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 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.
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.
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 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.
. 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
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.
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.
. 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.
: Associations needing legal assistance can contact us
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