The Volunteer Director

By Lisa A. Runquist

The United States is a society full of volunteers. We volunteer to serve lunches to the poor. We volunteer to rehabilitate abused animals. We volunteer to be big brothers and sisters. We volunteer to provide legal assistance. And we volunteer to serve on boards of directors of nonprofit organizations. In fact, most nonprofits would not function successfully without the volunteer assistance they receive. Not only do we give generously of our money, but we give of our time and expertise—which may actually be even more valuable.

But just because an organization is a nonprofit exempt under Section 501(c)(3) of the Internal Revenue Code does not mean that it is run properly. Unless you are actively engaged in the day-to-day operations of the organization, serving on the board of directors of an organization (especially if you are an officer as well) requires that you take steps to make sure that the assets of the organization are used only for the purposes for which the organization has been formed. In addition to having to answer to the state (generally the attorney general), the Internal Revenue Service (IRS) has taken an increased interest not only in the use of the funds, but also in the governance of the organization.

Obviously, the directors and officers need to act in the best interests of the organization in order to fulfill their responsibilities as fiduciaries of the organization (see, e.g., www.runquist.com/article_director.htm). But what are some of the specific issues on which you, as a director and/or an officer, need to be informed and provide active oversight?

1. Control of the money. I have seen too many organizations allow one individual to have control of the money, only to find out later, to their chagrin, that this individual had helped him- or herself to organization funds (sometimes with every intention of paying the organization back) or had otherwise used these funds in a manner contrary to the purpose of the organization. Unfortunately, once this begins, it is unlikely to stop until it is discovered, which can be thousands of dollars later and may result not only in a loss to the organization, but jail time for the individual who misused the funds. Further, the directors and officers who allowed this to occur may be charged with having not fulfilled their fiduciary duties to the organization and may be individually required to reimburse the organization.

Make sure that there are sufficient controls. Steps to take include requiring more than one signatory on the accounts; having someone other than the person who writes the checks balance the checkbook; if cash is received, having it counted by more than one person and deposited by a third; having the books reviewed regularly by an outside accountant (if the organization is large enough, it should probably have an annual audit); and making sure that someone on the board has signatory authority over the accounts and access to the bank records.

2. Use of credit. Credit cards are easily misused. The misuse of a nonprofit’s credit cards has resulted not only in the loss of jobs, but in jail time for the user.

My general recommendation is that no nonprofit organization should have credit cards; it is preferable to have individuals use their own cards and then obtain reimbursement from the company. I understand that, in some situations, this is not feasible. If an organization has credit cards for some of its staff, there should be a policy that the cards cannot be used for personal reasons. Further, someone other than the user must go through the bills each month and make sure that there are receipts for each charge and that the business purpose of the charge is clearly noted. The user of the credit card must immediately reimburse the organization for any charges for which there is not a receipt or that does not have a clear business purpose.

3. Employment issues. The one area in which directors and officers of nonprofits are most likely to be sued is the area of employment law—such matters as wrongful termination, sexual harassment, and discrimination. A nonprofit is not exempt from most laws concerning employees. An analysis of these laws and how they apply to a particular organization is beyond the scope of this article; any nonprofit that hires employees must learn what these laws are and how to comply with them. However, there are some issues that are more likely to occur with nonprofit organizations:

Treating employees as “one of the family.” This may result in failure to have regular reviews of the employees; if reviews are done, the record may be stated in a positive manner rather than reflecting the areas that need change. When the person is finally fired, there is no supporting written documentation to back up the claims of the employer that the employee was consistently late to work, did not perform the work properly, and did not follow through on the areas that needed improvement.

Expecting the employee to “buy into” the core values of the organization. This can result in more involvement in the life of the employee than may be legally permissible. Generally, the organization has no control over the activities in which the employee can engage outside of work hours unless those activities directly affect the organization itself.

Providing benefits to volunteers. If compensation of any sort is received, then the individual may be an employee, subject to minimum wage and hour laws, etc. If the operation for which the individual is performing services is a business, the volunteer exception from unrelated business income disappears, resulting in taxable income to the organization.

Allowing or requiring an employee to “volunteer” his or her services to the nonprofit. If an employee asks to be allowed to perform volunteer services, the organization should make sure that the employee is not somehow being pressured into performing these services. In addition, it would be wise to require that any volunteer services be outside of the normal course and scope of employment (e.g., if the employee is a bookkeeper, perhaps he or she could volunteer to work in the nursery).

4. Compensation. All assets of a nonprofit have to be used to advance the purpose of the organization. This means that, although compensation can be paid to people rendering services to the organization, this compensation must be reasonable. Compensation includes salary and other benefits. Salary surveys are one way to determine what is reasonable compensation for a particular job; if the board thinks that a higher amount than the average is reasonable, the justification for such a decision must be included in the resolution approving the higher compensation.

If the person being compensated is in a position to exercise “substantial influence” over the organization, and it is found that he or she was paid more than what was reasonable (an “excess benefit”), then the excess benefit must be repaid to the organization, plus interest, plus a penalty. Anyone approving the excess benefit transaction (such as the board of directors) is also subject to a penalty of 10 percent of the excess benefit, up to $20,000 per transaction.

To minimize the possibility of a finding of an excess benefit, the decision should be made by an independent board. This independent board should rely on outside objective facts, such as a salary survey, in making its decision, and should then document the decision, as well as the supporting facts, in the minutes of the meeting.

5. Gifts and retroactive benefits. One common problem that arises with nonprofits is the desire to make gifts to employees as well as to volunteers. As has been noted several times above, all the assets must be used to benefit the purpose of the organization. Although incidental gifts may advance the purposes of the organization by encouraging the continued involvement and efforts of the employee or volunteer, a significant gift is likely to be found to be a private benefit to the recipient.

I have seen many instances where, as part of a merger or a dissolution, the organization has wanted to provide extra compensation in the form of a one-time gift to its loyal and long-standing employees. Their reasoning is that, because the individual had little or no retirement benefits, this would be in lieu of a retirement program. Unfortunately, neither the IRS nor the state attorneys general consider this to be a good argument. Even though a retirement program would have been permissible had it been instituted beforehand, the organization cannot retroactively increase the benefits for services already rendered.

6. Serving as the lawyer for the organization. When a lawyer is asked to serve on the board of an organization, there is often an assumption that he or she will also provide legal services to the organization. Although many lawyers do so, this can result in adverse consequences to both the lawyer and the organization. For example, there may be no attorney-client privilege for a discussion of a legal matter that takes place in the context of a board meeting. Further, a litigation specialist is likely to be unqualified to provide legal advice about a corporate matter. And the primary reason why I generally do not serve on the board of a nonprofit for which I provide legal advice is that I want to be able to give purely legal advice, without also having to consider the best interests of the organization from a financial/political/public relations/business standpoint.

Make sure that the other directors know that you are serving, as they are, as a director and that your comments should not be considered legal advice, so that they do not give your comments extra weight. If you do decide that you want to provide legal advice as well as serving as a director, make it clear what hat you are wearing when you do give such advice.

7. Appropriate governance policies. The IRS, although it has no authority over the actual governance of nonprofits, has now revised its Form 990 (the annual informational return) to include questions about some 17 policies that it has determined nonprofits should address. Although there is no legal requirement that the nonprofit have some or all of these policies, and although some of the policies may be unnecessary for an organization, those organizations that do not have them must explain why not. The problem is that some nonprofits are simply adopting these policies (often versions that were furnished by their accountants) without giving thought to the consequences. Worse than not having a policy is having a policy that is not followed. This is the lawyer’s full employment act.

Make sure that the organization does not adopt policies unless they are appropriate for the organization. Make sure that any policy adopted is drafted to fit the particular organization’s situation. Do not adopt policies just so that the organization can say that it adopted them (see www.abanet.org/buslaw/blt/2009-07-08/runquist.shtml for more information).

8. Form 990 as a public relations piece. Form 990 is required to be made available for public inspection. (Copies of the form, as filed with the IRS, can be viewed at www.guidestar.org.) Because it is readily accessible, many people—both those who might want to give to the organization and those who do not like the organization—now review the Form 990 for any organization in which they are interested. It has, as a result, become the number-one public relations piece for the organization.

As a director, you should review the form before it is filed to make sure that the information is correct and that it tells the organization’s story in the best possible light. In addition, one of the questions now on the form is whether the directors were furnished with the form before it was filed (and what review was done).

Conclusion. Most nonprofits find lawyers to be desirable directors. The time you spend working with the nonprofit can be very rewarding and provide a way to give back to the community. However, a director is not there to be a rubber stamp; it is your responsibility to provide thoughtful oversight of the nonprofit and its operations.

   

  • Lisa A. Runquist is a principal in the law firm of Runquist & Associates in Northridge, California. She has 30 years of experience representing nonprofit organizations and is the first winner of the Outstanding Lawyer Award, a nonprofit lawyers’ award presented by the ABA Business Law Section. She may be reached at lisa@runquist.com or via her website, www.runquist.com.

Copyright 2010

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