Q: Must nonprofit reimburse staff for remote-work expenses?2020-06-03T03:09:17+00:00

A. Generally, yes, in mandatory remote-work situations including the circumstances of the COVID-19 pandemic.

Under a labor law already in place years before the current emergency, a California employer must reimburse an employee for the reasonable and “necessary expenditures or losses incurred … in direct consequence of the discharge of his or her duties….” See California Labor Code section 2802.

This would include (at least a portion of) home-office expenses like: cell phone or landline plan, home internet plan, personal computer or tablet, fax machine, and teleconferencing software or hardware.

It would not include items for the convenience of the employee like: higher-speed internet, larger external computer monitors, ergonomic chairs, or printers.

Other states including Illinois, Iowa, Montana, New Hampshire and South Dakota, have laws on the books that may require this type of reimbursement but the law is not as clear as California’s.

Q: Is there any difference between a “layoff” and a “furlough”?2020-06-02T02:18:34+00:00

A: Yes.

Since the middle of March 2020, the coronavirus has wreaked havoc on every aspect of U.S. society. Employers in almost every sector of the economy, including the nonprofit community, have had to make sudden – wrenching – staffing decisions. As of May 28, 2020, at least 40 million Americans had filed new unemployment claims.

In shedding personnel either temporarily or permanently, employers and employees often use terminology loosely – and inaccurately. More often than not, the terms “furlough” and “layoff” have been used interchangeably.

But employment lawyers and human resources specialists know that these terms are not identical or equivalent. The label selected and used in a particular situation can have significant unexpected consequences, particularly for the employee. The most common unintended result can be a disqualification of the worker for unemployment compensation benefits, including under the recent federal COVID-19 legislation, as well as loss of health and life insurance benefits.

Most simply stated, a “layoff typically happens when a company needs to cut costs quickly …. While the hope is that a layoff is temporary, it can be permanent.”

By contrast, a “furlough is an alternative to a layoff. Furloughs can take different forms, but the end result is the same: workers remain employed but are paid less, or not paid at all, saving the [employer] money …. It is similar to a layoff in that it’s a quick and efficient way to cut costs when necessary. Furloughs, however, are temporary and used to retain staff the company wants to keep but can’t afford to pay. In most cases, there is an end date to the furlough…”

This area of law is complex and confusing. To learn more about the distinction between these and additional employment-related terms, see, for example:

Q: How can we make sense of all the COVID-19 health and safety rules?2020-06-01T21:15:19+00:00

A. One of the most challenging aspects of this pandemic emergency for a nonprofit organization is the mind-boggling avalanche of information, recommendations, and mandates about safeguarding its own personnel as well as the communities it serves.

Compounding this confusion is (1) the evolving understanding of the disease by medical and science experts and (2) the rapid moves by various government authorities approving progress from stage to stage of “reopening” our society and economy.

This website includes a section titled “Health & Safety” under the “Workforce Issues” tab, where we direct you to the latest posted official information. There are also links to authoritative sources in the “Laws & Rules” tab; in particular, in the “Executive Branch,” “State of California” and “Local Rules” sections. (For organizations in other jurisdictions, each state and local government executive branch will have a dedicated “COVID-19” resource center including the latest mandates.)

Note also that each level of government has multiple offices and agencies that have jurisdiction in connection with health and safety issues. While rules of the federal Occupational Safety and Health Administration (OSHA) apply to many employers nationwide, the rules of state and local public health departments apply as well.

The publications from the Centers for Disease Prevention & Control (CDC) are invaluable these days but they are recommendations instead of requirements.

Generally, state mandates will control over conflicting local rules, unless a governor’s orders explicitly grant counties and municipal governments the power to deviate more or less. For instance, in California, the allowable progress through the stages of “reopening” have been delegated to a certain degree to the counties, but subject to approval and acceptance by Governor Newsom’s office.

Many experts have suggested that organizations appoint and “deputize” one person on their team to be the “go-to” resource for the “latest CDC/WHO guidelines, healthcare regulations, and city and county proclamations and regularly share them with impacted staff, so they can focus on the tasks ahead of them and not get lost in the media deluge.”

Q: May we use endowment funds for other purposes?2020-06-01T16:38:24+00:00

A. Like our FAQ on diversion of restricted gifts, the answer is: “It depends.”

Nonprofits facing the sudden loss of their traditional income during the COVID-19 emergency are eager to identify any potential revenue sources. For organizations lucky enough to have endowments, the temptation to dip into that pot of money can be strong.

A threshold issue is whether an endowment may under any circumstances, but particularly during a crisis, be tapped to cover a nonprofit’s general operating expenses or to subsidize program activities. Once again – (like the restricted grant analysis: is it a “true restriction?”) – this question turns on whether the fund that this organization refers to as an endowment is a “true” endowment. Such a “true” endowment has significant restrictions; otherwise, that money pool may be fair game.

There is a “true” endowment only under (either of) these two situations:

  1. “A donor makes a gift with a written gift document at the time the gift is made that designates the gift as an ‘endowment,’ or otherwise imposes a spending restriction on the gift”; or
  2. “A donor makes a gift in response to a charity’s written solicitation for gifts to fund its ‘endowment.’”

By contrast, “[f]unds that a charitable organization’s board has set aside with the intent not to use them for current spending are not an endowment, even if the board has labeled them as such.”

Also not a “true” endowment are “a donor’s recommendation that a gift be used for an endowment, or a donor’s attempt to designate a gift as an endowment after the donor has made the gift.”

 

Q: Could individual directors be liable to repay a COVID-19 loan?2020-06-01T05:30:23+00:00

A. For many organizations, the stark financial realities of the pandemic mean they may have to consider new revenue sources that include an element of risk or uncertainty. For example, the Paycheck Protection Program in the CARES Act passed in April 2020 includes conditional forgiveness for the loans.

A board that has not previously authorized this kind of risk worries that, if the loan becomes due but the organization doesn’t have the funds to pay it off, individual directors may be on the hook in their personal capacities. These individuals may also worry about legal liability for the act of authorizing new debt that an organization is unlikely to be able to repay. Are these well-founded concerns?

Generally, no.

The board of directors of a nonprofit is “responsible for governing the organization and is legally accountable for its actions.” But most 501(c)(3)s are incorporated; that status offers considerable protection against personal liability so long as the directors don’t individually guarantee repayment but instead perform “due diligence,” and fulfill their “legal duties of care, loyalty, and obedience” in approving the debt. More particularly, they must use “reasonable care” in authorizing the action and act “in the best interests of the organization.”

The board can also add a layer of protection by purchasing directors and officers liability insurance.

Q: May we divert capital-campaign funds for other purposes?2020-06-01T02:42:02+00:00

A. It depends.

Many organizations that were in relatively secure financial shape before the COVID-19 pandemic now face dramatically changed circumstances. A common question pops up; that is, whether money set aside in a particular fund may be redirected to pay general operating expenses or for other necessities during this emergency.

Generally, the answer turns on whether the funds are subject to a “true restriction.” That would be the case when a donor or other third party has given the money for a specific, expressed purpose. On the other hand, if the money in question is in a fund designated for – say – a capital campaign, but it was the board of directors that labeled it as such, it is not a “true restriction.” The board has the power to “unrestrict” the funds and authorize its use for any other purposes.

A fuzzier situation arises if a donor gives money to a specific fund that the board of directors has announced would be set aside for a designated purpose like capital improvements. In that case, the money should be treated as if the donor had restricted the funds.

Of course, if the donor is still alive and available, there’s no reason that an organization cannot approach the benefactor to request a partial or full lifting of the restriction under these extraordinary circumstances beyond anyone’s control.

Q: What if we can’t get a quorum?2020-06-01T01:30:23+00:00

A: Particularly at the outset of the COVID-19 crisis, many nonprofits worried about how their boards could make legally binding and valid decisions to address the emergency circumstances.

Ordinarily, most organizations meet in person and there is little trouble reaching a quorum. But with the stay-at-home orders still generally in place in California and many other jurisdictions, and with travel arrangements difficult to make and dangerous, that option – although specified in the bylaws – has not been possible.

Happily, California – (and many other states) – had already passed laws well before this spring authorizing the holding of virtual meetings so long as certain minimum requirements are met. In Nonprofit Board Meetings in an Emergency (March 26, 2020), we explained these legally authorized alternatives to holding in-person meetings. See also California Civil Code (“CC”) section 5211.

Another strategy to facilitate decision-making in these challenging times is to make full use of the board’s executive committee, if any. In What is an Executive Committee? (January 28, 2016), we described the purpose, powers, and proper uses of this smaller group of top directors.

Now, back to the main question: What’s the minimum number of people that will constitute a quorum so that business can be lawfully conducted? CC 5211 also has the answer to this query. In a nutshell, under section 5211(a)(7), an organization is permitted to designate any number to constitute a quorum, so long as it’s at or over the statutory minimum. “The articles or bylaws may not provide that a quorum shall be less than one-fifth the number of directors authorized in or pursuant to the articles or bylaws, or less than two, whichever is larger,….”

While this statute authorizes a quorum of one (if “… the number of directors authorized in or pursuant to the articles or bylaws is one,…”), as a practical matter, the IRS likes to see at least three directors in an organization applying for federal tax exemption. In this context, “likes to see” means you need to have three directors if you want that approval.

If the articles or bylaws are silent on the issue of a quorum, then a “majority of the number of directors authorized in or pursuant to the articles or bylaws constitutes a quorum of the board for the transaction of business.”

Q: Are there extensions for filing Form 990s?2020-05-31T15:40:55+00:00

A. Yes. During this pandemic crisis, governments at the federal, state, and local level are granting relief to entities including nonprofit organizations from normal filing deadlines.

In Filing Deadlines Extended for Nonprofit Organizations (April 24, 2020), we explain the important – and automatic – extensions of time granted by the Internal Revenue Service in connection with the information returns (Form 990 Series) that many organizations are required to file on the fifteenth day of the fifth month after the end of the fiscal year.

In connection with the employment tax deposits and payments required of employers, the Coronavirus, Aid, Relief and Economic Security (CARES) Act allows them to defer the deposit and payment of the employer’s share of social security taxes. Go to the irs.gov website at Deferral of employment tax deposits and payments through December 31, 2020 for details.

There are also automatic extensions of time and other accommodations for California nonprofit organizations that are required to file sales tax returns. Details are at California Department of Tax and Fee Administration (CDTFA).


Q. Must we notify the IRS if we suspend operations?2020-05-31T15:28:16+00:00

A. No. Generally, there is no requirement to notify the IRS if you suspend operations, or if you curtail or change some or all programs or activities, for a “reasonable” time in a good faith effort to step back and reevaluate your options or adapt to new circumstances. Even in situations not involving a declared national or local emergency, such a temporary move should not jeopardize your tax-exempt status in the short term.

In any event, the IRS is temporarily curtailing its own operations during the COVID-19 emergency; until further notice, there will be few, if any, employees available to receive or respond to any such notification.

It is essential, though, to file any required information return (from the Form 990-series) when due, or on or before any extension date. (The IRS has already extended the due dates for information returns ordinarily due in May or June of this year until at least July 15, 2020. Depending on the national circumstances, there may be further extensions.) Note that on the Form 990, there is a question in Section III about any changes you have made during the taxable year; on the 2020 information return that will be due in 2021, you must detail these changes occurring now including any suspension of operations. Since any Form 990 that you will file in the next few months will refer to tax year 2019, you will not have to report any current changes on that document.