Wouldn't you love the chance to get free legal information directly from an expert? Register now for our program on November 9 -- Legal Issues Every Nonprofit Manager & Trustee Should Know. Regina Hopkins of the D.C. Bar Pro Bono Program will discuss some of the most common legal issues nonprofits face.
In the meanwhile, the following post, originally featured on the Foundation Center-Atlanta blog, gives a great overview of what your organization can do to avoid some legal problems during the current financial crisis.
Staying Legal in Tough Economic Times By Rachel Epps Spears
Donations are down; requests for assistance are up. Nonprofits that
already operate on a lean budget are tightening the belt another notch
or two. Now is not the time to let down your guard when it comes to
the legal health of your nonprofit. Here are tips for keeping your
organization out of legal trouble while you weather the economic
downturn.
#1. Don’t stop paying your taxes.
With decreased revenue, nonprofits sometimes fall into the trap of
not paying employment taxes to the IRS . Don’t do this! The IRS won’t
be moved by your charitable works; the Service wants its money. Also,
Board members should know that they can be held personally liable for a
nonprofit’s failure to pay employment taxes. As a related issue, make
sure that any one you are treating as an independent contractor is
correctly classified as such. Follow the IRS guidelines or seek legal
counsel to determine whether a worker is an independent contractor or
an employee. Make sure that you are properly withholding and paying
employment taxes for anyone who should be treated as an employee.
See the IRS web site for more information.
#2. Be careful when laying off employees.
When laying off
employees, you must keep several things in mind to avoid future legal
challenges to your decisions. First, prepare a written layoff plan and
carefully document layoff decisions. This will help protect you from
accusations that your decisions were made improperly. Make sure that
the business reason for the layoffs is clear and that the selection
criteria for determining who is laid off is clearly defined so that you
will have evidence if your decisions are later questioned. Always
remember that you cannot make termination decisions based on an
employee’s race, national origin, sex, age, or any other characteristic
protected law. Also, before an employee is laid off, you must check if
the employee has an employment agreement and if there is an agreement,
check for a certain period of service and for a severance payment. Be
aware that when you lay off an employee, he or she may be eligible for
unemployment compensation. It is important that you consult legal
counsel to assist in creating a layoff plan that will be compliant with
various applicable laws.
#3. Make sure you pay minimum wage and overtime as required.
As an alternative to layoffs, you might consider retaining your
employees but reducing their compensation. Any such compensation
reduction program must comply with federal and state wage and hour
laws. If you decide to lower salaries, make sure that you are still
paying at or above minimum wage. Also, don’t slack off on paying
overtime to non-exempt employees. If you don’t know the difference
between exempt and non-exempt employees or haven’t carefully considered
this classification, seek help. See the Department of Labor for more information.
#4. Keep up to date your insurance premiums.
Insurance is costly but you need it more than ever when times are
tough. Be sure to pay all premiums due on general liability, workers’
compensation, director’s and officer’s liability and any other
insurance that is vital to your organization.
#5. Keep the Board informed and engaged.
Make sure the Board of Directors is well aware of the financial
challenges facing the nonprofit and be sure to give them time to
respond to those challenges. Board members should meet more
frequently, if necessary, and stay on top of any potential problems.
#6. Check your contractual obligations.
If a lease or contract (including an independent contractor
agreement) becomes too expensive or unnecessary to your business and
you want to terminate, be sure to read the termination clause first and
understand what risk you face by ending the contract. There may be
cancellation fees or other requirements.
Also, don’t use funds from one contract or grant to cover shortfalls
in operations or other less-funded programs without properly
considering your obligations under the contract and taking any
necessary steps.
#7. Renegotiate outstanding debt.
If you have a mortgage or
other type of loan and are having trouble keeping up with the payments,
don’t avoid your lender. Most lenders would rather renegotiate the
debt than foreclose. Contact your lender and see what can be arranged.
#8. Be sure subcontractors are being paid.
If you are in the process of building or renovating, don’t get
caught between your general contractor and any unpaid subcontractors.
Make certain that your general contractor signs a release that he has
received payment to pay subcontractors and make sure he pays them.
A subcontractor that does not get paid by the contractor can put a
mechanic’s lien on the property to obtain his payment. Mechanic’s
liens increase during difficult economic times. Make sure that you
have evidence that the owner paid the contractor in order to protect
your organization.
#9. Be careful about additional fundraising efforts.
Nonprofits look for new and innovative ways to raise money in a bad
economy but be aware that there are many laws and regulations for
fundraising. For example, Georgia has strict gaming laws governing
raffles, door prizes and bingo games. The IRS has many regulations
that affect fundraising, including rules about unrelated business
taxable income (UBTI).
The UBTI regulations may require organizations to pay tax on any
income (including fundraising income) that is not directly related to
their charitable mission. Finally, if you decide to try to raise
additional funds by hiring a professional fundraiser, make certain the
agreement will not affect your tax-exempt status.
#10. To Merge or Not to Merge?
Combining forces with another organization may be the only way to
survive an economic downturn. Although it is important that your
organization’s mission, programs and culture are sustained, you must
consider that merger with another organization may be the key to
surviving during a period of fierce competition for scarce resources.
Combined organizations are more likely to attract funding than each
organization alone and also experience more efficiency in operations.
Attorneys can help with the many legal issues that arise in a merger.
Rachel Epps Spears is the Executive Director of Pro Bono Partnership of Atlanta, a nonprofit organization
whose mission is to provide free legal services to other nonprofits
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