Legal Considerations of Paying Board Directors to Achieve DEI Goals

Traditionally, it’s been rather rare for the typical small or midsized nonprofit organization to compensate Board directors. The exceptions have been some large health care nonprofits and private foundations, where it’s especially difficult to find volunteers.

But in an effort to further DEI (Diversity, Equity, and Inclusion) goals, many nonprofits in Maine and elsewhere are considering how their Board practices might have the unintended effect of limiting who serves to those who are privileged enough to have ample free time on their hands and can afford the peripheral expenses of Board service. This tradition of non-compensation can lead to Boards that are overrepresented by wealthy retirees, at the expense of a healthy diversity of ages, races, and life experiences. To counter this dynamic, there is an increasing trend of offering modest levels (usually in the hundreds of dollars per year, not thousands) of compensation to Board Directors.

There is no right answer to the question of whether to compensate Board Directors, and there are many programmatic and practical factors for Boards to consider. Putting those programmatic matters aside, here is a rundown of the key legal and accounting issues:

• The organization’s current Bylaws and/or Articles of Incorporation may prohibit or limit compensation for Board Directors, in which case the Board would need to amend the Bylaws or Articles to allow for such compensation.  
• It’s possible that Board Directors that receive compensation for their service as Directors might lose a certain level of statutory immunity from lawsuits that exists for volunteers. The question of whether a modest compensation level renders a Director a non-volunteer has not been resolved by Maine courts. In 2018, the Maine Supreme Court held that an individual who received a mileage-based reimbursement was still a volunteer for the purposes of workers compensation law. But on the whole, the immunity consideration is a relatively minor one in my view, as Board directors are very very very rarely sued for their nonprofit-related activities. And even if sued, a D&O policy would cover the defense.
• If Board Directors are compensated more than $600 per year, the nonprofit must issue them an IRS 1099-NEC by January 31 of the following calendar year, with a copy to the IRS. The 1099-NEC (and accompanying Form 1096 summary) must be printed on special triplicate paper that can be ordered for free from the IRS. Whether below or above the $600 threshold, Directors are required to report any compensation as income, and depending on their tax situation might have to pay taxes on it.
• All compensation amounts paid to Board Directors must be reported on the Form 990-EZ (Part IV) or Form 990 (Part VII). This doesn’t mean that such payments are prohibited, or that the IRS will flag the organization for an audit. But the reporting requirement is straightforward and not discretionary. And the compensation amounts become public information once the 990 is published.
• Reimbursement of out-of-pocket expenses (e.g., for mileage, or babysitting expenses) actually incurred is an alternative to compensation. It has the advantage of not requiring any 1099-NEC filings or 990 reporting and minimizing the liability exposure risk, but these advantages come with the added complication of requiring that the organization receive receipts to substantiate the expenses. In addition, reimbursement might not be enough to make a difference to attract those who really need more ample financial assistance. And keep in mind that there is no such thing as reimbursement for time spent; that kind of payment must be treated as compensation.
• Section 713-A of the Maine Nonprofit Corporation Act provides that for any public benefit corporation (which includes most charitable and educational organizations), no more than 49% of the Board can be a “financially     interested person.” But the definition of this term excludes “any reasonable payments made to directors for serving as directors.” So a modest compensation for serving as a Director generally does not implicate this statute.
• There is no single best way to establish a compensation mechanism. For example, there could be a blanket level provided to every Director, but this might have the effect of compensating those who don’t need or want it. Another approach is to make compensation discretionary by allowing Directors to opt out or opt in. Any such opt-in or opt-out process should be discrete, so as not to place a spotlight on those who choose to receive the     compensation. That said, see above for the requirement to report such compensation on the Form 990, so such discretion will have its limits. One possible way to handle this dilemma is for the organization to issue     compensation to all Directors, with the understanding that those who choose can discretely donate the amount back to the organization. That way, the Form 990 shows the same compensation level to everyone and there is no sense of two different categories of Directors, those who receive the compensation and those who decline it.

It is too soon to know whether compensating Board Directors will be efficacious in diversifying Boards, and results will probably vary from organization depending on location and a number of other factors. Ideally, compensating Board Directors should be part of a package of broader efforts to diversity Boards. For other ideas, see this useful article outlining six governance steps to consider.

Camp Bomazeen Charitable Trust Ruling

A recent trial court decision over deed restrictions on a Boy Scout property serves as the latest application of Maine’s charitable trust principles. The decision is expected to be appealed to the Maine Supreme Court, so this won’t be the last word on the matter.

Here’s what happened: Back in 1944, George Averill donated a 344-acre property on Great Pond in Belgrade, known as Camp Bomazeen, to a group of individuals who served in a trustee capacity for the Boy Scouts of America. The deed created what is called a “charitable trust” by including specific charitable restrictions on the use of the property. In particular, the property was to be “forever” used “for camping purposes to the troops and members of the Boy Scouts of America, and especially for the troops and members of the Boy Scouts of America in the central part of the State of Maine.” The deed allowed the property to be sold, but the proceeds would have to support those same purposes. The deed stated that the local council of BSA could appoint successor trustees, and if they failed to do so then title would vest in the local council.

Fast forward 75 or so years to 2021, and the local council, known as the Pine Tree Council (PTC), sought to sell Camp Bomazeen and to use the proceeds to pay off general debts of the council that were not related to the property. The Maine Attorney General opposed the use of the proceeds for activities or debts unrelated to the purpose of the charitable trust., i.e., to support scouting activities in central Maine. Meanwhile, a group of Camp Bomazeen supporters intervened to oppose the sale outright. In turn, the PTC argued that the charitable trust was no longer in effect because successor trustees had never been appointed and the “vesting” in PTC effectively terminated the charitable trust.

Ina ruling on summary judgment, Judge Michaela Murphy found that the charitable trust is still valid, and the PTC couldn’t terminate the charitable trust restrictions simply by failing to appoint successor trustees. And the court declined to apply the doctrine of cy pres to broaden the charitable purposes beyond scouting activities in central Maine. Thus, the court ruled that the PTC can sell the property, but that any proceeds must continue to be devoted to scouting programs in central Maine. The PTC has signaled its intent to appeal.

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