Certainly, the “Directors and Officers” insurance policy that every charity should have gets a workout. Charity board members and officials get blamed for everything by donors, beneficiaries, members, volunteers, and everyone else. This may surprise you, but it is a little “rider” to most D & O policies that is most frequently used – the one providing so-called “employment practices” coverage.

A disproportionate number of insurance claims filed by exempt organizations result from legal actions instituted by unhappy employees. Some of these employees realize the importance of a charity’s public image and are quick to threaten media exposure to gain an advantage in their cases.

Typical Employment Issue Claims

We have identified three types of employment issues that put charities at risk. The issues arise, in part, from the dynamics of a charitable workplace. Employees enthusiastic about the cause may disregard their own rights. Managers may be so concerned about employee morale that they forget to manage. Even though everyone may have had the best intentions, these conditions may eventually explode and create unnecessary liabilities. Below are three of the more common situations.

Overtime Claims

Overtime. Not paid. These claims usually stem from the misclassification of employees as “exempt” or “nonexempt” and subsequent errors in the calculation of overtime pay. Charities rarely do this out of malice, but it does not matter. The law imposes strict liability, regardless of intention.

It is important that nonprofit managers get basic and important distinctions straight, as wage claims are expensive and tend to be contagious. If an organization misclassifies one employee, it is a good bet that it is not the only one. There are five fundamental rules of exempt/nonexempt classification.

1. Nonexempt employees are eligible for overtime.
2. Exempt employees are not eligible for overtime.
3. Classification of employees is not a management choice; it is a legal analysis.
4. Expressing an employee’s compensation as an annual “salary” is irrelevant for the exempt/nonexempt issue.
5. Titles have little or no bearing on the exempt/nonexempt issue.

Charity employees wrongfully denied overtime may suffer in silence for a long time. That patience is symptomatic of commitment to the cause and ignorance of the law. But if the light dawns, and it usually does, the organization could be on the hook for major payments, “me too” claims from other employees, bad publicity, and employee defections.

Employee-as-Volunteer Claims

Employees at charities want to help. They believe in the cause. That is why, when opportunities arise to volunteer for the organization, they always agree to do so. This becomes an issue if the employee is, or should be, non-exempt. Non-exempt employees should receive compensation for every hour of work.

They may not volunteer to perform their assigned job tasks for free. If that happens, the charity is guilty of a wage and hour violation.  Period.

(Note: It is acceptable, for example, if a data entry clerk volunteers in the charity’s soup kitchen on the weekend, since the soup kitchen is not her normal job. Take note, though, that the volunteering cannot be “mandatory” or “expected.”)

Employee Evaluation-Related Claims

Some exempt organizations do put micromanaging tyrants into leadership roles. However, that is the exception rather than the rule. More frequently, charity managers evidence a softer, more humane approach to supervision than their counterparts in the “business” world. This benevolence very often gives rise to inflated, less-than-frank employee evaluations. For example, the accurate “Smith hasn’t been on time for work in five years” may be euphemistically rewritten as “We would like to assist Smith to become even better at time management skills.”

Fast-forward. When the situation becomes so intolerable that management needs to terminate an underperforming worker, the final letter usually contains the truth that is missing in years of written evaluations. If the employee challenges the firing, usually through a wrongful discharge lawsuit or a discrimination claim, the employer has quite a conundrum: how to explain the reasoning of the final letter in the face of a stack of favorable evaluations? Frequently, such legal claims lead to generous settlements for the employee. It can be impossible to overcome a personnel file that is chock-full of accolades.

How Can Charities Reduce the Risk of Employment Issues?

The problem of too-benevolent-for-its-own-good is sticky, but fixable. Here are concrete suggestions:

1. As a prophylactic measure, make sure that your organization’s D & O policy includes robust employment practices coverage.
2. If there is any uncertainty about the degree of wage-and-hour compliance in your organization, it is essential to have a qualified professional (an employee or a retained consultant/lawyer) evaluate the situation.
3. Shop around. Not all insurance policies are equal. Carriers may offer policies that include access to lawyers and consultants on a free or reduced-fee basis. Others include usage of valuable online resources that can assist with the issues raised here.
4. Be like Ed Koch, iconic former mayor of NYC. Koch would incessantly seek feedback from his constituents with the simple question “How am I doing’?”  Taking the work temperature of employees, especially those below the senior management level, can often provide an opportunity to identify and defuse situations before they reach critical mass.
5. Do not resort to the popular default position on overtime work – providing employees with time off in lieu of additional compensation. This is known as the “comp time” solution and it’s deadly because it’s a violation of the Fair Labor Standards Act.

CCK COMMENT:  Employment claims against charities do not often hit the media, but when they do it can be grist for the “sensationalists.”  Any kind of bad press for a charity can reverberate through its donor base and result in lost contributions and bequests. Organizations would do well to perform, at a minimum, an employment practices “checkup” and a candid assessment of management performance. It is also important to ensure that the compensation of high-ranking officials does not exceed (or, ideally, even approach) levels that would raise an issue under the “intermediate sanctions” rules [26 U.S.C. § 4958].