No Safety in Numbers

An opinion released by the Michigan Court of Appeals on March 20, 2014, was discussed in “Nash v. Duncan Park Commission – Trustees Get Burned for Accident.” In that case, volunteer trustees were subjected to liability for the death of a child sledding in a Grand Haven park. It is gratifying to be invited to serve on a board of trustees or directors. Meeting with a group of like-minded citizens can be a pleasurable break in the business of work-a-day living. However, it can impose very serious, although unpaid, responsibilities. This post will discuss some of these responsibilities and how a candidate for a volunteer board should approach the job.

Some civic activities, such as jury duty, are unavoidable. Others, like voting, running for office, or serving on boards and commissions are voluntary. Being asked to serve on a board of trustees or directors for a nonprofit or being invited to sit on a civic panel is a privilege. It is an indication that the person invited is respected for his or her knowledge, experience, and standing in the community.

As gratifying as the invitation may be, acceptance should be carefully considered. Aside from the work, itself – attending meetings, acting as an officer, serving on subcommittees, and organizing and attending fund raisers – there can be devastating liability. The three trustees on the Duncan Park Commission may be found liable for a seven-figure judgment. Whether the board has three members or thirty, each board member is potentially liable for mistakes or misdeeds by the organization’s management or employees. To avoid financial catastrophe, there are six issues a prospective or serving board member should consider.

A) Board Insurance. Always insist on adequate insurance under an officers and directors liability policy. Whether the board is for a neighborhood association with a budget in the hundreds or for a social service agency with a budget in the millions, there is always the possibility that the board will be sued. A fund raiser in a park could turn disastrous if a child drowns in a nearby stream. A wine-and-cheese reception could end in catastrophe if a guest leaves drunk and had a driving accident or an unexpected ingredient in the food served causes food poisoning or a severe allergic reaction. Being careful is never enough. Liability is often based on bizarre events that no one could have expected. Think of it this way: There are 330 million people in the United States. That means that events with odds against them of 1:1,000,000 happen 330 times a day in this country.

B) Board Authority. There are many nonprofit social service agencies with multi-million dollar budgets, hundreds of employees, and volunteer boards of directors. The boards of such agencies often have no real authority over agency management. Boards that do have authority under the organization’s by-laws may be packed by the executive director with people he or she can control. They are window-dressing in that case – a very dangerous situation for board members.

Nonprofit organizations that accept funding from the federal government are under the threat of immense penalties under the False Claims Act if the management is not extremely careful in using the funds properly and keeping good books. Employees may engage in all sorts of improper activities that could result in liability for supervisors, managers and directors if they are negligent in overseeing operations. If the management team is irresponsible, the board may be held liable, even if board members have no real authority. If members of the board of directors could be held liable, they should ensure that they have the authority to control the management and exercise careful oversight.

Do not serve on a board that does not authority over the activity under its purview. If on a board, take governance issues seriously.

C) Event Insurance. Most events involve people and people are unpredictable. A dish cooked for a potluck may contain E-coli. A driver for a travel hockey team may be drunk or drugged. A child on a camping trip may disobey the counselors and get lost in a wilderness. Event insurance is relatively inexpensive, so make sure that every event has proper insurance coverage. If no company is willing to insure a particular event, that will be a warning that the proposed activity is not safe. For example, if the insurer refuses to cover a field trip to a church where they handle rattlesnakes, it is probably not somewhere you should send a vacation bible school class.

D) Financial Integrity. An organization with employees on its payroll should have a chief financial officer or treasurer with professional credentials and experience in the type of activity the organization carries on. Even a small nonprofit should have a budget and its accounts should be reviewed at every board meeting. Fiscal integrity is vital. If the organization cannot afford to hire a financial professional, an accountant or experienced financial officer should be recruited to volunteer on the board, or a CPA firm should be hired to keep the organization’s books.

E) Payroll and Management. Proper payroll management is necessary when an organization has employees. Calling an employee an independent contractor does avoid IRS withholding requirements and other employer obligations. Paying employees “under the table” or issuing Form 1099 instead of doing proper withholding is not just dangerous from a tax standpoint; failing to purchase workers’ compensation insurance means that the organization would be liable for medical expenses, lost earnings and disability if an employee were injured on the job.

It is also essential to have a comprehensive employment policy manual and a contract with each employee. Small employers are as vulnerable big companies to complaints by the Equal Employment Opportunity Commission, the Department of Labor Wages and Hours Division or the Occupational Safety and Health Administration.

F) Proper Organization. Many small companies run into legal difficulties by failing to organize their businesses properly. It is not sufficient to file articles of organization with the state and start doing business. Well-drafted by-laws and operating agreement are the foundation for the operation of the business. This is even more important for a charitable organization that solicits donations. Failure to create comprehensive plans for operations and to adhere to them could lead to major tax problems and even prosecution. Organize well, or face dreadful consequences.

Before joining a board of directors or trustees, review the organization’s operations, by-laws and operating agreements, and policy statements or procedure manuals. Also investigate the financial statements and accounting practices. The fact that an organization has been functioning for years does not guarantee that it has been following proper procedures and has not been mishandling funds. In forming a new organization, consult a lawyer with experience in advising nonprofits and engage the services of a certified public accountant to help set up the accounts and provide auditing services.

Service on a board of directors or trustees can be very rewarding. However, there are also pitfalls. Anyone joining a board must take precautions. The fact that a majority of board members support a particular action is no guarantee that the decision is right. For a case of serious board mismanagement, consider the PTL board’s mismanagement and the payoff of Jessica Hahn to protect Jim Bakker’s reputation and ministry.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2014 John B. Payne, Attorney
 
 

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