Avoid common lawsuits.
This free e-book, Nonprofit Boards and Officers: Key Facts About Insurance and Legal Liability, summarizes the responsibilities of nonprofit board members and officers, reviews laws that affect both, provides case studies of common lawsuits against them, and lists key coverages to look for in insurance policies.
Includes useful tips to help nonprofit board members and officers avoid the most common types of lawsuits.
Table of Contents
- Introduction: Who Should Read This E-book?
- Chapter 1: Insurance for Nonprofit Boards and Officers
- Chapter 2: What Board Members and Officers Should Know
- Chapter 3: Claims Against Nonprofit Boards and Officers
- Chapter 4: D&O Coverage Forms
- Chapter 5: Policies and Procedures
- Chapter 6: Board Practices
- Chapter 7: Summary
- Appendix: Member Resources
Please note: This e-book is designed to provide general information about risks based on our many years of experience in handling claims and lawsuits against nonprofit organizations. This e-book is not intended to offer legal advice or counsel. The information contained in this e-book does not alter the terms of any insurance contract or the law of the jurisdiction which is the site of any potential claim or suit. It is the terms and provisions of your insurance contract which provide the scope of the applicable coverage. Because the areas of law constantly change, those using this e-book should not rely on it as a substitute for independent research.
Introduction: Who Should Read This E-book?
This e-book is designed to provide general information about insurance policies and risks for nonprofit boards and officers, based on Nonprofits Insurance Alliance’s (NIA) many years of experience in handling claims and lawsuits against nonprofit organizations.
Specifically, it is designed to help nonprofits understand the coverages that provide protection for nonprofit boards and officers, including Directors & Officers (D&O), Employment Practices Liability (EPLI), and Fiduciary Liability — and to help them avoid lawsuits against their board members and organizations whenever possible.
Insurance companies often have different brand names for packages that include these three types of coverage. NIA’s brand name for these coverages is Board & Executive Liability.
This e-book briefly reviews the federal law that offers minimal protection for volunteers and explains why, for most nonprofits, D&O liability insurance is a valuable risk-financing tool.
We hope this will help you understand potential nonprofit liability due to certain risks, as well as the risk mitigation and insurance available to protect the assets and reputation of your nonprofit.
Please note: This e-book does not provide legal advice or counsel, nor does it provide detailed information on any particular liability insurance policy. For assistance with this type of information, you are encouraged to consult with legal and insurance professionals.
Further, the information contained in this e-book does not alter the terms of any insurance contract or the law of the jurisdiction which is the site of any potential claim or suit. It is the terms and provisions of your insurance contract which provide the scope of the applicable coverage.
Because laws constantly change, those using this e-book should not rely on it as a substitute for independent research.
Chapter 1: Insurance for Nonprofit Boards and Officers
Where does it fit into the overall insurance picture?
It was summer and Yourtown Community Center was operating at its peak. The organization’s new programs were in high demand, community donations were up, and the center had just completed construction of a new recreation facility. The board of directors had no warning of what was coming next — a lawsuit.
In late June, a terminated employee brought a lawsuit that alleged that the executive director was liable for sexual harassment and retaliation. Damages in excess of $500,000 were sought. Shaken, the board turned the lawsuit over to its insurance broker, expecting that the center’s General Liability insurance carrier would defend the nonprofit in its lawsuit.
However, at the next board meeting, the broker read a letter from the insurance company informing the organization that there was no coverage for employment-related claims under the General Liability policy and that the organization should look for coverage under their Employment Practices Liability (EPLI) policy.
The directors looked at each other with pained expressions — they had previously decided not to purchase EPLI insurance and opted instead to devote all available resources toward the expansion.
Although the details vary, that story happens all too frequently. What’s worse, though, is when boards do have the foresight to purchase some liability insurance — but fail to purchase a policy that contains the broad coverages they need.
Whether or not you have EPLI or other types of coverage for your boards and officers, becoming embroiled in a lawsuit will strain your organization and stress your employees. The best course is avoidance whenever possible.
The following section explains the distinction between General Liability coverage and D&O, Fiduciary Liability, and EPLI policies.
While General Liability policies are substantially similar from one policy to the next, there are often significant differences in the D&O, Fiduciary Liability, and EPLI coverages offered by different insurers. Therefore, these comments are very general regarding these coverages and reflect what’s typically found in policies.
General Liability insurance:
General Liability insurance provides coverage for “negligent” acts resulting in bodily injury and/or property damage and a specified series of offenses, such as defamation.
“Negligence” is doing something a reasonable person would not do under the circumstances or failing to do something a reasonable person would do.
If the organization, its employees, or volunteers (including board members) negligently cause someone to sustain bodily injury, cause property damage, or commit one of the specified offenses, General Liability insurance will typically provide the applicable coverage.
If someone is physically injured or their reputation is hurt, or another person’s property is damaged because of a mistake by someone at the organization, you can usually rely on General Liability insurance for coverage. For example, if/when a client trips and breaks a leg because of a faulty stairway at the nonprofit.
Insurance for nonprofit boards and officers:
EPLI, D&O, and Fiduciary Liability are three separate insurance policies that provide coverage for an action taken by an organization’s board of directors or officers that someone else thinks is legally wrong.
Generally, these policies cover instances in which there is some type of act, error, or omission which causes a person or entity to sustain damages, other than bodily injury, of the type that is specifically covered by the policy.
Typically, these claims involve allegations that an applicable law, a contract term, or a legal general duty of care owed to the claimant has been breached.
Employment Practices Liability (EPLI):
The vast majority of claims against nonprofit boards and officers involve employment — including acts of wrongful termination, discrimination, or retaliation that violate a statutory duty owed to employees.
For example, if an employee is terminated and they allege the decision was based on age discrimination, or if an employee claims they were fired rather than being granted a legally required medical leave of absence, the EPLI policy would typically provide the applicable coverage.
Directors & Officers (D&O):
If someone alleges that the board has done or has failed to do something which that person believes the organization is required to do under the law, its bylaws, or a contract — and this has caused loss to that individual, it is typically the D&O policy that would provide the applicable coverage.
For example, if a nonprofit board entered into a construction contract and there was a claim by the contractor over the payment, it would be the D&O policy that would typically provide coverage of the claim.
Fiduciary Liability:
If someone alleges that the nonprofit mishandled funds provided by a donor, grantor, or funder — or funds held in trust for employees such as benefit or retirement plans — Fiduciary Liability will typically provide coverage of the claim.
Chapter 2: What Board Members and Officers Should Know
The three basic fiduciary duties of nonprofit board members and officers.
Board members and officers owe three basic fiduciary duties to the nonprofit organizations they serve: The duties of obedience, loyalty, and due care.
- Duty of Obedience: Ensure that the nonprofit obeys all applicable laws and regulations, follows its own bylaws, and adheres to stated corporate purposes/mission.
- Duty of Loyalty: Ensure that the nonprofit’s activities and transactions are, first and foremost, advancing its mission; Recognize and disclose conflicts of interest; Put the interest of the organization before their own personal and professional interests..
- Duty of Care: Take care of the nonprofit by ensuring prudent use of all assets, including facility, people, and good will. The individuals charged with governing must handle their organizational duties with the care that an ordinarily prudent person would use under similar circumstances.
For many years, nonprofit board members and officers enjoyed a perceived sense of invulnerability because their services were associated with a nonprofit — and subsequently were not seen as an attractive target for litigation.
Board members who continue to believe they are invulnerable today may be in for an unpleasant surprise as plaintiff attorneys have no qualms about filing a lawsuit against nonprofits or their boards.
Nonprofit board members could individually be named in the lawsuit, being held personally liable for their actions and putting their personal assets at risk.
The duties of corporate governance — obedience, loyalty, and due care — may seem high-minded. However, the importance of these responsibilities becomes crystal clear when a nonprofit board member is faced with a lawsuit alleging improper fiduciary oversight or improper oversight of employment practices resulting in allegations of sexual harassment or wrongful termination.
Employment-related suits may allege a wide range of wrongful acts or improper employment practices. These cover a wide variety of subjects that include, but aren’t limited to:
- Sexual harassment
- Wrongful termination
- Violation of the Americans with Disabilities Act (ADA)
- Wage-and-hour violations
- Retaliation for exercising a legal right, such as taking a legally protected leave of absence
- Discrimination based on being a member of a protected class, which includes:
- Race
- Gender (including gender expression, gender identity, and gender stereotyping)
- Sex
- Sexual orientation
- Religion
- Disability
- Marital status
- Age
- Ethnicity
- National origin
The risk of facing an employment-related lawsuit does not necessarily expand proportionately by the number of paid employees in an organization. Often, the parties at odds in a wrongful termination lawsuit are the executive director and the board of directors.
Many of these lawsuits can be avoided — or at least be dismissed in the early stages of the lawsuit — if the nonprofit follows an up-to-date, legally compliant employee handbook. But more on that later…
The majority of claims against nonprofits involve some type of employment dispute, and while any EPLI claim can be costly to defend, the small percentage of claims not involving employment disputes can often be among the most expensive claims — and ironically, these often strike the smallest organizations.
For example, a lawsuit alleging “breach of fiduciary duty” for improper expenditure of funds could be brought by a donor, a concerned citizen, or even the attorney general in your state. This type of lawsuit alleges that the board of directors is not appropriately using and protecting the assets and resources of the nonprofit.
State volunteer protection laws:
Very few states offer any immunity to nonprofit organizations, and, even in these states, the immunities are typically limited in various ways. There are, however, various statutes that are often perceived as offering immunity, which is a defense that can be asserted in litigation. A review of these laws quickly demonstrates why they offer only minimal protection.
Nearly every state in the country has in place a statute that affords minimal protection to volunteers serving nonprofit organizations. These are intended to enable volunteers to avoid personal liability for simple negligence when they are working under the direction of a nonprofit.
Many of these statutes were adopted with the express purpose of encouraging citizens to volunteer their time and service to community-serving nonprofits.
While each state’s volunteer protection laws differ in some respects, most share common limitations, including:
- They do not extend protection for any willful acts by a volunteer.
- They do not extend protection for any claims involving the use of an automobile.
- They do not extend for any claims alleging violation of civil rights laws.
- They do not extend protection for any volunteer serving a nonprofit that does not have liability insurance.
Regardless of the extent of volunteer immunities, these protections do not extend to claims directly against the organization, its board, and its officers.
Also, these exclusions represent a significant percentage of the claims filed against nonprofits and nonprofit board members. Claims alleging violation of state and federal anti-discrimination and other civil rights laws such as those covering racial, sexual, age discrimination, or discrimination against those with disabilities represent a large portion of EPLI claims filed against nonprofit volunteers and organizations.
An EPLI policy will typically provide a defense for such allegations — but may not pay damages if it is determined that the law was willfully broken.
The state volunteer immunity laws discussed here apply only to individual volunteers. A lawsuit against a board of directors will typically name the individual board members and the nonprofit organization as defendants. Some suits only name the nonprofit organization and sometimes also name individual management staff.
Finally, while offering limited protection from being found liable by a court, none of the volunteer protection laws specifically prohibit filing lawsuits against volunteers, board members, or nonprofit organizations.
Typically, the most expensive part of any lawsuit is the cost of legal defense — determining the facts, such as whether the board member or executive acted in good faith, and whether the act was simple or gross negligence.
Once the point is reached where the court determines whether the board member should be held liable or not, most expenses of the lawsuit, in the form of lawyers’ fees and costs, will already have been incurred.
The Volunteer Protection Act of 1997:
Federal legislation, the Volunteer Protection Act of 1997, is in many respects a mirror image of the state laws that preceded it. To receive any protection, the volunteer must prove in a court of law that:
- The volunteer was acting within the scope of their responsibilities at the time of the act of omission.
- If appropriate or required, the volunteer was properly licensed, certified, or authorized by the appropriate authorities for the activities or practice in the state in which the alleged harm occurred.
- The activities or practices were undertaken within the scope of the volunteer’s responsibilities in the nonprofit’s organization.
- The alleged harm was not caused by willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of the individual harmed by the volunteer.
- The alleged harm was not caused by operating a motor vehicle, vessel, aircraft, etc.
The law also permits states to adopt more stringent requirements, such as the requirement in many states that limit volunteer immunity to cases where the nonprofit organization engaging the volunteer has a liability policy in place to cover the claim.
This law does nothing to protect nonprofit organizations from suits alleging negligent acts by their volunteers. The intent of the law’s sponsors was to make certain that, if an injury results from the simple negligence of a volunteer, the nonprofit organization — not the volunteer — is held financially accountable to the victim.
‘Wait a minute! My board indemnifies board members in its bylaws. Isn’t that adequate protection?’
When a nonprofit agrees in its bylaws to indemnify board members, it agrees that, in situations where it may do so by law, the organization will pay to defend board members and will possibly pay damages. That promise, however, is only as good as the financial resources available to fulfill it.
There are two potential risks here:
- First, nonprofits may not be permitted to indemnify board members against certain types of actions, such as allegations of self-dealing. For these types of allegations, the nonprofit may be prohibited from using charitable dollars in a board member’s defense — whether or not the accusations are justified.
- Second, few nonprofits have sufficient unrestricted funds or unencumbered cash available to mount an expensive and prolonged defense.
Some insurance coverage for nonprofit board service might be found under an individual’s homeowner’s policy, but the extent of that coverage depends on the specific wording of that policy. It is not uncommon to find coverage under a homeowner’s policy for incidents that cause “bodily injury” during the course of volunteer activities.
However, the coverage extended by a homeowner’s policy is typically limited in scope and liability limits. The coverage extended by policies for nonprofit boards and officers is typically broader than the coverage extended by the homeowner’s policy, with fewer exclusions and a higher limit of liability protection.
Even if every board member individually has a homeowner’s policy that provides coverage for their decisions as a board member, these policies provide no protection for the nonprofit itself. In these cases, if the nonprofit is named in a suit, the nonprofit must pay for its own defense.
Chapter 3: Claims Against Nonprofit Boards and Officers
Wrongful termination, harassment, and discrimination.
While far less common than claims resulting from slip-and-fall incidents and auto collisions, claims against nonprofit boards and officers are typically more complex and costly to defend.
Most claims are lodged by disgruntled former employees and frequently involve a board member or a senior employee with an emotional stake in the outcome, who may be reluctant to be completely candid.
Often, the facts are not clear-cut and are subject to interpretation by the various parties. Getting to the bottom of the issue can be a long, painful, and expensive process involving depositions and review of electronic records.
Indeed, no matter what the outcome, all parties may feel like losers because of the financial and emotional expense of the process.
Employment claims against nonprofit boards and officers typically fall into three major categories:
- Wrongful termination (including retaliation)
- Harassment
- Discrimination
The following are sample scenarios of typical types of lawsuits brought against nonprofit boards and officers, as well as things to consider that may help prevent such claims from occurring.
Wrongful termination:
A common scenario occurs when a poor-performing employee complains about illegal business or supervisory practices at their nonprofit. If the employee is terminated for continued poor performance, they can file a lawsuit alleging the termination was in retaliation for their earlier complaint of mismanagement.
In court, if the organization insists the reason for the termination was poor performance, but it cannot produce adequate documentation of the employee’s poor performance, that defense will likely fail. As a result, juries commonly sympathize with the employee and conclude that the nonprofit terminated the employee in retaliation for making waves in the organization.
Firing someone because they have pointed out wrongdoing is illegal — there are state and federal laws that protect whistleblowers from retaliation for making a complaint. In 2023, retaliation claims represented 39.4% of all claims filed with the federal Equal Employment Opportunity Commission.
If an employee complains about illegal business practices — including failure to protect an employee from exercising a legal right, such as taking a legally protected leave of absences — and then is terminated because of those complaints, that employee may well have a valid case for retaliation. The law does not require the employee’s complaint to be valid — employees are protected from retaliation simply for the act of reporting the complaint.
Of all employment practice claims, retaliation produces the highest jury awards. In most states, the plaintiff’s attorney fees can be recovered in addition to the jury award.
If an employee is terminated due to poor performance, even in an “at-will employment” state, the organization should be able to prove in court that the employee was counseled and given ample opportunity to improve their performance before termination was considered.
Unfortunately, many organizations are lax in compiling and maintaining adequate, appropriate, and accurate performance documentation. Documentation is essential to a successful defense to any employment claim.
Sexual harassment:
A supervisor at a nonprofit enters a romantic relationship with their employee. One day, the supervisor overhears other employees discussing the relationship between the supervisor and the employee.
Feeling that it is in the best interest of their position with the nonprofit, the supervisor breaks off the relationship. The employee is hurt and angered by the breakup and files a complaint with human resources that the supervisor has made unwanted sexual advances towards them.
This is a typical sexual harassment case — a romantic relationship gone wrong between a supervisor and a person who works for them.
The nonprofit may be held responsible not only for failing to do something about reported sexual harassment, but also for failing to investigate allegations of sexual harassment. Harassment can occur off-duty as well, so complaints regarding such conduct should also be investigated.
If an organization fails to investigate sexual harassment charges, the organization can be held as accountable and responsible — as if the harassment took place with their knowledge and assent.
However, if an employer investigates and takes prompt corrective action, it can in some cases provide a defense in a lawsuit.
Discrimination:
A nonprofit environmental agency had applied for a large grant to continue an innovative program for land acquisition and preservation. Unfortunately, the organization failed to get the grant and were forced to eliminate one of the staff positions serving this program.
One of the two positions was held by a 28-year-old man, Tom, who had been working for the nonprofit for six years, and the other by a 47-year-old man, Bill, who had been working there for nine years. After careful consideration, the executive director told Bill he would be laid off in a month, when the funds were depleted from an earlier grant.
The executive director’s reasons for her decision were Tom’s recent college degree achieved during night school and because Tom was bilingual, which was needed for program delivery. Bill sued for age discrimination.
The claim of age discrimination is not uncommon. Workers over 40, who are passed over for promotions or who lose their jobs when other, younger workers in the same positions keep theirs, frequently respond with a lawsuit.
Here, the reasoning of the executive director was sound and well-documented, and Bill failed with his lawsuit.
Another type of discrimination case can be based on sexual or gender orientation, expression, or identity. Any employment action taken because a person is gay, lesbian, bisexual, or transgender creates a serious risk of a discrimination claim.
As in all allegations of discrimination, a prompt, thorough investigation into the merits is essential, and once completed and if appropriate, remedial action should be promptly undertaken. It is essential that the investigation be conducted by a competent, neutral party.
Situations involving the executive director or complicated/serious allegations warrant the hiring of an experienced investigator or attorney to investigate the complaint.
Chapter 4: D&O Coverage Forms
Understanding key policy provisions.
Unlike General Liability insurance, where standardized policy language is amended by specific endorsements, each insurance company writes its own specialized policies for nonprofit boards and officers.
This can make determining what coverage is provided a very difficult process — one that is often more complicated for nonprofits because many insurers’ nonprofit D&O policies contain provisions that initially appeared in traditional, for-profit policies.
A wide variety of policies are available on the market today. Your insurance broker can help you evaluate which policy form is best for your organization. There are far too many variables to adequately evaluate the many differences in an e-book of this nature.
However, some important distinctions make the coverage provided by some far superior to others. In the next few pages are examples of the most desirable coverages for nonprofits.
A broad definition of ‘insured’:
A D&O policy containing a broad definition of “insured” extends coverage to the nonprofit itself, and any person who was, is, or becomes a director, trustee, officer, employee, committee member, volunteer, intern, or student-in-training of the organization. This is a major departure from for-profit policies, which typically cover only the boards and officers.
To determine whether a particular D&O policy contains this broader coverage, simply look at the definition of “insured.” If the organization and its employees are not named as insureds, the policy offers narrow coverage and the organization and/or its managers are uninsured.
Nonprofit managers should ask their insurance professionals to advise them of any potential gaps in coverage of this nature.
(Note: NIA policies utilize the term “member” as opposed to the term “insured.”)
Requirement to advance defense costs:
Unfortunately, deciphering language which states how the insurer will pay for defense costs is often difficult.
It might be reasonable to assume policy language stating that “the company will pay on behalf of the organization any loss…” is a commitment to pay the costs of legal defense as they are incurred. However, later in this policy, “loss” is defined as “amount paid by the insured or organization.”
This language, which makes the nonprofit eligible to get reimbursement for defense costs, is easy to overlook, but it can be disastrous to the nonprofit, which is required to reach into its own funds to pay costly legal bills.
Look for the language that requires the insurer to advance the costs of defense. Reimbursement language requires the nonprofit to pay all costs and attorney fees out-of-pocket and wait for repayment by the insurer.
Since litigation covered under D&O policies can be expensive and lengthy, reimbursement-style policies can severely stretch a nonprofit’s resources.
Broad coverage for Employment Practices Liability:
Although increasingly common, EPLI coverage is not universally provided in nonprofit D&O policies. In those policies that do grant coverage, the language is not in a consistent policy section.
In some policies, it is found within the section titled “Exclusions,” where employment contracts are exempt from the breach of contract exclusion.
While a policy may indicate previously that claims alleging breach of contract are not covered, under Exclusions, there may be a statement indicating this restriction on coverage does not apply to claims alleging breach of an employment contract.
In other policies, coverage for employment practices may be found in the body of the policy or in the endorsements.
A broadly written policy covering employment practices should insure payment for the legal defense of claims alleging a wide range of wrongful employment actions.
Some policies accomplish this by extending coverage to employment-related claims, while others list the specific causes of action (such as wrongful termination or sexual harassment) that are covered. If the policy includes a specific list, the reader must determine if all exposures are included.
There should be coverage for cases arising under both state and federal laws, those specific to employment and those, such as the Americans with Disabilities Act (ADA), applicable in many contexts.
Of equal importance — and not so easily determined — is an insurer’s interpretation of certain definitions.
If the insurer defines sexual harassment as sexual abuse, there may be no coverage under their EPLI policy if it contains a sexual abuse exclusion. If you have a question on this matter, you should ask your insurance broker to contact the EPLI carrier to determine the insurer’s interpretation of this and similar terms and issues.
Since most lawsuits filed against nonprofit boards and officers involve some form of employment practices liability, insurers looking to limit their exposure have made subtle policy changes that restrict coverage in these areas.
The nonprofit should ask their insurance broker to confirm that all coverages listed in this section are included in a policy designed to cover the exposures which arise from governance activities and should check whether a separate deductible applies to employment-related allegations.
Chapter 5: Policies and Procedures
How can you minimize the chances of facing an employment-related lawsuit?
Most employment-related complaints arise from the perception of prospective, current, or former employees that an organization failed to treat them fairly or acted illegally. Many potential employment-related claims can be avoided by striving for clarity and consistency in the administration of employment practices.
Every nonprofit’s personnel policies should be grounded in legal, defensible practices. In addition, a strong commitment to treating employees fairly — and with respect — should be the foundation on which all employment actions are taken.
The effectiveness of this approach is only as strong as the weakest link in the nonprofit. Therefore, it is crucial that all supervisors and managers be trained and coached in implementing the organization’s employment practices. It is not enough to simply distribute a list or handbook containing the organization’s policies.
Potential problem scenarios and concerns should be openly discussed, and those who administer employment policies must seek additional assistance or clarification when they do not understand the reasons behind a particular policy or how it should be implemented.
Other strategies a nonprofit should consider in managing the risk of employment-related claims are discussed next.
Keep your employee handbook updated and in compliance with current law:
In our review of hundreds of nonprofits’ employee handbooks, we have seen policies incorporated into handbooks that are patently illegal.
For example, policies requiring pregnant employees to take a leave of absence, or those requiring employees to work as volunteers instead of receiving pay for overtime work are simply illegal and will be indefensible in a lawsuit.
Seek the assistance of an employment attorney to make certain that your handbook complies with state and federal laws.
(Note: NIA members with EPLI coverage can get subsidized access to the BLR Employee Handbook Builder, and risk management support, to help create a reliable, web-based employee handbook.)
Clearly and promptly document each employment action:
Each time you meet with an employee for performance counseling, be sure to document the discussion and outcomes of the session and have the employee sign it to acknowledge that they have seen the document. Common performance management tools include performance improvement plans or written warnings for behavioral issues.
The employee may not agree with your assessment and may indicate so on the document; however, attempt to have the employee acknowledge receipt and review of the document. Keep one copy in the employee’s personnel file.
A decision to terminate employment for performance deficiencies should not surprise the employee. If the employee will be terminated if the conduct continues, the documentation should include a statement that termination can result if performance does not improve. Good documentation, accurate evaluation, and timely discipline will assist you in achieving this goal.
Make ‘at-will’ the standard of employment:
Unless your nonprofit intends to have relationships with employees governed by contracts, which is not common, take steps to establish and preserve the “at-will” status of your paid staff.
“At-will” employment simply means that either the employee or the employer may terminate the employment relationship for any reason, except an unlawful one.
If your employee handbook or other document specifies a length of employment or provides or suggests that employees will be terminated only “for cause,” you have created an additional legal obligation for yourself that is not required by law.
Many nonprofit managers resist adopting “at-will” language because they believe that they must then become less supportive of employees. The “at-will” language does not require employers to terminate without cause; it simply may make it easier to avoid certain types of lawsuits once the organization determines that an employee is not performing adequately and must be terminated.
However, it does not mean that an employee can be terminated for no reason without risk. To defend against discrimination or retaliation claims, an employer should have a legitimate business reason for terminating a worker that can be proven in court.
If your nonprofit changes from a policy whereby employees may only be terminated for cause to one where true employment “at will” exists, it may be necessary to compensate employees accordingly. Consult an employment attorney for specific guidance on this tricky issue.
Ban the word ‘permanent’ from your employee handbook:
Using the words “permanent employee” in a handbook or other employment document can create an implied contract of employment. The word “permanent” should not appear in any description of employment or employee status.
If you need to distinguish your regular staff from another group of staff, you can label staff “regular employees.”
Do not include termination as one of the actions covered by any grievance policy:
Grievance policies are a helpful tool to allow current employees to bring policy violations or concerning behavior to management’s attention. To many nonprofits, the recommendation not to include termination in the policy sounds odd. Isn’t that often what the grievance policy is for — an appeals board in case of termination?
If you allow a termination to be brought to the grievance committee, you have destroyed your ability to terminate “at will.”
When someone can grieve a termination, you may set up your organization to terminate only “for cause” and create a procedure you would be required to follow — whether the former employee has filed a claim or lawsuit.
Again, this does not mean that your organization should not give ample opportunity to help poorly performing employees improve. It only means that you have reserved the right to determine when termination is appropriate and have not waived that right for some third party’s determination of what is proper “cause.”
A best practice would be to thoroughly review the appropriateness of a termination decision before it is made, not after the fact. So, any grievance policy should state that it only applies to “current employees.”
Follow your employee handbook to the letter!
This guideline may be the most important of all: If your policies provide for written notice before termination, if you promise to provide a second chance, if you have agreed to respond in 30 days, etc. — be sure to do just that.
If you do not follow your own policies, it will likely be used against you in a court of law — even for a justified personnel action. If your policies do not represent your practices, then revise your handbook, and of course, make sure it is regularly updated to reflect all current, applicable employment laws.
Conduct candid, thorough annual reviews:
The key word in the above statement is “candid.” If your managers cannot be truthful and candid with employees about poor performance and areas in need of improvement, then they should not be allowed to continue as supervisors.
If your nonprofit uses performance as selection criteria for layoffs — yet written performance reviews suggest an employee has a consistent record of acceptable performance — a discrimination claim looks much more substantial. Emphasize to supervisors the importance of conducting candid reviews and teach them how to accomplish this goal.
Investigate harassment or discrimination allegations promptly and thoroughly:
Nonprofit managers are being asked to do more with less, and there is never enough time to accomplish it all.
However, harassment and discrimination claims based on legally protected characteristics (race, sex, religion, age, disability, national origin, sexual orientation, gender expression, etc.) are taken seriously by the courts — and any allegations against your nonprofit should be followed up with a prompt, thorough investigation.
Failing to take these allegations seriously could put your organization and your ability to fulfill your mission at risk.
It is also important to remember that any notice of harassment based on protected characteristics that has occurred — however informal — should trigger an investigation. The investigation should include interviews with the witness(es), the person(s) making the complaint, and the accused person.
Once the facts are established, findings should be made and the complainant notified in writing whether the complaint was substantiated or not, that remedial action will be taken — if any — and that they are protected from retaliation.
If an employee approaches a manager and states, “I just overheard Bob making a sexually explicit comment to Marie and she seemed very upset — but I don’t want you to actually do anything about it…” the manager cannot ignore the comment and should follow the organization’s procedure for investigating the matter. Supervisors are “the nonprofit,” so once any supervisor learns of a complaint, it needs to be investigated.
All employers must have a written harassment and discrimination complaint policy, even if they have no employee handbook.
Seek legal advice before taking an adverse employment action:
Even though your nonprofit may be an “at-will” employer, and you can terminate an employee for any reason (except an unlawful reason), a court may be sympathetic to a plaintiff terminated under inexplicable circumstances.
Due to the very risky nature of termination, it is prudent to consult with an employment specialist before you take adverse action against an employee. Make a commitment to do so every time, with no exceptions.
(Note: NIA understands that nonprofits have limited discretionary funds, and that obtaining consultation from an HR expert or employment attorney before taking an employment action — such as a layoff, termination, or demotion — can be a stretch for a nonprofit’s budget.
However, NIA feels so strongly about the value of such consultation that free pre-termination employment consultations are available to members who have EPLI insurance through NIA.
For more information about this service, call NIA at 800-359-6422, ext. 5001.)
Chapter 6: Board Practices
What board practices are particularly important to avoid claims?
A board of directors should follow several practices to guard itself against the threat of lawsuits. While following best practices cannot guarantee that the board will not be sued, good board practices can be an effective defense against unjustified allegations.
Informed and regular review of financial statements:
Board members should understand the sources of income for the nonprofit and know where those resources are being expended. If a professional fundraiser is used, the board should determine that any fees charged by the fundraiser are comparable to those charged to other companies for similar services.
Not all nonprofits are required to conduct an independent audit. . Circumstances that may trigger the requirement for an independent audit include:
- Nonprofits that expend more than $750,000 in federal funds in a year are subject to special audit requirements
- State laws may require that charitable nonprofits submit a copy of their audited financial statements when they register with the state for charitable solicitation/fundraising purposes.
- Federal, state, and local governments may request a copy of the organization’s audited financial statements
- Contracts with state and local governments to provide services in the community
- Private foundations may request that a nonprofit submit a copy of the most recent audited financial statements when submitting a grant proposal
- Banks may require an audit as a condition of receiving a loan
(Note: The National Council of Nonprofits created a Nonprofit Audit Guide, with a 50-state chart, to provide charitable nonprofits with the tools they need to make informed decisions about independent audits.)
At least once each year, the audit committee or the entire board should meet with the organization’s independent auditor to discuss the audit’s findings.
During the meeting, it is appropriate for the board or committee to ask the nonprofit’s officers to leave the room briefly to allow the auditor to speak candidly to the board.
Regular attendance at board meetings:
As a board member, ignorance of a problem facing the nonprofit is not a good defense. To make informed decisions about the governance of an organization, board members must:
- Thoroughly review background information
- Regularly attend board meetings
- Actively participate in those meetings
Board members should also feel comfortable expressing disagreement and voting against proposals for which they are not in favor. Silence may well be interpreted as agreement by a court of law.
Clearly understand the board’s role in personnel situations:
The CEO/executive director should have the authority to hire and fire staff below the executive director level. If the division of labor between the board of directors and the executive director is not clear, the board may find itself embroiled in a situation better resolved at the staff level. The responsibilities of each party should clearly be spelled out in the nonprofit’s bylaws.
Avoid conflicts of interest:
Board members who receive any compensation from the organization, other than reimbursement for expenses, must fully disclose the nature of services they provided — and the compensation received.
The board of directors must decide, independent of the compensated board member, that the arrangement is in the best interests of the nonprofit and that a more favorable arrangement for the nonprofit could not be obtained elsewhere.
To avoid the possibility of sanctions, there are specific guidelines about how these types of matters must be handled. If there is any uncertainty about how this may affect your organization, consult your nonprofit’s attorney for specific guidance.
Sanctions could come from the IRS, and/or the state in which the nonprofit is chartered. State requirements are not always the same as federal, so the organization needs to be familiar with both.
While nonprofits should never make a loan to a board member, it is also unwise for a board member to make a loan to a nonprofit. A board member with a loan to a nonprofit is in a situation of potential conflict — their actions may be viewed as prioritizing repayment of the loan rather than the best interests of the nonprofit.
Boards with a member who provides professional services to a nonprofit — lawyers, accountants, insurance or real estate brokers, etc. — must be especially careful.
While it may appear that that individual is providing the best possible service because of special knowledge and commitment to the organization’s mission, the nonprofit should periodically confirm that the services it is receiving are satisfactory and that the costs of working with the “insider” are competitive with those of other sources.
Enact and comply with the governance policies required by law:
Board members should look carefully at applicable state and federal laws, maintain all policies required by law, and determine whether their organizations ought to voluntarily adopt governance accountability practices — even if not legally mandated.
In particular, the federal Sarbanes-Oxley Act, passed in response to corporate accounting scandals, has two provisions applicable to the nonprofit sector.
Under Sarbanes-Oxley, nonprofits must develop, adopt, and disclose a formal policy to respond to employee complaints of illegal, improper, or fraudulent activity — and to prevent retaliation. Civil rights laws similarly require policies to address complaints of discrimination or harassment of employees.
Board members must ensure that the nonprofit thoroughly and promptly investigates employee and volunteer complaints of wrongdoing and implements prompt corrective actions when necessary. This should include a process whereby complaints regarding illegal conduct of the executive director can be made directly to the board, typically through the board chair/president
Sarbanes-Oxley also requires nonprofits to have a written document retention and periodic destruction policy that applies to paper records, electronic files, and voicemail.
Chapter 7: Summary
Prevention and protection are the keys.
Most boards of directors for 501(c)(3) nonprofit organizations will never have to face a lawsuit. However, no organization should claim that, since it hasn’t happened in 75 years, it won’t ever occur. The chances of being sued may be modest, but the consequences of an uninsured lawsuit — no matter how unjustified the allegations — can be devastating.
Continued increases in the number of employment-related lawsuits are among the reasons nonprofit board members are at risk. During economic downturns, the risk of employment litigation increases substantially as it becomes more difficult for laid-off employees to find employment.
Employees of nonprofits may be more long-suffering and willing to endure less job security and accept fewer “perks” than their counterparts in the for-profit world. Nonprofit employees are also probably less likely to sue the nonprofit for whom they have worked hard and in whose mission they believe.
However, when employees feel they have been mistreated by a nonprofit or disagree with policy decisions made by the organization’s leadership or board, they may retaliate with emotion and conviction. If these disputes result in lawsuits, the process can be expensive and difficult for both sides.
Employee handbooks in compliance with law — along with strict adherence to personnel policies, supervisor training, and honest and respectful communication with employees — can go far to mitigate potential problems.
Boards of directors must adopt and stand behind clear anti-discrimination and anti-harassment policies. When there are allegations of wrongdoing, make sure that the matter is promptly and competently investigated, thoroughly documented, and action is taken in a prompt and fair manner.
Not all lawsuits can be avoided but having proper procedures in place and following them can go far toward providing a strong defense.
Remember, not all D&O, EPLI, or Fiduciary policies provide the same protection. Insurance buyers should make sure that the policy includes a broad definition of who is an insured, provides for defense costs to be paid by the insurer as they are incurred, and includes broad coverage for employment-related activities.
Managing a nonprofit organization is never an easy task, and it is getting more complicated each day. Those who volunteer for board membership and those who serve in management positions already give generously their time and their talents. They should not be asked to put their personal assets at risk each time they make a governance decision.
Appendix: Member Resources
See all free and discounted risk management services available to nonprofits insured by NIA.