Disclosing Employee Salaries

Upon request, associations must provide compensation information for all employees, including the general manager, as follows: "Except as provided by the attorney-client privilege, the association may not withhold or redact information concerning the compensation paid to employees, vendors, or contractors. Compensation information for individual employees shall be set forth by job classification or title, not by the employee's name, social security number, or other personal information." (Civ. Code § 5215(b)) 

Because the Legislature used the word "or" in describing how employee salaries must be shown ("job classification or title") in an "association record" that is being provided to a member to inspect, the decision of which format to use is the association's, not the person requesting the information. The Legislature clearly wanted to preserve employee anonymity as much as possible when making compensation disclosures that are part of an "association record." It then added further protections by prohibiting the listing of an employee's name, Social Security number, or other personal information.

List of Employees. Associations are not required to provide members with a list of their employees. The right to salary information applies to the association's employees, not to the employees of the association's management company or its vendors.

Compensation Undefined. AB 104, signed into law in 2003, required disclosure of employee compensation and addressed financial disclosures. The legislature did not comment on what it meant by "employee compensation." It would be reasonable to define it as salary plus any nondiscretionary bonuses. 

Employee Year-End Bonuses

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 year-end bonuses. Doing so is not a breach of the board's fiduciary duties, and it does not affect the association's tax status.

Personnel Issues. Boards can 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 boards broad authority 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 for 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, excluding 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. Association members sued, claiming the board misused their funds and exceeded its authority. The court found that political contributions were not illegal and that boards can take actions they believe serve the association's best interests, even if members disagree.

Benefits the Association. The Business Judgment Rule protects directors from personal liability if their decisions are mistaken, provided they act in good faith and in the association's best interests. In this case, employee bonuses benefit the association. They build goodwill among employees, promote workforce stability, and foster good work. Disaffected employees and high turnover are clearly not in the association’s best interests—they can be far more costly than a year-end bonus.

Tax Status. Giving employees a bonus will NOT result in tax penalties or the loss of an association's status as a nonprofit mutual benefit corporation.

Vendor Employees. For convenience, associations sometimes place employees on the management company's payroll. Doing so does not preclude the board from giving year-end bonuses to these individuals.

Personnel Records

Employees have a right to privacy. Personnel matters include anything involving employees, including, but not limited to, hiring, firing, raises, disciplinary matters, performance reviews, and adopting or amending employee policies, which fall under the purview of the board of directors and must be heard in executive session. (Civ. Code § 4935) Even board members do not have the right to inspect personnel records. 

Inspecting Employee Contracts

In the context of community association document inspections by members, the Davis-Stirling Act defines "association records" to include "executed contracts not otherwise privileged under law." (Civ. Code § 5200(a)(4)) The Act further provides that for the purpose of member inspections, "contracts for management" are not "privileged contracts." (Civ. Code § 5215(a)(5)(D))

Independent Contractors. Management contracts with independent contractors, including portfolio management companies, are clearly not "privileged contracts" and therefore are subject to inspection by association members. Opinions are split on whether members are entitled to review a general manager's employment agreement.

Employment Agreements. Some associations employ a general manager (sometimes called an "executive director") whose job is to oversee other employees and manage the association's business affairs. The general manager often has an employment agreement with the association, and members may occasionally ask to review it.

OPINION #1: NO RIGHT TO INSPECT. California's Constitution specifically recognizes the inalienable right of privacy–a right the courts have applied to employment information. In recognition of this constitutional right of privacy, the Davis-Stirling Act expressly excludes from the broad scope of community association member inspection rights "personnel records" and information regarding compensation paid to individual employees. (Civ. Code § 5215(a)(5)(E) & (b)) The Davis-Stirling Act also recognizes a distinction between employees and vendors when it comes to disclosures (Civ. Code § 5375) as well as rules that managing agents must follow in the handling of association funds. (Civ. Code § 5380) In both statutes, the term "managing agent" expressly excludes full-time employees of the association. (Civ. Code § 5375; § 5385) Finally, advocates of employee privacy believe that the protections found in Labor Code § 1197.5(d) include employment agreements when it states that "Every employer shall maintain records of the wages and wage rates, job classifications, and other terms and conditions of employment of the persons employed by the employer."

OPINION #2: RIGHT TO INSPECT. Attorneys who believe a manager's contract is subject to inspection argue that Civil Code § 5215(b) begins with the opening statement that the items listed in that subparagraph may be withheld or redacted from what is otherwise an "association record" under (a)(1). The implication is that the subparagraph is talking about permissible exclusions from a larger document that is an association record and one of the listed exclusions is for "personnel records, other than payroll records, required to be provided under paragraph (2)." Subparagraph (d)(2) does not use the term "personnel records." Instead it states: "Except as provided by the attorney-client privilege, the association may not withhold or redact information concerning the compensation paid to employees, vendors, or contractors. Compensation information for individual employees shall be set forth by job classification or title, not by the employee's name, social security number, or other personal information." In most employment agreements, compensation includes not only salary but additional benefits such as car allowance, severance payments, health insurance, a 401(k) retirement fund, perhaps a residence, and so forth. Those compensation items are not included in the association's "payroll records" so it can be argued that the association must produce the contract so as to reveal all compensation items.

Recommendation: Until the courts or legislature clarify this issue, boards should rely on counsel's advice on whether an onsite manager's contract should be available for inspection and copying.

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