The board of directors is the backbone of a nonprofit organization, formulating and governing its mission and programs. The extent of its involvement in the nonprofit's daily operations can vary considerably. For instance, in a small or startup organization, it is not unusual for board members to function as staff members, whether paid or unpaid. In larger or well-established organizations, board members remain separate from staff, although their responsibility for the organization remains the same. If the nonprofit chooses to pay fees or salaries to its board members, there are a number of questions and concerns that the leadership must address.
Conflict of Interest: Perception Is Everything
As the nonprofit's governing body, the board of directors makes decisions that impact its finances and activities. If a board member is also paid by the organization, she may encounter decisions that would affect the role she plays. Blue Avocado, an online magazine for nonprofits, notes that most nonprofits require each of its members to disclose, in writing, and at set intervals, any potential conflicts of interest they may have, and board members who have such conflicts may be excluded from votes regarding related issues. Note that this includes not just "actual" conflicts but anything that could potentially be perceived as conflicts by the public and government agencies.
Independent Contractor vs. Employee
Numerous tests exist to determine classification as an independent contractor or employee. Nolo.com offers this definition:
"If a board member provides specific services, using his own tools and materials, setting his own hours and operating independently, he is usually classified as an independent contractor. The organization would not deduct any taxes or pay benefits on his behalf, and the income he receives would be reported on a 1099 form. However, if he works in the offices of the nonprofit, is paid by the hour and is managed by other staff members, then he would probably be classified as an employee. He would receive paychecks with payroll taxes deducted, and his income would be reported year-end on the W-2 form."
The employee vs. independent contractor question is nuanced and complex, and may best be addressed by a labor attorney. As Nolo.com cautions, if there are any gray areas, the IRS would be happy to classify the board member as an employee. In that case, the nonprofit would have to pay Social Security and other benefits to the government on that person's behalf.
Paying Board Members Can Pay Off
Nonprofits strive to attract and retain highly qualified board members to assist in fundraising, finance, advocacy and other crucial activities. According to the Cullinane Law Group, if the board member is also an employee, she may be more likely to deploy her contacts, knowledge and experience in carrying out her job than she would if she were only providing oversight. In addition, board members who function as staff will be much more familiar with the challenges and opportunities of the nonprofit, and more able to help the board determine an appropriate and timely policy and response.
Paying board members as employees or independent contractors generally attracts additional scrutiny from state and federal regulatory agencies, and may even result in audits, fines and other red tape. In addition, this practice may even discourage charitable giving, as most donors wish to see their dollars spent on programs and services. Full disclosure of monies spent and other activities will help address both of these issues.