Tuesday, December 16, 2014

Give Your Board a Christmas Present – Schedule a Legal Check-Up

With the year’s end in sight, now is a great time for nonprofit board members and other key leaders to think ahead to next year’s plans and goals.  From a legal perspective, the beginning of a new year may be an optimal time to check up on the organization’s annual and other legal compliance matters as follows.  By doing so, nonprofit leaders can better fulfill their fiduciary duty of due diligence to responsibly govern the organization.  The measures below may be addressed at a board meeting or separately, as appropriate.  What a great Christmas present!

            1)        Check Filing Deadlines for Government Reports.

            Most nonprofits must file periodic government reports, ranging from annual reports owed the Secretary of State (typically in the anniversary month of incorporation), the IRS Form 990, state charitable solicitation renewals, and employment-related filings (due quarterly and/or annually).  For effective leadership, nonprofit board members should be aware of these filing requirements and exercise oversight to make sure they are satisfied.  A spreadsheet or chart may be helpful for organizations that operate in multiple states to track the applicable filing deadlines, since they can vary from state to state.  Coordination with the organization’s accountant and payroll service may be key, as well, especially for significant employment changes.  Since the proverbial buck stops with the board, directors need to stay informed and on top of these requirements. 

            Note that the IRS Form 990 deadline is May 15 for organizations operating a calendar fiscal year (i.e., four and half months after the fiscal year close).  Early preparation can be critical, particularly for organizations that receive more than $200,000 in annual revenues and therefore must file the full-blown Form 990.  (And one question on the Form 990 asks whether board members have had an opportunity to review it.  The “right” answer is “Yes.”)  Other organizations with lower revenues may be eligible to file the considerably shortened Form 990-EZ or even the “e-postcard” Form 990-N.  

            2)        Review Corporate Charter Documents.

            Another key area for periodic checking is an organization’s charter documents – its articles of incorporation, any articles of amendment, and bylaws.  Does the “purpose statement” in the bylaws match the purpose statement in the articles?  Is the purpose statement current (e.g., is it consistent with what is listed on the organization’s website and in its brochures)?  Does it accurately reflect the organization’s current scope? If the answer to any of these questions is no, then some updating is in order.   Ideally, a nonprofit’s purpose statement should serve as an organization’s guiding “compass,” not only operationally but also so that it can qualify for available legal exemptions consistent with such self-identification.

            With respect to the bylaws, it is critical that board members have a working understanding of its provisions.  For example, the directors and officers should be elected, appointed, and removed in strict accordance with its requirements.  Meetings should likewise be called and conducted in compliance with applicable provisions.  In addition, the board should understand how their committees are to be constituted and utilized.  To the extent that board governance does not match the bylaw provisions, then either the bylaws or board practice should be changed.  Many bylaw provisions also may warrant updating, such as to provide expressly for meeting notices via email, confidentiality, financial practices, and committee structures.  Bottom line: a nonprofit’s bylaws should be a helpful, accurate, and current reference tool for all board members, for clear understanding, effective governance, and avoidance of potential problems later in actual practice.

            3)        Complete Annual Conflict of Interest Disclosures.

            Directors, officers, and other key leaders of nonprofit organizations owe a fiduciary duty of loyalty to govern in the organization’s best interests.  Stated differently, leaders may not use their positions of trust for personal advantage at the nonprofit’s expense.  Consequently, to the extent any leader may have a financial or personal conflict by reason of family, business, or other relationships, such matter must be fully disclosed and satisfactorily addressed to determine whether it is permissible or impermissible.   

            A “best practices” approach is to utilize an annual conflict of interest form, to be completed each year and evaluated for any potential issues.  This saves potential embarrassment and awkwardness, and such proactive disclosure guards against potential legal issues later.  In addition, this disclosure form should be utilized for any new board member, and it may be used when a conflict arises in a particular situation.  (Also note that New York recently amended its nonprofit law to require such disclosures both annually and by new board members.)  

            4)        Check the Corporate Notebook.

            A highly beneficial tool for nonprofits is a corporate notebook, which serves as a repository of corporate, tax, and financial information.  The notebook should contain the organization’s articles and bylaws (which makes them easy to access!), recent board minutes (e.g., from the past year), corporate financials (e.g., audited statements, most recent Form 990), annual conflict of interest disclosure statements, key corporate policies, standing board resolutions, and other important documents related to the organization.  Such a notebook may serve as a great reference tool for leaders and may be an attractive way to showcase a well organized and governed nonprofit to prospective board members.  It also may save time and trouble later, when such key documents are needed for legal or financial matters.  

            For optimal effectiveness, make sure to annually update the corporate notebook.  Financials, minutes, and annual conflict of interest disclosures all should be current or dated within the past year.  Corporate policies and standing board resolutions may need additional attention.

            5)        Remind Leaders of Their Confidentiality Obligation.

            As part of each board member’s and key leader’s fiduciary duties to their nonprofit organization, they owe a duty to keep board matters confidential.  The scope of this duty includes the organization’s financials, donor lists and similar contact information, and operational matters addressed through their board service.  A gentle reminder each year may prove useful.  In addition, it may be helpful to include a written acknowledgement as part of each leader’s annual conflict of interest disclosure statement. 

            6)        Make Plans to Review Board Policies.

            As with a nonprofit’s purpose statement and bylaws, it is critical that the organization have effective board policies in place that are accurate, appropriate, and legally compliant.  Accordingly, the board may want to schedule times later in the year for reviewing the organization’s policies.  To ease the burden, it may be helpful to delegate responsibility for policy review to committee members (e.g., review of employee and volunteer handbook – human resources committee; review of financial policies – finance committee; risk management – property committee/other quality control) and then have the board exercise oversight.  Legally compliant policies should fit each organization well, particularly with respect to evolving and other critical legal areas such as risk management, employee discrimination issues, and technology-related aspects including use of social media and privacy.

            For faith-based organizations, it may now be particularly important to review the organization’s legal documents, policies, and programs to ensure optimal religious liberty protections.  The legal landscape relating to religious liberty concerns, particularly in relation to sexual orientation and gender identity issues, is changing rapidly.  Our firm continues to report on cases, executive orders, and other developments regarding this area of law.  Faith-based organizations concerned with their vulnerability to discrimination liability should talk to a knowledgeable attorney about how they can address such concerns through updates to their documents, policies, and programs.

            For more information on legal issues affecting nonprofit organizations, contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com or visit us on the web at www.wagenmakerlaw.com.

Tuesday, December 9, 2014

Sixth Circuit Bucks Trend, Refuses to Overturn State Same-Sex Marriage Laws

        Against the recent trend in federal circuit courts, the Sixth Circuit has refused to hold state laws supporting the traditional definition of marriage unconstitutional, largely on states’ rights, non-religious grounds.  Last month, in a 2-1 decision, the Sixth Circuit reversed decisions of four district courts that struck down such state laws.  See DeBoer v. Snyder, No. 14-1341, 2014 WL 5748990 (6th Cir. Nov. 6, 2014) (click here for copy of the opinion).  This decision applies to Kentucky, Michigan, Ohio, and Tennessee.  The Sixth Circuit’s decision is likely to be appealed to the Supreme Court, but whether the Supreme Court will elect to hear the case is anybody’s guess.  For now, the traditional one woman-one man definition of marriage remains the law of the land in the four states under the Sixth Circuit’s jurisdiction.  Other district courts not under the Sixth Circuit’s jurisdiction may elect to disregard the Sixth Circuit’s decision.  See, e.g., Rolando v. Fox, No. CV-14-40-GF-BMM, 2014 WL 6476196 (D. Mont. Nov. 19, 2014).

Background:  United States v. Windsor and the aftermath

In 2013, the Supreme Court struck down the Defense of Marriage Act.  The Court’s decision made the prohibition of same-sex marriage illegal in the federal context, but did not expressly address state laws addressing the issue.  After Windsor, however, federal courts have rapidly overturned state laws prohibiting same-sex marriage as being invalid under the U.S. Constitution’s due process and equal protection protections.   In the federal system, there are twelve circuit courts of appeal with geographical jurisdiction.  Each court covers several states.  Prior to the Sixth Circuit’s DeBoer decision last month, the Fourth, Seventh, Ninth, and Tenth Circuits decided cases that effectively legitimized same-sex marriage in the 30 states within those circuits.  The District of Columbia also recognizes sex marriage.  Six other federal circuit courts have yet to chime in definitively.  But the Sixth Circuit’s opinion may have slowed the momentum of sweeping change in the legal landscape concerning this issue. 

At Issue:  States’ Rights

            In DeBoer, the two-judge majority did not take a position as to whether same-sex marriage should be legal.  Instead, the majority focused on the core federalism question of states’ rights with respect to this issue.  As the majority opinion stated at the outset:

[O]ne option is not available: a poll of the three judges on this panel, or for that matter all federal judges, about whether gay marriage is a good idea. Our judicial commissions did not come with such a sweeping grant of authority, one that would allow just three of us—just two of us in truth—to make such a vital policy call for the thirty-two million citizens who live within the four States of the Sixth Circuit: Kentucky, Michigan, Ohio, and Tennessee. What we have authority to decide instead is a legal question: Does the Fourteenth Amendment to the United States Constitution prohibit a State from defining marriage as a relationship between one man and one woman?

DeBoer at *1. 

            The majority framed its discussion in terms of historic federalism and concluded the Fourteenth Amendment did not prohibit such state definitions about the nature of marriage.  The court held that Windsor did not address the matter of states’ rights.  Instead, the court reasoned, Windsor and the Supreme Court’s refusal to disturb state family-oriented laws actually underscored the states’ right to self-determination in this area.  In doing so, the court’s majority noted the extensive marriage-related prerogatives that all states have historically enjoyed without question or federal intrusion.  These state-covered areas include minimum age requirements for marriage, consanguity (kinship) requirements, prohibitions against polygamy, and permissible grounds for divorce.  The majority pointed out that the Supreme Court previously held that a state’s denial of a marriage license to a same-sex couple did not raise a substantial federal question.  See Baker v. Nelson, 409 U.S. 810 (1972).  Thus, the majority claimed, the circuit court had “no license to engage in a guessing game about whether the Court will change its mind or, more aggressively, to assume authority to overrule Baker ourselves.”  Id. at *5.

            In addition, the court highlighted the extensive legislative and voter activity that affirmed traditional marriage by high percentages, which strongly indicate how each state views the same-sex marriage issue and therefore deserves great deference.  The court majority also observed that “traditional” marriage is just that:  strongly supported by worldwide history throughout thousands of years.  In contrast, other states that have legalized same-sex marriage are still within an experimental stage that – in accordance with federalist principles deferring to states’ rights – is entirely appropriate within our country’s constitutional framework.  

            In her dissenting opinion, Judge Daughtrey criticized the majority for treating “both the issues and litigants here as mere abstractions,” and failing to “grapple with the relevant constitutional question in this appeal:  whether a state constitutional prohibition of same-sex marriage violates equal protection under the Fourteenth Amendment.”  Id. at *27.  But instead of engaging in the majority’s discussion on federalism, she focused on the plaintiffs’ specific family situations and related social and psychological issues.  In her judgment, these issues directly implicated equal protection rights for the plaintiffs challenging the state laws.  Judge Daughtrey then analogized the equal protection rights of the plaintiffs here to the equal protections rights in historic cases involving school desegregation, miscegenation, and slavery itself.  Taking this approach, she concluded that the equal protection interests of discriminated plaintiffs trumped the voice of each state’s voting majority that had codified laws against same-sex marriage.  The dissent concluded that the Sixth Circuit should not have reversed.  In essence, a court’s responsibility is “to right fundamental wrongs left excused by a majority of the electorate…”  Id. at *42. 

Appeal likely – Supreme Court may settle division

            From this point forward, there are two potential avenues of appeal for the plaintiffs.  First, they may request a rehearing for an en banc review by the Sixth Circuit.  An en banc review would involve all sixteen judges who currently sit on the Sixth Circuit rehearing the case decided by the three-judge panel.  Such rehearings are usually very rare, occurring in less than one percent of all federal appeals cases.  But given the importance of this case, and its far-reaching implications, the Sixth Circuit may choose to allow an en banc review if so petitioned. 

The other potential avenue is an appeal to the Supreme Court.  Already groups like the American Civil Liberties Union have expressed their intent to file such appeals.  In October, the Supreme Court refused to hear appeals from states affected by the decisions of the four federal circuits listed above that legitimized same-sex marriage.  Whether the Supreme Court will similarly deny certiorari and refuse to hear an appeal from the Sixth Circuit is anyone’s guess.  Given that there is now a split among the federal circuits, the Supreme Court may be more inclined to hear the appeal.  But at this point, no one knows for sure. 


Regardless of what the Supreme Court may or may not do, the potential implications for religious nonprofits are great.  Many churches, other religious institutions, and faith-based organizations hold strong, sincere religious beliefs concerning the nature of marriage, sexual orientation, and same-sex marriage.  While churches, for now, enjoy First Amendment protections related to sexual orientation and gender identity issues, other non-church religious organizations and faith-based businesses have more limited protections.  In some states, anti-discrimination laws include sexual orientation as a protected class, and additional states may soon follow suit.  Given the rapidly changing landscape in this area of the law, nonprofits should be vigilant to keep track of specific restrictions and requirements in states in which operations are conducted.  Our law firm will continue to monitor the progress of appeals from the Sixth Circuit and other related cases, and provide updates as we have them.

            For further legal information on same-sex marriage, sexual orientation, and gender identity, and the relevance of such issues in the nonprofit setting, please contact one of our attorneys at info@wagenmakerlaw.com or 312.626.1600, or visit us on the web at www.wagemakerlaw.com .

Monday, December 1, 2014

Multi-Site Nonprofit Employers and Unemployment Coverage (Part 2)

As explained in our law firm’s prior blog article, nonprofit employers enjoy special privileges under unemployment laws.  For example, nonprofit employers are “covered” by such laws only if they have at least four employees during at least 20 weeks of a calendar year.  (Note that churches and other religious institutions are categorically exempt.)  But what happens if a nonprofit has at least four employees scattered among multiple states?   
            For example, consider a nonprofit organization with two employees working at its office in Illinois, one employee working remotely from Seattle, and two employees working remotely from Mississippi.  Is the nonprofit “covered” for unemployment tax purposes?  Must it pay unemployment taxes into each state system?  Or is the nonprofit completely exempt, since it does not have at least four employees in any one state?  This is an increasingly common employment scenario, so a good understanding is important for effective legal compliance.

A.             Four Tests to Determine Jurisdiction

            In situations where employers have employees performing in multiple states, such employers must pay unemployment tax to the state to which tax is owed.  States have generally agreed upon a four-step analysis to determine the state to which unemployment tax is owed.  With the exception of the third test, the tests refer to factors pertaining to the employee.  The below tests are to be performed consecutively, in the order specified, for each of the multi-state organization’s employees.   

1.              Localization.   

The employer should first consider the state in which the employee’s work is localized.  If most of the employee’s activities are performed in a single state, the employer is usually considered subject to that state’s unemployment tax. 

2.              Base of Operations.

If the localization test is not applicable, the employer should next look to see whether some of the employee’s work is performed in the state in which the employee’s base of operations exists.  For example, if an employee performs services in Virginia, North Carolina, and South Carolina, and the employee’s base of operations is in North Carolina, then North Carolina’s unemployment compensation law applies.

3.              Place of Direction and Control.

If the first two tests do not apply, the employer should next look to the state from which the employer’s authority is exercised.  If some of the employee’s work occurs in the state from which the employer exercises control, then that state’s law applies.  If, for example, the employee works in Georgia, Florida, and Alabama, and the company exercises control from Alabama, then Alabama’s unemployment compensation law applies.  But if the company exercises control from Mississippi, the employer should use the Employee Residence test. 

4.              Employee Residence. 

If the first three tests do not apply, the employer should look to the place where the employee lives, is registered to vote, has his or her children in school, and refers to as his or her “home.”

B.             Interstate Reciprocal Coverage Arrangement

            Forty-five states have adopted the Interstate Reciprocal Coverage Arrangement (“IRCA”) that permits employers to bypass the four-step test articulated above and to elect to make payments to one specific state.  The five states that are not signatories to the IRCA are Alaska, Kentucky, Mississippi, New Jersey, and New York.  Puerto Rico also has not signed the IRCA. 

Under the IRCA, employers may elect to be subject to a participant state’s unemployment compensation law.  “Such an election may be filed,
with respect to an individual, with any participating jurisdiction in which (1) any
part of the individual's services are performed; (2) the individual has his residence; or (3) the employing unit maintains a place of business to which the individual's services bear a reasonable relation.” 

To make the election, the employer must submit a form documenting its election to the agency of the elected jurisdiction that has authority to administer the unemployment compensation law in that jurisdiction.  The election must receive approval from the elected jurisdiction and any other interested jurisdictions that might otherwise govern the employer’s activities.  In Illinois, employers should use Form RC-1 to make an election under the IRCA.  Available at www.ides.illinois.gov.

C.            Recommendations
            As discussed in our firm’s previous article, nonprofit corporations are not liable for federal unemployment tax.  In some states, however, nonprofits will be subject to state unemployment compensation laws.  Furthermore, given that some nonprofits have employees in multiple states, such nonprofits may be subject to multiple states’ unemployment compensation laws, as determined under the four tests discussed herein. 

In light of this potential for complex multi-state liability, nonprofits should consider election in the Interstate Reciprocal Coverage Arrangement.  Such election, when approved by the elected state and other interested states, will limit the employer’s requisite filings to a single jurisdiction.  In cases where the nonprofit has employees in states that are not signatories to the IRCA, the nonprofit may have to file in those few additional states as well.  In cases where the IRCA does not apply, employers should apply the four jurisdictional tests to ensure compliance with the proper state’s unemployment compensation laws. 

Complying with multi-state unemployment requirements can be challenging for nonprofits, which generally do not have large HR departments.  Use of a qualified payroll company can help.  Such payroll companies are often able to automate the required filings and withholdings.  Nonprofits that prefer to handle such matters in-house may seek qualified legal counsel.  Such counsel may be necessary to help the nonprofit navigate various states’ laws and properly designate workers as employees or independent contractors.  For more information on multi-state unemployment tax liabilities for nonprofit employers, please contact one of our attorneys at 312.626.1600 or at info@wagenmakerlaw.com, or visit us on the web at www.wagenmakerlaw.com .

Wednesday, November 26, 2014

Unemployment Taxes for Nonprofits

Nonprofit organizations enjoy special privileges under unemployment laws. What are the privileges, and how can they benefit your organization?  For most nonprofits, the following rules apply: (a) only state law unemployment taxes are owed, not federal; (b) smaller may be better; and (c) self-insurance may provide cost savings (but not always!).  Additional tax considerations apply for covered nonprofits operating in multiple states.  Notably, churches and other religious institutions are entirely exempt from unemployment coverage.

Background:  FUTA, SUTA, and Employee Eligibility

The US system of unemployment taxation and benefits is designed as a cooperative between federal and state programs to promote social welfare.  The Federal Unemployment Tax Act (“FUTA”) imposes taxes equal to a percentage of total wages paid in a year.  All nonprofit public charities are categorically exempt from FUTA.

The state unemployment counterpart is called “SUTA,” which stands for the State Unemployment Tax Act.  Employers that are covered by SUTA generally must contribute into the state government unemployment insurance system so that government funds may be paid out to employee claimants as unemployment benefits.

Generally speaking, an employee is eligible for unemployment benefits if he or she is laid off or terminated without good cause.  Consequently, an employee who resigns is not eligible for unemployment benefits.  Likewise, an employee who is terminated for repeatedly violating a work rule or otherwise engaging in serious misconduct is also not eligible.  A person whose employment is terminated for poor job performance, however, will be eligible for unemployment benefits. 

Church Exemption (What about Severance?)  

Churches, other religious institutions, and church-controlled schools are generally exempt from paying into both the federal and state unemployment system (unless they voluntarily elect to participate in such government system).  In some states like Illinois, such nonprofit organizations are legally required to provide written notice informing employees that they will not be eligible for any unemployment benefits upon termination.

Due to the exemption for these organizations, their leaders should seriously consider offering severance pay when terminating their workers’ employment to provide a substitute “safety net.”  The specific severance amount to be provided is a matter of judicious use of charitable resources, with an eye toward fairness among employees.  Such pay should always be accompanied by a written agreement that provides for release of claims by the employee against the employer.  Other severance aspects may be included in the agreement, such as tax treatment, confidentiality, non-disparagement, and return of property.  A severance agreement thus should be drafted with assistance of legal counsel.

Exemption for Nonprofits with Fewer than Four Employees

Except for the religious organizations above, all other nonprofits in Illinois are required to pay state unemployment taxes once if they have at least four employees (whether full-time, part-time, or temporary), during at least 20 weeks of a calendar year.   So if a nonprofit has fewer than four employees, it qualifies for exemption from coverage and is not required to pay into unemployment. 
Three caveats are in order.  First, while this “small potato” exception should be great news to a nonprofit just starting out, its leaders should be prepared to register and pay unemployment taxes as the organization grows.  Second, and on a related note, the term "employee" may be broadly construed for the purposes of state unemployment compensation statutes.  For example, this term may include individuals otherwise regarded by an employer as independent contractors.  Third, as indicated above in relation to churches, written notice may be legally required, with accompanying considerations warranted for employer-paid severance. 

The Self-Insurance Option

An additional privilege available to nonprofits is that they may elect to be self-insured.  This is known as being a “reimbursable employer.”  In other words, the electing nonprofit pays the state only for actual unemployment benefits received by their eligible terminated employees through the government system.  An employer’s liability thus will end when its prior employee becomes reemployed or otherwise becomes disqualified for continued unemployment benefits (e.g., when the eligibility time period ends, which is ordinarily in 13 weeks during periods of low unemployment and 26 weeks during periods of high unemployment, as determined by the government; going to school may also be a disqualifying event).

To become a reimbursable employer, a nonprofit must make such election prospectively. Likewise, changing back to being an insured employer (i.e, paying contributions as taxes rather than reimbursing the government) must be done in advance.  To make either change, the nonprofit must be current on any and all unemployment taxes owed.  A nonprofit considering reimbursement should thus carefully count the cost by (a) evaluating its work force’s stability and (b) planning well ahead for any major layoff or other significant employee changes that may occur. 

Multi-State Employees and Employer Obligations

What happens if a nonprofit has two employees working at its office in Illinois, one employee working remotely from Seattle, and two employees working remotely from Mississippi?  Is the nonprofit “covered” for unemployment insurance purposes?  Must it pay unemployment taxes into each state system?  Or is the nonprofit completely exempt, since it does not have at least four employees in any one state?  This is an increasingly common employment scenario, so a good understanding is important for effective legal compliance.  Our firm’s next blog article will address this issue in detail.  Stay tuned!
For more information on unemployment and other employment-related considerations for nonprofit employers, please contact one of our attorneys at 312.626.1600 or at info@wagenmakerlaw.com, or visit us on the web at www.wagenmakerlaw.com.