Editor’s note: This commentary is by Don Keelan, a certified public accountant and resident of Arlington. The piece first appeared in the Bennington Banner.
[N]ot too long ago, it was a rarity for a lawsuit to be filed against a nonprofit entity. Who would ever think of bringing a nonprofit agency to court? The plaintiff would be ostracized within his or her community. It just did not happen, but that has changed.
According to an article in the summer 2015 issue of The Nonprofit Quarterly, lawsuits filed against nonprofits are no longer a thing of the past – they are, in fact, numerous, and are becoming as prevalent as lawsuits filed against for-profit entities. But “why,” one would ask.
Pamela E. Davis, who wrote the piece for The Nonprofit Quarterly, has quite a background on the subject. She is the president and CEO of the Nonprofits Insurance Alliance Group. Davis’ piece focuses on one specific area of insurance that most nonprofits have or should have – directors and officers liability insurance.
Here in Vermont, with so many nonprofits, there are state statutes in place that provide immunity for those of us who volunteer our time and service to a nonprofit board. According to Davis, there are three areas where directors (trustees) of nonprofits can find themselves and their fellow board members (and organization) in front of a jury.
The three are: governance liability, fiduciary liability, and employment practices liability. I will skip the first two and focus on employment liability. Davis surveyed 1,500 recently filed nonprofit lawsuits and found that only 5 and 1 percent, respectively, pertained to governance and fiduciary liability. A whopping 94 percent were applicable to employment issues. Why am I not surprised?
Many nonprofits in Vermont, in order to survive financially, fall victim to designating employees as exempt when they are not, treating employees as contractors (or freelancers) when they are not, or just pay their employees on a per-diem basis.
In Vermont, a month does not go by that we don’t read, in our media sources, about the contentious relationships between an organization’s board and its executive director (or an employee). And these are the ones that make it into the media. There are numerous others (not based on any specific research) that never become public due to a “non-disclosure agreement” executed by the warring parties.
Full transparency has never been a virtue of the nonprofit world, whether pertaining to employment litigation or fiduciary mischief. Otherwise, it would heap a great deal of negative publicity – and could seriously impact an organization’s mission, not to mention the impact it would have on fundraising.
Employment lawsuits against nonprofits are very much analogous to embezzlement losses within this sector of the economy. Many institutions are not large enough to have the proper staff – either in a human resource department or a finance department, as would be the case in much larger institutions.
The lack of resources becomes even more critical as an ever-increasing amount of employment regulations are heaped upon institutions, both large and small.
Davis notes that the most common types of employment claims (lawsuits) are sexual harassment, racial and gender discrimination, retaliation, defamation, failure to accommodate, and improper classification.
For space reasons, I will only take up the claim for improper classification. Many nonprofits in Vermont, in order to survive financially, fall victim to designating employees as exempt when they are not, treating employees as contractors (or freelancers) when they are not, or just pay their employees on a per-diem basis. Why? To avoid the 20 to 30 percent overhead cost that relates to benefits, payroll taxes, and increase in liability insurance.
Pamela Davis provided some thoughtful advice: “The demands of nonprofits seem to grow no matter how hard or long they work. But there are a couple of things that we believe are essential on the governance side that will more than repay the time, energy, and money expended. These are: (1) get good professional advice before taking a significant employment action; and (2) remember that a 501(c)(3) nonprofit is held in trust for the public, and management is accountable to them.”
