of penalties, but also to provide evidence that the relationship is, in fact, an independent contractor relationship.

    Some sort of formal contract lies at the heart of every independent contractor relationship. It is important that the contract expressly identifies the independent contractor relationship and its key consequences; for example, that the worker is responsible to report and pay his or her own taxes, that no benefits are provided, and that the relationship is finite in scope and duration. Depending on the services provided, it may be appropriate to require the independent contractor to provide evidence of liability or other insurance coverage. If the independent contractor retains staff, the water fund will want to verify that the independent contractor is itself compliant with applicable labor laws. The water fund may want to include provisions addressing confidentiality and assignment of intellectual property by the independent contractor. The contract should not require an exclusive relationship, which is inconsistent with independent contracting. It may, however, restrict solicitation of employees or relationships with competitors.

What are the key questions that should be addressed when launching a Water Fund?

At a minimum, this step for launching a water fund will seek to address the following questions (note: some questions may have already been answered in the Design Phase):

  • What steps need to be taken to ensure the Water Fund is legally constituted?
  • Who will define who may sit on the initial Board of Directors and the rotation period? (i.e. typically defined in the governance and legal design of the feasibility study)
  • What conditions will be included in the legal document for creation?
  • What manuals and procedures will guide the operation of the Water Fund?

The exact legal procedures that will need to be followed to legally create a water fund will vary depending on the country and/or state. TNC and one of its legal partners, Morrison and Foerster, have compiled a series of concise guidance documents to help others in conducting these analyses, which can be accessed below.