Laid-off employee returns to nonprofit and does same job unpaid. Is that legal?

Q: I work at a nonprofit that is having serious financial difficulties. Recently a part-time employee was laid off. We had an awkward party, signed a card, said goodbye ... and then she showed up to work again the following week in the same capacity but as an unpaid volunteer.

In theory, this is until she finds new employment, but she enjoys the socialization in the office and does not have strong prospects for being employed elsewhere. Is this legal? Ethical? Just super bizarre?

A: That's a pretty neat trick your employer has pulled, getting a laid-off employee to come back and replace herself for no pay - possibly even under the fiction that this is actually doing the poor dear a favor.

But the federal Fair Labor Standards Act, assuming it applies to your organization, might tell the story differently. The FLSA generally doesn't allow private-sector employees to "volunteer" their labor doing jobs they were hired to perform, and it prohibits displacing paid workers for unpaid workers, such as interns or volunteers. Nonprofits get a bit more leeway, as many rely on volunteers to carry out charitable missions, but those volunteers are generally not supposed to perform commercial activities or jobs that would normally be done by paid employees of the nonprofit.

Even if your now-unpaid colleague enjoys the social atmosphere at your workplace, it's unclear how she can afford to go from gainful employment to volunteering. Perhaps she believes she is helping to keep a valued organization afloat through her sacrifice, or she figures even unpaid work is better than a gap in her work history. In any case, she appears unlikely to complain to anyone about the arrangement.

But someone else could still tip off your state's labor agency or the federal Labor Department's Wage and Hour Division, which might trigger some kind of investigation or audit. Since your organization was successful in cutting one payroll expense without a corresponding loss in productivity, "other workers may fear they'll be next," says Paula Brantner, CEO of PB Work Solutions.

And Brantner alerted me to another twist: Even if your employer laid off this worker to avoid having to pay her, it could end up having to pay her indirectly later on. Certain nonprofits are allowed to opt out of paying state unemployment tax and instead pay out claims only when their former employees file for unemployment. If your volunteer qualifies for unemployment, the nonprofit could receive a bill from the state for the benefits she's receiving. And if the unemployment office asks about her job-search efforts, and it comes to light that she's working free of charge for her old employer, that could also lead to an uncomfortable line of questioning for your organization.

If this arrangement really is on the up and up, the organization should "have something in writing to verify the volunteer is doing this without pressure" and "going into this with his or her eyes fully open," with no expectation of being paid or rehired, says employment attorney Declan Leonard of Berenzweig Leonard.

Or it could shift your colleague from the work she's doing now to a truly volunteer capacity, performing duties in service of its nonprofit mission. That would give her the social contact and résumé filler she needs while helping steer the nonprofit clear of legal issues - although, of course, it doesn't resolve the issue of how the nonprofit can fill her old job at no additional cost.