Employee Year-End Bonus
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EMPLOYEE YEAR-END BONUS

QUESTION: 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?

ANSWER: The LA Times article gave exceptionally bad advice. Boards CAN give employees Christmas or year-end bonuses. Doing so is not a breach of the board's fiduciary duties nor does it affect the association's tax status.

Personnel Issues. 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. 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.

Compensation.The 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 service to the association. Boards do not need membership approval to hire, compensate and give bonuses. The Davis-Stirling Act specifically makes personnel and contract issues executive session topics for boards to address to the exclusion of the membership.

Case Law. 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 protects directors from personal liability if their decisions are in error, provided they are in good faith and in the best interests of the association. In this case, employee bonuses benefit the association. They establish good will with employees, promote stability in the workforce, and encourage good work. Disaffected employees and high turnover are clearly not in the association’s best interests—they can be far more costly to an association than a year-end bonus.

Tax Status. 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. However, except for minor gifts like a bottle of wine, bonuses are deemed "compensation" and need to be run through the payroll system so appropriate withholdings and taxes can be taken.

Vendor Employees. 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 to these individuals.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC