Five Legal Steps to Remunerating Not for Profit Directors
23 May 2017 at 8:23 am
Angela Stackelbeck from Touchpoint Legal unpacks the five key legal steps that should be in place before remunerating not-for-profit directors.
Many people question whether non-executive directors sitting on a not-for-profit or charitable board should be remunerated. But before any decision on remuneration is made there are a few legal steps that ought to be in place.
Step 1 – Check Your Constitution
To qualify as an NFP, there will usually be a clause in your organisation’s constitution to the effect that all profits of the organisation must solely be applied to a particular purpose (whether the entity is operating or is being wound up).
The first step for directors of an NFP or charity to seek payment of fees for their services on the board, is to check whether there is a clause in the governing entity’s constitution indicating that directors can be paid reasonable compensation for bona fide services rendered to the organisation.
Without this clause, there is no authority for a director to be paid.
Care must be taken to ensure that your NFP or charity can show that paying a director’s fees will advance the purpose of your organisation and is not inconsistent with the organisation’s purposes. (For example, does conferring the private benefit of payment of a fee assist the organisation to achieve its purpose or is it simply conferred for private gain? The amount of remuneration and the process for setting that remuneration would be relevant in determining this question).
If you need help to check your constitution or to draft an appropriate clause, please don’t hesitate to contact us here for an obligation free discussion.
Step 2 – Remuneration Policies and Procedures
A decision to pay directors (which has been made in accordance with law) should be accompanied by well-considered and documented remuneration policies and procedures which manage:
- what expenses directors should be compensated for; and
- the quantum of fees to be paid for their services.
Having in place appropriate remuneration policies and procedures is essential.
If payment terms are seen to be above market for the services provided, or compensation is paid for ‘luxury’ items, then it becomes arguable as to whether the organisation is in fact operating as a ‘for profit’ entity. This could result in loss of not-for-profit or charitable status.
Having robust remuneration policies and procedures in place which can evidence fair and reasonable remuneration for bona fide services performed should assist in preventing loss of not for profit or charitable status.
In addition, a defence can be put forward on the basis of the process in respect to any allegations of failure to act in the best interests of the organisation.
Step 3 – Determine Application of State Based Laws
If your charity is regulated under the Charitable Fundraising Act 1991 in New South Wales, then there is a prohibition on members of a governing body from receiving remuneration for their role unless ministerial approval is obtained.
Criteria for obtaining ministerial approval includes where:
- staff members are elected to form part of the governing body of the organisation; and
- where the Constitution of the charity allows for members of a governing body to be remunerated.
There is a general limitation of remuneration to one person except in certain circumstances.
Accordingly, payment of directors and committee members regulated under these laws is reasonably restrictive and may limit an organisation’s plans to remunerate services performed in governing the organisation.
Step 4 – Funding Agreements and Quality Standards
In addition to the above steps, you will need to check the contractual terms of any funding agreements that apply to your organisation to ensure that you do not breach existing requirements and any restrictions in applicable quality standards.
Step 5 – Corporations Law and Immunity from Prosecution
Where the constitution of a company limited by guarantee permits payment to directors, then the word ‘Limited’ must appear at the end of the name of your organisation. Failure to do this constitutes an offence under Corporations law.
You must also be aware that if you are paid for your services as a director, you will lose immunity from prosecution under Work Health and Safety laws upon loss of status as an unpaid volunteer.
If you need any further information regarding the above steps, please don’t hesitate to contact legal director, Angela Stackelbeck for an obligation free discussion about how we can help you.
You can find other useful tips about laws impacting not for profits here.
This blog is for information purposes only, does not constitute legal advice and should not be relied upon as such. If you require legal advice please contact us or another registered legal practitioner.