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October 2003
Board Members Protected Under Federal Volunteer Protection Act
A federal District Court recently held that volunteer board members of a nonprofit organization cannot be held personally liable for the unpaid salaries of the organization's employees under the Fair Labor Standards Act (FLSA).The case, Armendarez v. Glendale Youth Center, is one of the first to interpret the Federal Volunteer Protection Act (FVPA). The FVPA was enacted in 1997 and generally provides protection from civil liability for nonprofit or government volunteers if:
• the volunteer receives no compensation for his or her services (excluding reasonable reimbursement for expenses);
• the volunteer was acting within the scope of his/her responsibility;
• the volunteer was properly licensed, certified or authorized to engage in the activity or practice in which the harm occurred (if required by the state in which the damage occurred);
• the harm was not caused by willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of the individual harmed by the volunteer; and
• the harm was not caused by the operation of a motor vehicle, aircraft, or other vehicle for which an operator's license or insurance is required by the state.
The case dealt with an insolvent organization whose president worked without pay while the organization settled its debts but contended that the organization's board of directors had promised to pay her unpaid wages. The Board claimed no such promise was made, and she sued both the organization and its individual board members for her back pay under the FLSA. The individual defendants claimed they were protected from liability under the FVPA, but the plaintiff claimed the FVPA only applied to claims based on state law. The judge rejected the plaintiff's argument. The text of the act does make specific exceptions for certain federal laws, but the FLSA is not among them. Thus, according to the court, "because Congress purposefully failed to list the FLSA as an exception, the Court cannot imply that the FLSA is an exception to the VPA's limitations on liability."
The importance of this case for nonprofits is two-fold. First, it recognizes that the FVPA precludes certain liability under both state and federal law. Second, it suggests that the exceptions to immunity for volunteers under the FVPA should be narrowly construed, thus granting maximum protection to volunteers, which include unpaid Board members.
However, it is important to remember that the FVPA does not prevent suits from being filed, but merely provides an affirmative defense to liability, and then only if all the prerequisites are satisfied. For example, the first case under the FVPA, Momans v. St. Johns Northwest Military Academy, held because the harm alleged was willful, the FVPA was inapplicable, and thus the case would have to go to trial to determine if the misconduct was, in fact, willful. Thus, while the Arizona case should be hailed for granting significant protection to board members and other nonprofit volunteers, it does not provide a license to act recklessly.
By Eric Tars
IRS Introduces Online Tool for Research on Intermediate Sanctions Now available for download off the IRS website is a hyperlinked key word index linking relevant words found in the IRC 4958 regulations to the corresponding regulatory cite(s). Section 4958 imposes harsh financial sanctions on people in charities and social welfare organizations who exploit their organization's tax exempt status for their personal gain, as an alternative to punishing the exempt organization itself. By downloading this PDF document, nonprofit executives and advisors who wish to understand the nuances of the rules' prohibitions can find a key word they are interested in, click on the regulatory cite adjacent to it, and be taken directly to the regulatory text where the word appears. The database can be accessed by clicking here .
By Eric Tars
Registering Alternate Trade Names May Assist Nonprofits
While operating a business under an unofficial or "trade" name is common, many nonprofit organizations
also find it useful to have more than one recognized name. In addition, it is important to know that
an organization may be required to register its alternate name.
Effective November 13, 2003, cooperative mailings involving nonprofit and for-profit corporations will be permitted to use the U.S. Postal Service's Nonprofit Standard Mail rates. Under the new regulations, nonprofits will be able to make compensation of fundraisers contingent on direct mail revenue and still use their nonprofit mail permits. The new rule will assist many nonprofits by allowing them to reduce upfront fundraising costs and share the financial risk of direct mail campaigns with commercial fundraising entities.
The federal government has undertaken a research project to examine the process of applying
for federal grants and wants to hear from people who have experience with any aspect of the process.
The study is being carried out by Rockbridge Associates, Inc., an independent market research firm,
in conjunction with IBM consulting. If you have been involved with federal grants in
any way and wish to participate in the survey, you can register at http://www.panelearth.com/grantsurvey.reg.
There are a number of compelling reasons that nonprofit organizations may want to use one or
more trade names. For example, a nonprofit that has more than one program may want to build
up independent public recognition or branding of each program. Alternatively, an organization
may decide to change its public image through adopting a new trade name, but for one reason or
another may also want to keep its official name as well. Sometimes a public name change is almost
outside an organization's control. For example, sometimes website addresses have become more
recognizable than official corporate names. In all such circumstances, the organizations should
consider whether they should register their unofficial trade names.
Registering a trade name under state law may be advisable or even required, depending on the context.
Some state regulations require registration of alternate trade names if the activities conducted
under the trade name do not identify the official name of the organization. In order to use the
alternate name without reference to the organization's primary name, the alternate name must
be registered as a trade name in the state or states in which the organization conducts
business using the trade name. In addition, the post office will not allow organizations
to use an unregistered trade name to mail under a nonprofit mailing permit unless the alternate
name has been registered in a state.
As an aside, it is important to note that trade names are not the same as trademarks.
Having a trademark indicates ownership of a name or logo and the right to prevent
others from using it; registering a trade name does not mean that you own the name,
but serves as notice to the state and the public that you are operating under a certain name.
To determine whether your organization should register a trade name, you must review the
laws of the state or states in which you operate.
By Josh Sadlier
Nonprofit Mailing Rates Now Apply to Nonprofit-Commercial Partnerships
Under the old rule, cooperative mailings between eligible nonprofit organizations and commercial fundraisers were ineligible to use Nonprofit Standard Mail rates. Cooperative mailings are mail fundraising campaigns in which two entities share risk of financial loss. The old rule effectively required nonprofits to pay fundraisers a set fee if they wanted to mail under their nonprofit mail permits. The rule was intended to deter abusive fundraising relationships that raise donations while primarily benefiting for-profit fundraisers. Some observers have expressed concern that loosening the cooperative mailing rule will allow unscrupulous fundraisers to retain an inappropriate share of charitable contributions, particularly where the cooperating nonprofit is desperate for revenue and perhaps unaware of appropriate fundraising practices.
It is unclear whether this loosening of the cooperative mailing rule will lead to an increase of misleading fundraising practices. In an attempt by the Postal Service to discourage abuse, the new rule requires the commercial partner to provide the nonprofit with the name and contact information for each donor and the amount of the donation. The Postal Service's Consumer Advocate will also monitor mailings under the new regulations to determine whether abuses are occurring.
Nonprofits should exercise care when entering into contingency payment arrangements with fundraisers. Although excessive fundraising costs are unlikely to result in legal problems (see NN 5/03), it is a quick way to damage a charity's reputation. Nonetheless, for organizations who are aware of this risk, the new rule affords greater flexibility in structuring contracts with direct mail fundraisers, potentially enabling them to leverage name recognition or the popularity of their causes to conduct larger fundraising campaigns at lower cost.
The new rule amends the USPS Domestic Mail Manual ("DMM"), section E670.5.3. The DMM is available at the USPS website: http://www.pe.usps.gov/cpim/ftp/manuals/manualmenu.htm
By Paul Tanis and Josh Sadlier
U.S. Government Seeks Feedback on Federal Grant Application Process
By Josh Sadlier
This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.
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