Category Archives: Non-Profit Employers
NewsFlash for Non-Profit Employers: The Rebuttable Presumption of Reasonableness May Disappear or Change
In a recent presentation to the Georgetown Law Center Tax-Exemption Organization Conference, staff members to the Senate Finance and House Ways and Means Committees reported on some proposals for legislation that would have a legal impact on larger non-profit employers in the realm of senior executive compensation.
Large non-profit employers need to exercise care in determining compensation of senior executives in order to avoid intermediate sanctions. In essence, such employers currently need to use compensation consultants to establish a “rebuttable presumption of reasonableness” to be assured that the IRS will not find such compensation to constitute an excess benefit.
Currently on Capitol Hill, there is a legislation proposal to eliminate reliance on the rebuttable presumption and compensation consultants. The proposal would impose a 10% excise tax on the organization itself (not just disqualified persons and organizational manager) if the executive compensation is deemed excessive under an IRS “facts and circumstances” test. This would be a substantial change in intermediate sanction law and non-profit employer compensation processes.
On an additional note, floating around Capitol Hill is a proposal for a 25% excise tax on exempt organizations for executive compensation over $1,000,000 – which is rare, but out there. It would include defined compensation payments. Lookout senior health care executives, university presidents, and Big 10 coaches!
Takeaway: Keep an eye on these potential legislative developments affecting non-profit employers. Minnesota Employer will keep you informed, of course!
Many employers encourage employees to seek community leadership positions so as to enhance the company’s public profile. Indeed, for some senior executives, this can be an employer expectation. But does this “doing good” present some employer risks?
It can. For example, a prominent employee’s service on a non-profit board can identify the employer with the mission of the non-profit, which may or may not suit the company’s business strategy. That is why many employers require a senior executive to obtain prior approval before accepting a non-profit board membership.
Also, a senior employee on a board of a non-profit that is a customer or client of the employer may run into conflicts of interest issues that could result in the employer losing the non-profit’s business. Or worse, the failure to make proper disclosure could expose the employer to the enforcement powers of the Attorney General or IRS, both of which keeps a close eye on conflict abuses. That is why a policy underscoring the importance of compliance with conflict disclosures when serving on non-profit boards may be an important protection for the employer.
And what if the non-profit becomes involved in a scandal or litigation? Can a senior executive membership on the non-profit’s board expose the employer to risks? Normally not, since the non-profit is a free-standing corporation. But one can conceive of scenarios (such as when a company itself “appoints” a board member; or in a company-sponsored foundation, or service as trustees of charitable trusts) in which there could be a potential legal complications or exposure. One important safeguard in Minnesota is the state law that provides immunity from any claims of negligence for non-profit directors who are uncompensated. That is why making sure there are no unusual ties between the employer, employee and the board is an important policy. There should also be a policy on any compensation earned for non-profit service.
Takeaway: There are good reasons for an employer to consider carefully an employee non-profit board service policy since good intentions do not count for everything. Legal counsel can be of material assistance in this regard.
For the majority of employment law issues, the employer’s status as a for-profit or a non-profit makes no difference. But there are some points of distinction, such as:
- Senior executive compensation for non-profit employers must meet certain “excess benefit” rules under Section 4958 of the IRS Code.
- In Minnesota (and other states), non-profit employers can opt out of unemployment insurance tax payments and can opt into a reimbursement program instead.
- Classification issues are often a bit more “liberally” interpreted for non-profits with independent contractor/control questions sometimes more easily cutting in favor of the looser structure of a non-profit, especially smaller non-profits.
- But non-compete enforcement can be more difficult for non-profits than for-profits since they are mission-oriented rather than business-oriented. For-profits have a clear and legally recognized right to protect legitimate business interests, but such an argument can be more strained for non-profits that are not necessarily conceived of as in marketplace competition. Clear and precise confidential information policies may be better protection for a non-profit.
Takeaway: While the regular run of employment law issues in hiring, leaves, compensation, discrimination, collective bargaining, termination, taxation and benefits are usually the same for non-profits as for-profits, there are points of differences, such as the above. Consult counsel to see if the difference makes a difference.
Non-Profit employers usually exist in the same employment law “world” as do for-profit employers. However, as to senior executive compensation and staff conflicts of interest, unique rules apply. Forgetting this distinction can lead to serious and costly “intermediate sanctions” fines by the IRS and ultimately to the loss of non-profit status. An earlier Minnesota Employer post discussed the “rebuttable presumption” rules to avoid excess benefit problems.
It would be dangerous to assume that the recent public controversies regarding the IRS’s review of certain political organization’s applications for tax-exempt status have somehow blunted or sidelined the IRS Exempt Organization Enforcement Division. Indeed, Stephen Clarke, Project Manager of the IRS Exempt Organization Division recently spoke at an American Bar Association Seminar about the IRS’s renewed emphasis on making sure that “disqualified persons” (usually non-profit board members, officers and senior employees) receive no excess benefits by virtue of their position (that is, that they receive only the value of their services based on market norms). In a strengthening economy and more competitive job market, excess benefits can very much come to the forefront, especially when there are hires from the for-profit sector. Clarke also emphasized that non-profits must watch out for sloppy, sporadic or in-effective conflicts of interest disclosure forms and processes.
In short, this is the right time for a non-profit employer to make sure that it has the right market data backing up senior employee and board member compensation and other monetary or property transactions and that it has a strong and up-to-date conflict of interest policy. Legal counsel can provide valuable assistance in reviewing the “rebuttable presumption” process in important situations and in updating and making more effective the conflicts of interest disclosure forms and procedures used by non-profit employers. A good discussion of the proper role of conflict of interest policies from the IRS point of view is available here.
Takeaways: A non-profit employer should not forget the important, statutorily-mandated and powerful enforcement duties of the IRS. Conflict of interest forms and senior employee compensation stick out to the IRS when there is any inquiry as to the operations of the non-profit corporation. On these points, vigilance is the price of non-profit liberty!
Although the Minnesota Human Rights Act (MHRA) generally prohibits employers from discriminating on the basis of sexual orientation, it also allows certain religious associations and educational institutions to discriminate on the basis of sexual orientation in certain circumstances.
The MHRA includes an exemption for non-profit religious associations, religious corporations, or religious societies, or any institution organized for educational purposes that is operated, supervised, or controlled by a non-profit religious association, religious corporation, or religious society. The exemption states that nothing in the MHRA prohibits such religious associations or educational institutions from “taking any action with respect to education, employment, housing and real property, or use of facilities . . . in matters relating to sexual orientation.” Minn. Stat. § 363A.26.
The statute includes an important limitation on this exemption, however. Specifically, the statute states that it “shall not apply to secular business activities engaged in by the religious association, religious corporation, or religious society, the conduct of which is unrelated to the religious and educational purposes for which it is organized.”
Takeaways: Religious associations and educational institutions that are controlled by religious associations may discriminate on the basis of sexual orientation in certain circumstances, but must be careful not to discriminate on the basis of sexual orientation with respect to “secular business activities” that are “unrelated to the religious and educational purposes” of the institution.
The world is full of eager college students who want to have a chance at “breaking in” to a non-profit job via an internship but need some type of compensation to be able to do the work. There are plenty of non-profit employers willing to pay a stipend to get the best internship candidates and help assure commitment and dedication, but that cannot afford to pay minimum wage for the learning opportunity. Matching these needs through a below-minimum-wage stipend is the common solution – but that can lead to unintended Fair Labor Standards Act (FLSA) and tax consequences unless done correctly.
The use of the word “stipend” is not conclusive of the matter. An intern could receive a “stipend” that, if over $600 and therefore reported to the IRS, changes his or her classification to what the Department of Labor would consider an employee, and the nonprofit could owe back wages constituting minimum wage and back FICA. The question is whether the intern is a trainee on a stipend rather than an employee.
In essence, a “stipend” is compensation for services provided to the nonprofit. Those who perform work in exchange for compensation are normally employees who are paid at least minimum wage and have FICA withholdings and matches (or they are independent contractors under circumstances probably not relevant to the terms and conditions of an internship since the non-profit will probably need to control the intern’s work and work conditions). The significant exception under federal Department of Labor rules is for trainees, who, assuming they qualify, do not have to be paid a minimum wage.
To be considered a “trainee,” the internship must satisfy all six criteria developed by the Department of Labor for distinguishing unpaid trainees from employees who must be paid under the FLSA. The primary requirement is that the internship must benefit the intern – not the employer. The DOL’s criteria can be tough to meet when the non-profit is really trying to get below-minimum-wage employees. The forced solution is often to pay minimum wages but limit hours or structure an actual trainee program with the chief goal to be the benefit of the intern.
Takeaway: Nonprofits that pay interns a stipend below minimum wage should work with their employment counsel to match the internship program to the DOL’s criteria and avoid the unintended consequences of hiring a minimum wage employee rather than an intern on a stipend.
A non-profit employer enjoys the privilege of being tax-exempt – but every privilege brings obligations, of course. For example, the Internal Revenue Code has very stringent and vigorously enforced prohibitions against the higher echelon employees of non-profits (Foundations, Churches, Colleges – about 6% of US GNP and 10% of the national workforce) receiving compensation beyond marketplace norms.
This prohibition against “excess benefits” and “private inurement” extends to all forms of compensation, including salary, benefits and severance pay. It applies to “disqualified persons” and can result in “intermediate sanctions” against the “ non-profit managers.” But don’t worry, if you do certain things, you can obtain the protection of the “rebuttable presumption of reasonableness”!
Behind this legalese is the basic concept that an employee in a position to influence a non-profit should not receive a benefit from a tax-exempt entity beyond the market value of his or her services. The IRS and the Minnesota Department of Revenue require that non-profit employers use specific legal procedures to demonstrate that senior executives have their compensation set based on market data and without personal influence. Otherwise, substantial penalties can ensue.
Takeaway: Following these procedures to determine the compensation limits for higher echelon non-profit employees can be somewhat complex. Non-profit employers should proceed with awareness of these prohibitions and obtain counsel to assist in determining if the prohibition applies to a particular executive compensation question. If so, the non-profit should set up the processes necessary to make sure that compensation determinations are consistent with the privileges of non-profit status.
As a general rule, most non-profits must be completely nonpartisan – they cannot engage in political campaigning. The rules concerning non-profit lobbying are complex and must be followed carefully. This restriction is the fair price of tax-exempt status and most non-profits are acutely aware of coming within a “legal mile” of illegal campaigning, ballot initiatives or lobbying. The penalties and consequences to tax exempt status and donor relations are quite significant.
But what about the political activities of a non-profit’s employees? Are they also prohibited from such partisan activities? In an election year that is a common question for a non-profit employer, especially when many non-profit employees are politically active, public-minded citizens and many candidates and political initiatives would like the prestige of being associated with a foundation, important service agency, hospital, college or school.
The answer is that the whole is greater than the sum of its parts – the employees can be partisan so long as they are not on employer time, using employer resources or leading others to believe they speak for the non-profit. To preserve this legal distinction requires that the non-profit develop an employment policy “wall” between the employee’s personal time public activities and public actions that are or give the appearance of being on behalf of the non-profit or using non-profit resources. Such a “wall” will address matters such as requiring that political activities not occur during paid working time (except when using PTO) and allowing the employee to identify his or her place of employment at a campaign event so long as they also make clear that they are not participating as a spokesperson of the non-profit.
There are several other developed norms that should be addressed in such “wall” policies to preserve the balance between personal political activity and the important prohibition against partisan political activities by a corporation that has been accorded the privilege of tax-exempt status.
Takeaway: A non-profit employer should have a “Political Activity” policy that builds the necessary wall between employee personal political activities and work-related activities. The policy should be written to be specific to the non-profit’s mission, the work of its employees, and the nature of their potential political or lobbying activities. This will avoid otherwise legal employee partisan political actions being attributed to the non-profit and thereby becoming illegal – Ah Democracy!