Nonprofits Face Tough Decisions on Funding

By HunterMaclean Attorneys

Published in Business in Savannah

In the wake of the economic downturn, the nonprofit sector has experienced tremendous stress from lack of financial support, mainly due to a reduction in charitable donations and available grants, forcing many nonprofit organizations not only to cut back on their community outreach, but also to take draconian operational measures in order to cut costs.

As difficult as the situation may be, it is important for nonprofit organizations facing inevitable layoffs, mergers, furloughs, salary reductions and shut-downs to carefully consider the operational and legal ramifications of each option before moving forward. Consulting the organization’s board of directors and professional financial and legal counsel is highly advised before a nonprofit makes any major decisions.

There are several legal questions to consider when making these decisions so as to avoid a possible lawsuit, such as:
● Will a salary reduction or forced days off result in a breach of contract?
● How will reduced hours affect benefits?
● Will the program comply with state wage payment laws?
● Will the program comply with the Fair Labor Standards Act?

For example, for most nonprofit organizations, rent and staff are significant portions of their operating budgets and are first on the list when considering cutbacks. In many instances, it may be easier to scale back on staff than to change locations. Using furlough days as an option to relieve the cash flow stress may be a good solution, but such a decision may have unforeseen negative consequences, such as changing an employee’s classification under the Fair Labor Standards Act (“FLSA”) from exempt to nonexempt.

Many nonprofits are subject to the FLSA, which narrowly defines a worker’s status according to his or her specific job description, tasks performed and hours worked per day. The FLSA characterizes employees as either non-exempt or exempt. Non-exempt employees are covered by the FLSA’s minimum wage and overtime pay requirements, but exempt employees are excluded from its requirements. If an organization cuts exempt staff, thus forcing non-exempt employees to work more hours, the non-exempt employees may be entitled to overtime pay.

Regarding a nonprofit’s employee benefits, many statutes, such as ERISA or COBRA, specify that an employee must work a certain number of hours to qualify for certain benefits. Nonprofits should also consult these statutes when establishing criteria for accumulating vacation, personal leave and/or sick pay and retirement benefits. Given this complication – that a reduction in hours may disqualify an employee from coverage under certain statutes and/or trigger COBRA coverage – nonprofit organizations may want to consider pay cuts as a last resort instead of furloughs or reduced working hours.

Other unforeseen liabilities may arise when an employee continues to work as an unpaid volunteer for a nonprofit after being laid-off and while collecting an unemployment check from that nonprofit organization. This is a dangerous practice and places the nonprofit at risk for committing unemployment insurance fraud, not to mention additional FLSA violations, since the “volunteer” is likely an employee in the eyes of the law.

It is also wise to understand all employment contracts. If an employee has an employment contract, the nonprofit must review the contract to determine whether or not it can reduce the employee’s salary. No salary reduction plan should be implemented without a reasonable notice period and evidence that the affected employees have consented to the plan.

In the event that all options have been exhausted and a nonprofit must shut down, there are formal procedures that must be followed to ensure a successful dissolution without liability. The nonprofit is advised to seek counsel from its board of directors and from financial and legal professionals.

On a positive note, charitable donations rose between 2009 and 2010 and are expected to remain steady in 2011. Nonprofit organizations that have survived the recession have learned to function with leaner budgets. They understand what it takes to stay afloat and have a good chance of marked financial improvement as the economy improves and individual and corporate donations and grants become more readily available.