Maintaining business ethics is essential for any organization, but is particularly important for nonprofit organizations. If a nonprofit breaks the law or is suspected of any behavior that could question the integrity of their organization, it would obviously cause numerous systemic issues including the loss of strategic donors and corporate sponsors. Not only does this limit the good the nonprofit can do, but it can also affect its staffing and volunteers which only leads to ongoing problems.
One question that frequently arises about nonprofit payroll is whether or not board members can be paid employees. Let’s explore this question further to determine what would be considered ethical and what is legal.
Paid Staff Members Should Not Sit On NonProfit Boards
Most nonprofit board members operate in a volunteer capacity or are brought on to serve as an objective, third-party source. Bringing on board members who are also internal staff can compromise the integrity of the board and create several conflicts of interest. Whether overtly or indirectly, putting a board member in a situation that lends itself to a conflict of interest eventually leads to a higher potential for a major issue. For example, an employee board member may vote in the interest of keeping their job or creating opportunities for their own advancement.
Additionally, promoting paid employees to also serve as board members, even in a nonprofit capacity, creates competition amongst the ranks of the organizations leaders to vie for influence by sitting on the board.
However, There is Always an Exception to the Rule
While it is not a good idea for a nonprofit board to appoint paid employees, there is typically at least one paid employee in the room when the board meets. This person is a non-voting member who serves as an advisor to the board. This board member, typically an executive director, provides insight into the operations of the nonprofit and answers questions that the board brings up. They will not vote on any issues so as not to compromise their integrity.
It is only recommended to have one paid employee on the board in this advisory position.
Keep Board Meetings Open to Staff and Volunteers
Instead of bringing on paid employees to serve as board members, or nominating an advisor to the board, nonprofits can invite employees and volunteers to attend board meetings and voice their concerns or ideas. Keeping these board discussions open allows for certain levels of transparency while creating a platform for employees to share their insights if the board is voting against the best interest of the organization.
While some issues may need to be discussed in a closed-door meeting, nonprofit boards that are acting ethically should be able to keep most of their business open to observation and scrutiny. The behavior of the board should not change if/when someone shines a light onto it.
NonProfits Do Not Need to Pay Their Board Members
Most nonprofit boards subscribe to the philosophy that the board should not serve as an expense for your organization. Most people serve on nonprofit boards as a way to offer their experience to the local community and work as a force for good. The IRS says that charities should not compensate board members except for the reimbursement of expenses for service. Additionally, if board members are paid more than $600 per year, they need to fill out a 1099 form as an outside contractor in their taxes.
That said, board members can deduct their expenses on their taxes. They serve as volunteers and can deduct service hours, mileage traveled in their own cars, and other expenses accrued while serving on the board. For example, if an account reviews a nonprofit’s finances in a board capacity, they could deduct those hours worked.
Many local business leaders and retired professionals serve on nonprofit boards. They guide the organization to operate ethically and make good business choices to make drive the mission of the organization. By keeping paid employees off of your board, except in an advisory capacity, you can avoid a significant amount of traps that would result in the exact opposite of why someone is sitting on the board in the first place. Every nonprofit wants to maintain their ethics while bringing in fresh perspectives for management to help achieve their mission.
Learn more about nonprofit HR and payroll management and other legal challenges that charities face in our nonprofit section, or within the nonprofit section on our blog.