According to an article in the LA Times, boards cannot give
year-end bonuses to employees without membership approval. And even then
it may affect the association's tax status. Our HOA has been giving
bonuses for years. Are directors in breach of their fiduciary duties?
Will we lose our tax status?
The LA Times condo column was a train wreck. Boards can give year-end bonuses to
employees and doing so is not a breach of their fiduciary duties and does
not affect the association's tax status.
Boards have the authority to hire employees and contract with vendors
to provide services to the membership. This power is found in virtually
every set of bylaws I've ever reviewed. In addition, associations
(through their boards) "may exercise the powers granted to a nonprofit
mutual benefit corporation" unless the governing documents specifically
provide otherwise. (Civ. Code §4805(a)
.) This gives broad powers to boards to act on behalf of their associations.
authority to hire employees and contract with vendors means boards can
pay for those services. An employee's compensation
can include year-end bonuses, either as part of a negotiated
compensation package or as a reward to employees for rendering exemplary
the association. Boards do not need membership approval for this. The
Davis-Stirling Act specifically makes personnel and contract issues executive session
topics for boards to address to the exclusion of the membership.
. The board's authority to use HOA money for more than just repairing common areas came before the courts in Finley v. Superior Court
In that case, a board used HOA funds to fight the conversion of a
nearby military base into a commercial airport. Members of the
association sued claiming this was a misuse of their funds and exceeded
the board's authority. The court found that political contributions were
not illegal and that boards can take actions they believe are in the
best interests of the association, even if members disagree.
Benefits the Association
. The Business Judgment Rule
relieves directors of personal
liability if their decisions are in error, provided they are in good
and in the best interests of the
association. In this case, employee bonuses benefit the association. It establishes good will with employees, promotes stability in
the workforce, and encourages good work. Disaffected employees and high
turnover are clearly not in the association’s interest—they can be far
more costly to an association than a year-end bonus.
Giving a bonus to employees will not result in tax penalties or the
loss of an association's status as a nonprofit mutual benefit
corporation. If boards have any concerns on this point, they should
contact their association's CPA. NOTE
: Because a bonus is part of employee's compensation, it must go through payroll so appropriate employee withholdings and taxes can be taken out.
. For convenience,
employees of associations are sometimes put on the payroll of the
management company. Doing so does not preclude the board from giving
year-end bonuses. As noted above, the bonus should be run through the vendor's
payroll account so they can take out appropriate taxes and withholdings.
: Associations needing legal assistance can contact us
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