| Coping with Economic Downturn: Weathering the Storm without Legal Trouble |
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| Saturday, 03 January 2009 22:44 |
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The instability of today’s economy is having far-reaching effects on the nonprofit sector. With few reserves and a heavy dependence on government sources of revenue, human-services nonprofits The full impact of the downturn on nonprofits will not be known for a while, but few, if any, charitable organizations will emerge completely unscathed. While the boards and managers of nonprofits are positive It is imperative that nonprofit managers and board members be proactive to maintain financial equilibrium and The resolve of those boards and managers to remain legally compliant may also be tested. Virtually every step that a nonprofit can take to protect itself has legal implications, and many strategies that may be considered to shore up finances or control costs could place the organization in legal jeopardy.
Proactive Steps Keep your board in the loop. The organization’s board members were selected because of their belief in the organization’s mission, their skills and their connections. Unify the board to work collectively to preserve core programs. Volunteer board members, however, are only going to be willing to leverage their personal relationships to benefit the corporation if they are confident that they have a complete and accurate picture of the corporation’s fiscal health. Board members have a duty to oversee the organization’s financial management and this duty is heightened during difficult financial times. Boards must demand, and staffs must provide, frequent and accurate financial reporting. Contingency planning is not a meaningful exercise unless the board is involved in anticipating the difficult choices the organization may have to make. Provide for ample liquidity. Ready access to cash will be necessary to provide a cushion against sudden shifts in funding. Review donor restrictions on gifts to determine what organizational assets, if any, are restricted and what those restrictions are. If possible, discuss relieving those restrictions with the donors. As tempting as it might be to tap a restricted asset without the donor’s consent, even temporarily, this is a dangerous proposition that could jeopardize retention of the gift. If the organization has a strong financial history, speak to the bank about opening or extending the organization’s line of credit. If debt service is difficult right now because of cash flow constraints, negotiate an interest rate or amortization rate adjustment. Safeguard your staff. For most nonprofits, their staff is their greatest asset. Start by reviewing the employee benefit package the organization offers to ensure the most cost-efficient options. This includes enforcing “use it or lose it” vacation and sick day policies and requiring staff to use accrued vacation. Depending on the terms of the personnel policies, accrued vacation and sick days may have to be paid out when a staff member leaves the organization. This can constitute a significant liability. Conduct timely performance evaluations so staff has a clear understanding of expectations, and ensure that personnel files are up to date and contain documentation of performance reviews for recent periods. Meet grant or contract deliverables. Review deliverables outlined in grant or contractual agreements, particularly performance-based contracts. Budget cuts may mean that your organization is not able to deliver all the services originally planned. It is better to seek budget and contract modifications now than risk a disallowance or a pullback of funding later. If necessary, meet with funders to discuss changes in priorities and needs. Common Pitfalls As you navigate the challenges that lie ahead, be aware of a few common pitfalls that nonprofits have fallen into that carry with them significant consequences. Failure to Remit Withholding Taxes Nonprofit employers are required to withhold payroll taxes from employee paychecks and to then remit the taxes withheld, along with employer side taxes, to state and federal taxing authorities. The funds withheld from employees’ paychecks are known as “trust fund taxes.” Organizations that are struggling with cash flow may delay remitting these payments to taxing authorities. Failing to pay the trust fund taxes to taxing authorities brings with it potential personal liability for the “responsible person”, i.e. the person who decides not to pay the withholding taxes on time and potentially volunteer board members. Taxing authorities also have the power to levy and lien bank accounts. Misclassifying Employees To lower fringe benefit costs, some nonprofits may be considering classifying workers as independent contractors rather than employees. If a worker is misclassified and an employer did not have a good faith basis for the misclassification, taxing authorities will require payment of back taxes and related penalties and interest. If the employee was an hourly employee that did not receive proper overtime payments there could be a violation of the wage and hours laws. Also, employers are required to pay for unemployment, workers compensation insurance and disability insurance. There are further penalties that can be assessed for failure to make these payments. Commingling Contract Funds Many government contracts require the funds related to that contract be kept in a segregated bank account and that contract funds not be used to pay expenses related to other programs. With extensive delays in government contract payments, many nonprofits are challenged to honor those restrictions even in the best of times. As constraints on cash flow heighten, it will become more difficult to keep funds completely segregated and to restore funds that have been “borrowed” for other programs. Take the time to review the fine print in your contracts and to bring your internal control procedures in line with those obligations. Legal Support Because the funding landscape is changing so rapidly, boards must engage in contingency planning now to make quick decisions in a fast-moving economic crisis. An attorney should review the draft contingency plan and then help implement that strategies outlined. To make that legal help efficient and effective, start to gather pertinent information to help volunteer attorneys assess the current status and needs of the organization. Key items to assemble: • Fundraising: grant agreements, donor letters, solicitation material, fundraising contracts • Personnel management: personnel policies, employee benefit contracts, performance reviews • Real property: deeds, mortgages, leases • Mergers and strategic alliances: certificates of incorporation, bylaws, term sheet • Debt restructuring: current list of assets and liabilities Legal Assistance Nonprofits should contact their legal counsel for advice regarding contingency planning and strategies for coping with the economic downturn. The Lawyers Alliance website contains information about how to request pro bono legal assistance and Board Talking Points that will facilitate planning and action by nonprofit board members and managers http://www.lawyersalliance.org/economic_downturn.php. Through our Resource Call Hotline (212) 219-1800 x. 224 Lawyers Alliance can provide general information over the telephone on legal issues of importance to nonprofit staff and Board members including those related to preservation of programs. Sean Delaney is Executive Director at Lawyers Alliance for New York. Linda S. Manley is Legal Director at Lawyers Alliance for New York.
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