This column is comprised of questions that have been posed to me by homeowners, property managers and related professionals regarding legal issues they have encountered with respect to their associations.
Can Board Members Be Paid for Their Work on the Board?
I have had this question asked a number of different ways. The questions are worded differently, and involve different fact scenarios, but all come down to the same core question: Can we pay our board members? This article will look at the legality of paying board members, as well as some of the pros and cons of such action.
Some people believe that board members should be paid as the position is one that can take up a great deal of personal time, requires making decisions that affect a large number of people, and entails the creation and oversight of a large budget. Conversely, others argue that by paying board members you encourage people whose interest is more in collecting the payment than helping the association. Of course, there are other arguments for and against payment. I find that people have very strong opinions on this issue and I will attempt to provide helpful information no matter which way you decide to proceed.
As I have explained in prior editions of this column, associations in Minnesota are nonprofit corporations and are governed by the Nonprofit Corporation Act (NCA), Minn. Stat. §317A. Nonprofit corporations are allowed to compensate board members, subject to the limitations in the association’s articles of incorporation or bylaws.1 In addition, many associations are also governed by the Minnesota Common Interest Ownership Act (MCIOA).2 However, MCIOA does not directly address the issue of paying board members for their services.
If an association’s articles of incorporation or bylaws prohibit payment to board members, then such payments would not be allowed. If the documents are silent on the issue of compensation, then the NCA would allow payment for service on the board.
Once you determine if board members can be paid under your governing documents, the issue becomes, should they be paid? What would be a reason not to pay your board members? One of the biggest reasons is liability.
The NCA provides a certain level of immunity from civil liability to board members. However, this liability is only provided for volunteer board members. Specifically, Minn. Stat. §317A.257 states that a "person who serves without compensation as a director [or] officer . . . is not civilly liable for an act or omission by that person if the act or omission was in good faith, was within the scope of the person’s responsibilities . . . and did not constitute willful or reckless misconduct.” Compensation includes anything of value received for services rendered, with the exception of reimbursement of certain expenses. Therefore, while the NCA does allow board members to be compensated, doing so removes the liability protection that is otherwise afforded under the statute.
Whether or not your association decides to pay board members, there are some things to keep in mind.
If payments exceed $599, the association may be required to issue a 1099 form to each board member receiving the payments.
Repayment of out-of-pocket expenses is not considered payment for board service. For example, if a board member takes a flyer to be photocopied for an association newsletter, the cost of the copies can be reimbursed.
Waiver or reduction of assessments for board members would be classified as a payment. In that regard, if your association Declaration states that all assessments must be levied equally among the units, an amendment might be necessary in order to allow for an exception for board members (if they are being paid).
Granting an existing board member a year of free dues after they leave the board is still payment, even if it is not realized until a future date.
In summary, the short answer is "Yes, in Minnesota it is legal to pay board members, provided your association documents do not prohibit it.” However, doing so can remove protection from civil liability and can introduce various complications.
Can Board Members be Hired to Perform Work for the Association?
The short answer to this question is usually yes. However, I would caution an association from doing so. Hiring board members to perform work that a board member does as his/her profession is usually okay. For example, if the Board wants to create a website to provide information to the members and a board member works professionally as a web developer, the board might want to hire that member. Provided there is no restriction against it in the governing documents, that is okay. However, the board should bid the project against other vendors to ensure it is not overpaying, and the board member in question should abstain from voting on awarding the contract.
The answer gets more difficult when the job in question is miscellaneous landscaping or handyman work. Hiring a board member who is retired or unemployed to perform hourly work can lead to a big headache for an association. Most likely the board member will be uninsured, which could lead to a claim against the association should he/she become injured or damage property while working for the association. Additionally, the board member may be deemed to be an employee (as opposed to an independent contractor), which would require that the association pay payroll taxes, carry workers compensation insurance, withhold taxes from the employee, etc. Having an employee greatly raises the complexity of running an association. Failure to properly classify a worker as an employee can lead to stiff penalties from various State and Federal agencies.
Finally, if an association does want to proceed to hire a board member to perform work, the question of who gets the work must be addressed. Is the work just offered to a board member or are all members of the association offered the chance to apply for the position? If it is just the board members, the association would need to ensure that such action is allowed under its governing documents. Some documents provide that a director should not receive any benefit for serving as a member of the board. Being given preferential treatment in the hiring process may be a benefit, and therefore a violation of such a clause.
1 Minn. Stat. §317A.211
2 Found at Minn. Stat. §515B
To have a question answered in a future article, please email it to me at firstname.lastname@example.org with the subject line of "Ask the Attorney.” While I can’t promise that all questions will be answered, I will do my best to include questions that have a broad appeal. Questions will also be answered by other attorneys practicing in this area of law. The answers are intended to give the reader a good understanding of the issue raised by the question but are not a substitute for acquiring an opinion from your legal counsel.