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Tips to Protect Nonprofit Board Directors from Personal Liability

Tips to Protect Nonprofit Board Directors from Personal Liability

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There are 170,000 nonprofit organizations in Canada, dedicated to a wide variety of causes. These organizations rely on volunteer boards of directors to help guide their missions, and thousands of individuals serve on nonprofit boards. Being a board director is a fulfilling experience and a great way to contribute to society. However, many individuals who join a nonprofit board are not aware of the responsibilities and related liability that come with such a role. 

For example, directors and officers at nonprofit organizations can be personally liable for compliance with employment laws. This means that directors can be required to pay amounts owing to employees, pay administrative penalties or they can be charged with offenses for non-compliance, which can result in fines or imprisonment. Understanding your potential liability as a charity or nonprofit board director helps you to manage that risk.

In this article, we’ll provide 4 tips to help you protect yourself.  

#1 Know Your Legal Obligations

The first thing you can do is make sure you understand when, and for what, you can be exposed to personal liability. Liability for employment-related obligations is imposed on directors under a number of different Acts. Directors can be personally liable under the following types of employment legislation:

  • Accessibility
  • Employment Standards
  • Health and Safety
  • Human Rights
  • Pay Equity

In some provinces, directors also have liability under corporate legislation. For example, in Ontario, the Not-for-Profit Corporations Act, 2010 makes directors personally liable for employees’ unpaid wages and vacation pay (in other provinces, this liability is provided for in employment standards legislation). 

Directors also have personal liability under federal legislation for payroll and tax withholdings, which includes CPP (Canada Pension Plan) payments, EI (Employment Insurance) payments, and income tax withholdings.

You should become familiar with your organization’s general responsibilities as an employer. You are not expected to be an expert in the law, but you should have a general knowledge of the types of laws that your organization must comply with. This helps you to identify red flags or issues that may require legal advice.

Directors should also ensure that an organization’s senior management is aware of these obligations and has access to resources to help them understand these obligations. It is also important that you monitor changes to these requirements. Employment laws change all the time and you need to be aware of changes that impact your organization. 

#2 Get Legal Advice Before Hiring “Independent Contractors”

A significant liability risk comes from misclassifying employees as independent contractors.  Many nonprofit organizations prefer to classify workers as “consultants” or “independent contractors.” This often seems to be a better fit with funding arrangements and may be seen as a way to reduce some of the organization’s administrative burden. 

The problem with this is that the question of whether someone is properly an employee or independent contractor is a legal question - this isn’t something that an organization can just decide on its own. If you have treated someone as an independent contractor, you likely have not made CPP or EI payments, remitted income tax withholdings, paid vacation pay, or made other statutory payments. If that person should have been classified as an employee, the organization may become responsible for all of those payments. In the case of CPP, EI, and income tax withholdings, the organization may also have to pay significant interest and penalties. If the organization cannot pay these amounts, directors and officers are personally liable for these payments.

Misclassification also carries a risk of litigation, including the risk of class action lawsuits if you have misclassified a number of employees. 

To manage this risk, always seek legal advice before hiring someone as an independent contractor to ensure that you are classifying them correctly. 

#3 Monitor Your Organization’s Financial Operations

In most provinces, directors are personally liable for unpaid wages and vacation pay. They are also liable for payroll remittances. The amount of unpaid wages that a director is liable for ranges from 2 months to 6 months. In some provinces, directors can also be personally liable for unpaid vacation pay of up to 12 months. There are generally preconditions that must be met before a director will be made to pay, including a requirement that the organization be unable to pay before an employee can recover any unpaid wages and vacation pay from the directors.

Where directors have personal liability, their liability is generally “joint and several.” This means that each director is liable for the entire amount owing, but also that the payment of the amount owing can be recovered by any one or more of them. 

For example, if an organization owes $10,000 in unpaid wages to its employees and there are 5 directors, all 5 directors are responsible for the total amount owing.  But, the employees can enforce payment against any one or more of the directors.  That means one director could be required to pay the full $10,000.  It would then be up to that director to claim against the other directors to recover their contribution.  This is done to make it easier for employees to recover what is owed to them.

As a director, you will want assurance that employee wages are being paid and that CPP, EI, and income tax withholdings are being remitted on schedule.  You will also want to be sure the organization has the ongoing ability to make these payments. If possible, it is recommended that organizations maintain a reserve that will cover these amounts for at least 3 months. Some organizations maintain a reserve that covers the full period of a director’s liability, although this isn’t always possible.

#4 Obtain Directors’ and Officers’ Insurance

Finally, you should consider obtaining Directors’ and Officers’ liability insurance (D&O Insurance).  While insurance generally does not provide protection with respect to offenses, it can provide protection for personal liability. The specific terms of D&O Insurance will vary, but generally it will cover the legal costs associated with a claim against the directors and officers and any monetary award that the directors and officers are required to pay. 

D&O Insurance provides the organization with stability and peace of mind. It can also help the organization attract and retain professionals to your board of directors. It can be very helpful to have directors with specific professional experience, such as lawyers, accountants and HR professionals. These directors can provide the organization with expertise but they will often require D&O Insurance as a requirement to join the board. If you have D&O Insurance it is also important to review the policy from time to time to ensure that it still meets the needs of your organization. 

Understand your personal liability

As a director of a nonprofit, it is important to understand your personal liability and what you can do to manage that risk. This general overview highlights some key areas of concern. If you need help understanding your organization’s obligations, or staying on top of changes to those obligations, please check out Compliance Works for more resources and to learn more about how we simplify HR compliance. Compliance Works provides up-to-date plain language summaries of employment law requirements across the country and provides you with notice of upcoming changes.

 

HR Intervals

 

 

Guest contributions represent the personal opinions and insights of the authors and may not reflect the views or opinions of Imagine Canada.

Compliance Works is co-founded by Lesha Vanderbij and Gayle Wadden. Lesha and Gayle are both lawyers with over 20 years of labour and employment, pensions and legal research experience. 

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