What Every Nonprofit

Should Know: Key Legal Developments

and Issues Chambliss, Bahner & Stophel, P.C.

1000 Tallan Building Two Union SquareChattanooga, TN 37402

(423) 756-3000cbslawfirm.com

© 2012 Chambliss, Bahner & Stophel, P.C. All Rights Reserved.

October 25, 2012

Nuts and Bolts of Hiring and Disciplinary Actions

for Nonprofits

Justin L. Furrow

The Alphabet Soup of Employment Law

Employment Law Basics

• Whether employment laws apply generally depends on the number of employees– Tennessee Employment Security Law: 1

employee– Tennessee Human Rights Act: 8 employees

• Can also depend on volume of sales– Fair Labor Standards Act: $500,000 in sales

or receipts

Employment Law:Why Does it Matter?

• Provide rights to employees– Anti-discrimination, anti-harassment, and

anti-retaliation laws– Required minimum wage and overtime

payments• Impose obligations on employers

– Voting leave– Workers' compensation insurance– Jury duty leave

Hiring Process:How to Legally Hire

Employees• Disability-related issues

– Medical examinations and related inquiries• Social Media

– Look at all of this information on Facebook• Job Descriptions and Qualifications

– Job-related and consistent with business necessity

• Background Checks

What About Non-Employees?

• We pay them by 1099, isn't that ok?• Independent contractors

– Right to control is paramount• Volunteers

Discipline: What to do When the Employee Does Wrong

Discipline: What to do When the Employee Does Wrong

• Well-documented employee personnel file that is complete, thorough, accurate and up-to-date

• Legitimate business decisions will be evident from the file– This will be the basis on which you defend

your action to an administrative agency or court when the organization is sued

Discipline: What to do When the Employee Does Wrong

• Be accurate– All documentation should contain

information that you know to be true and which can be objectively substantiated

• Stick with the facts – The documents should contain a description

of the offense or problem, along with names, dates, times, place of events and/or warnings, and the duration and frequency of the problem or offense

Discipline: What to do When the Employee Does Wrong

• Be informative – Tell precisely what rule or policy was violated

or what performance, attendance, or behavioral problem exists and explain what the employee must do to correct the problem

– List previous steps taken to resolve the problem and the consequences if the problem continues

Discipline: What to do When the Employee Does Wrong

• Be clear and precise in the Corrective Action Report – Don't use the words "never" or "always"

Don't say: "You are not doing your job" or "You are always late." Do say: "You did not finish the XYZ project by the June 1 deadline"

• Be timely– Write down the information while it is still

fresh

Discipline: What to do When the Employee Does Wrong

• Take care to keep– Keep in employee's personnel file any papers

that show mistakes, e.g., memos, phone messages, purchase orders, as well as all prior warnings or memos concerning the employee

• Have employee sign – It is important to show that the employee

actually received a Corrective Action Report or other write up. If the employee refuses to sign, talk with Human Resources

Employee TerminationsHow to End the

Relationship

Employee TerminationsHow to End the

Relationship

• Tennessee is an at-will employment state!– But what does that mean?

• Know what laws do (or might) apply– Has person recently filed or made a

discrimination/harassment claim or been part of investigation?

– Has she recently had a workers' comp injury or is he in middle of a claim?

– Has he engaged in whistleblowing?

Employee TerminationsHow to End the

Relationship

• Consult Human Resources!• Review the personnel file• Make sure the punishment fits the crime

– Consistent with past disciplinary actions– No differential treatment of employees

Employee TerminationsHow to End the

Relationship

• Meet with the employee to convey the decision– ALWAYS have a witness!

• Be truthful and accurate in describing the reason for discharge– BUT be concise!

• Separation Notice

Questions?

State Regulationof Charitable

Solicitations: Managing the Morass

Leslie Stophel Maclellan

Charitable Giving

• As of August 2012, more than 1.5 million nonprofit organizations were registered with the IRS

• In 2011, individuals, foundations and corporations gave over $298 billion as charitable contributions– Religious organizations received 32% of total

– Educational institutions received 13% of total

– Human service organizations accounted for 12% of total

(Source: National Center for Charitable Statistics)

Goals of State Regulation

• Increase goodwill and confidence of donors• Protect citizens from fraudulent solicitations• Help donors make informed decisions• Prevent wasting charitable assets• Allow states to know who is receiving donations• Assist authorities to resolve complaints, educate

the public and nonprofits, and effectively investigate to ensure compliance

(Source: National Association of State Charities Officials)

Why Register?

• State Charitable Solicitation Acts: 40 states (and the District of Columbia) require nonprofits to register before raising funds

• Form 990 and 990EZ• Oversight by industry organizations• Use of professional fundraiser and/or

solicitor

State Charitable Solicitation Acts

• Consequences– Civil fines

• Georgia – Maximum fine $25,000• Arizona – Maximum fine $2,500• Pennsylvania – Maximum fine $10,000• Washington – Maximum fine $5,000

– Criminal fines and jail, depending on the state and egregiousness of the acts

• Up to a 3rd degree felony in some states

State Charitable Solicitation Acts

• Consequences– Media coverage/damage to reputation– Oversight of operations– Audit– Court ordered return of donations– Donor lawsuits

Increased State Enforcement

• Each year– Approximately 100 enforcement cases– 2 to 3 organizations are shut down– Tennessee Deputy Attorney General

"definitely is increased focus"

Increased State Enforcement

• Florida, 2005– The Terri Schindler-Shiavo Foundation– $1000 fine

• Georgia, 2009– Foundation formed by Atlanta councilman– $25,000 fine– Personal liability– Aggravating circumstances

Increased State Enforcement

• Florida, 2009– A Tampa Bay charity for slain police

officers' families– Failure to renew– $1000 fine (legal fees?)– "$75 registration fee turned into

nightmare"

Increased State Enforcement

• New Jersey, 2010– Unregistered charity operating in New

Jersey from 2005 through 2009– Fined $17,500 and barred for five years– Former volunteer committed fraud– Charity victim, but still punished

Form 990 and Form 990 EZ

• Part VI, Line 17– List all states in which a copy of Form

990 is required to be filed• Schedule G

– List all states in which the organization is licensed to solicit contributions or has been notified it is exempt from registration

Oversight by Industry Organizations

• Evangelical Council for Financial Accountability

• National Association of State Charities Officers– Fall conference – heavy focus on charity

registrations

Professional Solicitor/Fundraiser

• Most states require professionals to register

• Contracts filed with states• Contract should include

representation as to registration and compliance with applicable laws

Registration Process

• Determine states in which you solicit (not receive) contributions

• Analyze exemptions• Complete Uniform Registration

Statement

Soliciting Contributions

• State specific definitions• Oral - TV, radio, commercial• Written - mail, email, public posting, or

communicated by any media, including press

• Offer or sale of goods at fair market– Books, tapes, membership– Conference invites if fee paid– Car washes, bake sales

Includes "Charitable Sales Promotions" or "Charitable

Appeal"

• Commercial co-venturer• Benefit concerts• Stores donating portion of sales to

charity• Bingo, "Game Night," vehicle

donation programs

To request (directly or indirectly) money, credit, property, financial assistance, or any other thing of value on the plea or representation that this will be used for a charitable purpose or will benefit a charitable organization.

(Source: NAAG/NASCO Conference, October 2011)

Exemptions

• Churches (exempt for federal tax purposes)

• Higher educational institution• State chartered school• "Religious organization"• Less than $25K gross revenue• Less than 10 donors

Remember: State specific!

The Uniform Registration Statement

The Uniform Registration Statement

• NOT uniform– State specific addendums

• General information (non-inclusive)– Description of mission– Bylaws, charter, exemption letter– List of officers/directors– Description of fundraising activities

• State specific– Form 990– Audited financials– Professional fundraiser contracts

Cost of Registering

• Fees vary from $0 to $400, depending on the state

• Must be renewed annually

• Some fees are determined based on a sliding scale

• Hidden costs - Some organizations have determined that 30% to 50% of a full-time employee's workload can be spent complying with the registration process

Trends - More State Oversight

• State legislators, concerned about the financial integrity of charities, continually propose new legislation to increase regulatory oversight

• Recent attempts were made in several states to mimic the Sarbanes-Oxley Act to impose tighter restrictions on use of contributions

• Federally, some members of Congress make regulating charities and charitable gifts a priority– Most notably, Senator Chuck Grassley (R-Iowa)

Trends – Internet Solicitations

• In over 10 states, officials view the "Donate Now" link on your website as a solicitation

Trends – Internet Solicitations

• Charleston Principles– Applies state registration statutes to

internet solicitations– Adopted by some states including

Tennessee– States enforce the law against

nonprofits that mislead or defraud persons in the state

Trends – Internet Solicitations

• Charleston Principles: An out-of-state entity must register if:

– Its non-internet activities would require registration– The entity solicits contributions through an interactive

website and either• Targets a person in the state, or• Receives contributions from citizens of that state on a

repeated an ongoing basis (or a substantial basis through its website); or

• The entity solicits contributions through a site that is not interactive, but either specifically invites further offline activity or establishes other contacts with the state (such as sending an email promoting the website) and

– Targets a person in the state, or– Receives contributions from citizens of that state on a

repeated an ongoing basis (or a substantial basis through its website)

Trends – Responding to Social Media

• Social media permits nonprofits to raise money in different ways than charity-run websites and poses significant problems that charity regulators are trying to resolve

• Questions that arise– How to monitor "daily-deal" websites that encourage

online donations– How websites that charge fees for collecting donations

should disclose those fees– How to respond to "friends" soliciting via Facebook– How to prevent bogus charities from social network

abuse

Trends – Uniform Disclosure Statements

• Many states also regulate solicitations by requiring nonprofits to disclose certain information in conjunction with the solicitation

• Uniform Disclosure Statements are created to address these requirements

• Many organizations include them with all public communications

What Board Members Should Know and Do

FORM 990

James L. Catanzaro, Jr.

I. Understanding the Deal Your Tax Exempt Organization (TE) Has Made with the IRS

• The TE obtained exempt status by submitting an application (Form 1023) making certain representations concerning the public interest it would serve and its governing structure to achieve these results

• The IRS determined that the TE would, as governed, provide beneficial services to the public, which the government would otherwise have to furnish, and granted an exemption

• In granting exempt status, the IRS relied upon the documentation and representations made by the TE!

• The IRS, therefore, has a continuing interest in monitoring whether the TE continues to govern as described in the application and any changes that might have occurred. It does this through Form 990.

II. What You Need to Take from Form 990

It is not just a form foryour CPA to file!

• Form 990 is a detailed annual return that queries the TE about governance practices

• The IRS has stated that it ties good governance with tax compliance!

• The board, as the body primarily responsible for ensuring that assets are properly used and the purpose of the organization is pursued, must see that critical governance practices are implemented

• Although a TE is not "required" to adopt each practice asked about, the TE must implement and demonstrate a thoughtful approach to the pursuit of its operations and mission

How is Thoughtful Governance Demonstrated?

The work is done before a Form 990 is completed and involves:

1. Periodically reviewing the mission to ensure that it continues to be that which is set out in the articles and bylaws and as described in the application

• Where fundamental changes have occurred, notifying the IRS

Risk if Fail to Do:

• In Part I, Line 1 and Part III, Line 1, Form 990 requests a current statement of the TE's purposes. If fundamentally inconsistent with the original purpose of the TE, there may be a risk of a redetermination of exempt status

2. Implementing the use of responsible controls, including:

A. Appropriate conflict of interest policies and procedures to include:• Annual disclosures• Processes for identifying and

sequestering conflicted board members

• Standards by which matters involving conflicts may be properly approved

Risk if Fail to Do:

• In Part VI, Lines 12 (a), (b) and (c) ask whether the TE had a sufficient written conflict of interest policy

• If the answer is "No," the lack of any real process may raise concern about the TE's use of assets

B. Demonstrating that compensation paid to officers and directors is "fair value" and set by an appropriate procedure

Risk if Fail to Do:• In Part VI, Line 15 and Part VII, the

TE is asked how it sets compensation and how much compensation it pays to officers and directors

• If the TE does not utilize compensation processes, there may be an inference that it is overpaying

• Overpaying could result in a private benefit/inurement finding or risk intermediate sanctions– See also Part VI, Line 5!

3. Recording and maintaining contemporaneous minutes of board meetings and actions

Risk if Fail to Do:

• In Part VI, Line 8 asks whether contemporaneous documentation occurred

• If not, a negative inference may arise about the propriety of actions taken

4. Evaluating board membership with a preference, where possible, for "independent" directors

• An "independent" director has no material financial relationship with the TE

Risk if Fail to Do:• In Part VI, Lines 1(a) and (b) asks

about the number of independent directors

• Where the board is populated by members who are not independent, the TE may be subject to an inference about use of public assets

5. Making sure that the TE continues to qualify as a "public charity" if revenue sources materially change

Risk if Fail to Do:

• In Parts I, Lines 8-12 and VIII, Form 990 requests specific information about revenues

• If the TE's sources of revenue materially change, it will be forced to disclose this and may be subject to reclassification

6. Managing UBTI

• UBTI or Unrelated Business Taxable Income results from revenue created by an activity which is regularly carried on and not in furtherance of the TE's charitable mission, regardless of the use of such revenues

Risk if Fail to Do:• In Part VI, Lines 7(a) and (b) must

be disclosed– Could be subject to taxes, interest

and penalties if not disclosed

• Also, too much UBTI could lead to an audit and questions about the continued tax exempt status of the TE if at any time the unrelated activity becomes "substantial"

What Board Members Should Know and Do

FORM 990

APPENDIX

J. Nelson Irvine

Who is Looking at Your 990?

Forms 990 are public records. Donors and creditors as well as regulatory agencies such as the State Attorney General pick up information from Forms 990. Reporting agencies like Guidestar use and rely on information in the Form 990. State and local tax assessors may use and rely on statements of mission, purpose and related activities.

Required Provisions in Your Organizing Document

• Section 501(c)(3) requires that our organizing document state your exempt purpose(s), such as charitable, religious, educational, and/or scientific purposes.

• Describe specifically where your organizing document meets this requirement.

[From Instruction to Form 1023]

Narrative Description of Your Activities

• Describe your past, present and planned activities in a narrative.

• If this application is approved, it will be open for public inspection.

• Your narrative description of activities should be thorough and accurate.

[From Instructions to Form 1023]

Purpose

"To the extent that the corporate purpose is described in more than one document, it is important that these descriptions be consistent. [Guidebook for Directors of Nonprofit Corporations, Third Edition, pg. 9].

Purpose and Mission

"It is very important that the mission statement is consistent with any purposes statement set forth in the articles of incorporation [the charter] or bylaws." [Guidebook for Directors of Nonprofit Corporations, Third Edition, pg. 9]

Mission

If a 501(c)(3) organization does not have a governance instrument, such as charter and bylaws, the organization should have a mission statement. The mission statement should reflect the organization's purposes, activities and constituencies.

Schedule OMission Statement

Example

The organization operates a public garden, dedicated to promoting the beauty and value of plant material through education, preservation, recreation and research. The garden celebrates an Alaskan sense of place through the aesthetic display and interpretation of plant collections uniquely suited to the sub-artic environment.

990 Review Process

• Part VI, Governance, Management and Disclosure

• Section B. Policies

• 11a. Has the organization provided a complete copy of this Form 990 to all members of its governing body before filing the Form?

• 11b. Describe in Schedule O the process, if any, used by the organization to review this Form 990.

Schedule O990 Process Statement

Example 1

• Form 990 is prepared by an independent CPA firm and submitted to the executive director for review.

[Form 990, Part VI, Section B, Line 11]

Schedule O990 Process Statement

Example 2

• Form 990 is prepared by the independent accounting firm, then reviewed and verified by the chief financial officer and reviewed by the chairman of the finance committee. Copies of the form are then sent to all members of the executive committee for review and comment. Copies are made available to all members of the board of directors. The final version is filed with the Internal Revenue Service.

[Form 990, Part VI, Section B, Line 11]

Schedule O990 Process Statement

Example 3

• The Form 990 approval process is the same as the audited financial statement review process. The audit committee is presented a draft copy of the Form 990 for detailed review and approval. Upon audit committee approval, the Form 990 is presented to the chairman of the board of directors and president for final approval. Upon final approval, the Form 9990 is submitted to the chief financial officer for signature.

[Form 990, Part VI, Section B, Line 11]

General Standard for Directors – Duty of Care

(a) A director shall discharge all duties as a director, including duties as a member of a committee:

(1) In good faith;

(2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and

(3) In a manner the director reasonably believes to be in the best interests of the corporation.

General Standards for Directors - Reliance

(b) In discharging such duties, a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:

1. One (1) or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented;

General Standard for Directors - Reliance

2. Legal counsel, public accountants or other persons as to matters the director reasonably believes are within the person's professional or expert competence; or

3. A committee of the board of directors of which the director is not a member, as to matters within its jurisdiction, if the director reasonably believes the committee merits confidence.

Questions?

Disclaimer

This presentation is provided with the understanding that the presenters are not rendering legal advice or services. Laws are constantly changing, and each federal law, state law, and regulation should be checked by legal counsel for the most current version. We make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the information contained in this presentation. Do not act upon this information without seeking the advice of an attorney.This outline is intended to be informational. It does not provide legal advice. Neither your attendance nor the presenters answering a specific audience member question creates an attorney-client relationship.