3 Common Legal Issues Nonprofit Boards Experience

Many laws that impact the commercial industry are still applicable to nonprofit organizations. Good intention doesn't justify a lapse in protocol, and board members should take meticulous care to research regulations that might affect their operation. Let's take a look at three common legal issues that nonprofit boards experience, so that you can identify and avoid them.

1. Misclassification of Employees

This legal issue most commonly manifests as misclassification of employees as "independent contractors." These groups are two very different classifications that require their own distinct protocol, and the terms of the initial contract signed between an employer and the employee have no bearing on the matter.

A worker's classification as an independent contractor depends on the following: 

• The contracts and benefits of the person performing the work.
• The tools and expenses involved in the person's responsibilities.
• The manner in which they get their work done.

If an employee receives the treatment of an independent contractor, they may not enjoy the benefits of workers' compensation. This problem has the potential to lead to a lawsuit in the event of an injury, in addition to other misclassification problems involving payroll tax liabilities and penalties.

In the case of Marie v. American Red Cross, the nonprofit misclassified their employees as volunteers. Even a seemingly inconsequential misnomer can lead to serious legal trouble, which you can avoid with a nuanced understanding of different worker classifications.

2. Political Campaigning and Lobbying

No board member may use their operation as a platform on which to publicly support or oppose any candidate running for public office or already elected. Violation may result in the imposition of excise taxes and denial or revocation of tax-exempt status. The penalties are steep.

Nonprofit organizations are likewise not permitted to contribute to political campaigns or intervene in any way on behalf of a candidate. Repurposing a charitable operation to benefit a member, or misappropriating funds in any way, is inherently immoral. The guilty party will face serious repercussions if funds are improperly used.

Board members that speak for their nonprofit must show discretion, and under no circumstances can they issue a public statement on behalf of a candidate. Any politically charged public statement, either verbal or written, is against regulations and will likely result in the aforementioned consequences.

The Sierra Club, an environmental organization, received $26 million from one of the country's largest gas companies, which represents a significant conflict of interest. You can avoid these kinds of legal issues very easily by keeping your profession and affiliations separate.

3. Compliance with State Laws

Different states have different legal requirements that nonprofits must adhere to. Board members should closely inspect the regulations of a new state before moving their operation elsewhere, as a failure to understand proper conduct can result in serious consequences for everyone involved. 

If a nonprofit's activities qualify as "doing business" within a certain state, they have to register as a foreign corporation. All of the money that they earn in these areas will later need detailing in their annual reports, so careful record-keeping is essential to maintain the legality of an operation. 

Payroll and workers' compensation are important to review, and employees active in the new state may require special consideration. If board members have more pressing concerns, they should take care to delegate this important responsibility to a trusted professional.

The Red Cross received criticism for misrepresenting facts and figures for their work in Haiti, a danger that nonprofits face operating outside their state of domicile. You can avoid this legal issue if you review state laws before you begin soliciting in a new place, maintaining accurate reports in the process.

Ignorance of the Law Is Not a Defense

Startup nonprofits might benefit from legal consultation with a professional who can guide them in the right direction. Poor planning and research on the part of inexperienced board members often results in legal trouble that more established corporate boards don't face.

Either way, educating yourself can help prevent the issues listed above.