Volunteer Legal Handbook, 9th Edition
Handbook > Law > Contracts

Chapter 4. Contract Liability

The second major area of legal liability for nonprofit corporations and volunteers is the group of risks associated with contractual liability. Not all contracts are signed and written; most oral contracts are quite enforceable and some contracts and some terms in contracts are implied by law. This part of the manual very briefly summarizes some of the issues in contract law that are likely to affect volunteers.

Written Contracts. At the risk of stating the obvious, if a nonprofit corporation has entered into a written contract for goods, services or anything else, and breaches that contract in some way, perhaps by attempting to terminate it early, or by refusing to pay the contract price, the nonprofit corporation faces a risk of liability for damages for breach of contract.

Contracts are usually enforceable according to their terms, unless they are adhesion contracts, which are interpreted to favor the party who didn’t write them. For example, any term in an insurance policy, which is an adhesion contract offered on a "take it or leave it basis" (you don’t get to negotiate over the terms), will be interpreted according to the insured person's reasonable expectations, not necessarily according to the insurance company’s interpretation.

Some kinds of contracts are unenforceable as a matter of law, usually on the grounds of public policy. For example, a contract between you as a director of a nonprofit corporation and the nonprofit corporation to indemnify you for your intentional misconduct would not be enforceable.

One kind of written contract that should concern individual officers and directors most is a personal guaranty, your promise to be responsible for the debts of another person, usually the nonprofit corporation. A personal guaranty is risky and you should never sign one without the advice of your attorney.

Oral Contracts. Some people believe that an oral contract, one never reduced to writing, is not enforceable. That’s just not true. Except for a few special kinds of contracts, an oral contract is just as "legal" as a written contract. One of those exceptions is the personal guaranty mentioned in the preceding paragraph. With some exceptions, the promise to answer for the debt of another must be in writing to be enforceable. Most kinds of unwritten promises or agreements are just as enforceable as any written agreement.

Special Classes of Contracts for Nonprofits.

All kinds of contracts are important to nonprofit corporations, but some are critically important to officers and directors. Those special classes of contracts are discussed here.

Agency. An agent is a person who is authorized to act in the name of another person, called a principal. The agent’s acts, if made with authority, are binding upon the principal just as if the principal had performed them himself or herself. Both employees and volunteers can be agents for nonprofit corporations.

Examples of agency relationships are everywhere, but the most common is the relationship between an employee and an employer. The employee is an agent; the employer is the principal. This area of agency has given rise to a whole area of law, called employment law, that is discussed later in this Chapter. Other agency relationships are discussed here.

There are always limits on the kinds of things which an agent may do. Some of the limits are imposed by statute, for example. By statute, an officer has no authority to perform an act which would make it impossible for the nonprofit corporation to continue to conduct business. And there is a statutory prohibition against a nonprofit corporation making loans to its directors. Other limits are imposed by the rules of the nonprofit corporation itself, its Articles of Incorporation and Bylaws. Still other limits can be defined in a job description, employment agreement or service agreement for employees and volunteers.

Employment Law. Employment law is a special kind of agency law, dealing with what the law used to call the "master-servant" relationship. This is a complex area of law that affects a nonprofit corporation every day. Only a few selected topics are discussed here.

Wrongful Dismissal. Some employment agreements are for definite terms; a year, for example. But most are for an indefinite term: the employee stays employed until the employee quits or the employer dismisses them. Dismissal, in Alaska, must almost always be for cause. There really is no such thing as "employment at will."

Wrongful dismissal is also prohibited under federal law. An aggrieved employee (or volunteer) only needs some circumstantial evidence that he or she was fired for a retaliatory reason to proceed with a retaliation claim. See Sylvester v. SOS Children’s Villages Illinois, Inc., Op. No. 05-4219 (7th Cir. 2006).

Discrimination. Don’t get confused here. Discrimination is not always illegal. Wrongful discrimination, however, is illegal. This part talks about wrongful discrimination.

Alaska law strictly prohibits discrimination by anyone, including nonprofit corporations and their employees, in the selection, hiring, review, promotion, payment or discharge of employees based upon race, religion, sex, age, national origin and other legally protected categories. Wrongful discrimination exposes a nonprofit corporation to criminal liability, administrative sanctions, and civil liability to the victim of the discrimination.

Federal law also prohibits wrongful discrimination, but it is generally a little easier to comply with than is state law. Federal law generally carries more severe sanctions, however.

Frequently, contracts which nonprofit corporations make, including grants, service agreements and procurement agreements, contain special non-discrimination terms and conditions. You need to make a special review of each of those agreements when you enter into them to avoid inadvertent violations. You should also make certain that the terms of your agreements are not mutually inconsistent, requiring you to do one thing in one contract and barring you from identical conduct in another contract.

Worker’s Compensation. Alaska has a mandatory worker’s compensation system; it is an implied term of essentially every employment agreement. Worker’s compensation is an odd mix of statutes, insurance companies, and an administrative agency. While certain kinds of employees are exempt from the requirement of worker’s compensation, the exemptions are narrow and courts do not favor them. There is no special exemption for nonprofit corporation employees.

The worker’s compensation program applies to every "employee" of an "employer." Officers of nonprofit corporations may be covered, at the option of the nonprofit corporation, but only if the board of directors elects to have those officers covered. AS 23.30.240. For the purposes of worker’s compensation insurance, the definition of "employee" is quite detailed. One of the tests is payment for the work. 8 AAC 45.890. Other tests are discussed below.

There are grave consequences for a failure to obtain required worker’s compensation insurance. It is a crime, and it exposes not only the nonprofit corporation but also the individual officers and directors who failed to obtain the worker’s compensation insurance to financial liability.

There are a dismaying host of other laws affecting the employment relationship. Only a selected few, more common to nonprofit corporations, are discussed here.

Wage and Hour Laws. State and federal law strictly regulates the wages to be paid and the hours that may be worked by an employee. Overtime pay at one and one-half times the regular hourly rate is mandated in Alaska for any time in excess of eight (8) hours in a single day or forty (40) hours in a single week. There are only a very limited number of exceptions; there is no general exception for nonprofit corporations. The exceptions are interpreted quite narrowly, and only a few are discussed here.

A non-employee/volunteer, defined as an individual engaged in the activities of a nonprofit religious, charitable, cemetery, or educational organization where the employer-employee relationship does not, in fact, exist, and where the services rendered to the organization are on a voluntary basis, is exempt from overtime laws. AS 23.10.055(6). However, if someone is being paid anything of value for their services, you should assume they are an employee.

Individuals employed in a genuine executive, administrative or professional capacity are exempt from overtime laws. AS 23.10.055(9). There are definitions for each term, and in each instance not more than 20% of the employee’s time may be spent on non-executive, non-professional or non-administrative matters. 8 AAC 15.910. Recent amendments to the statute require these definitions to be interpreted in accordance with the federal Fair Labor Standards Act and its regulations. Another recent amendment to the statutes makes it clear that persons acting in a supervisory capacity (and who do not meet the definition of an executive, administrative, or professional employee) are subject to the overtime laws. In most nonprofit corporations, few, if any, employees will be exempt.

Here are some other kinds of employees who are exempt from the general overtime laws. Please consult an attorney before concluding a person fits in any of these categories. See generally AS 23.10.055.

Child Labor Laws. Children enjoy special protection under labor laws. For example, minors are not permitted to work in hazardous occupations, but are exempted from wage and hour laws, to the extent of thirty (30) hours per week.

"Volunteers" v. "Employees."

It’s frequently critical to be able to tell "volunteers" from "employees." Employees, as discussed above, are entitled to worker’s compensation insurance, overtime, and the protection of various other statutes. Volunteers are not subject to worker’s compensation laws or wage and hour laws. They may or may not be subject to other kinds of protections.

It’s not always easy, however, to tell volunteers from employees, but here are some guidelines. The cases focus on worker’s compensation, but the rules probably have general application.

There is no hard and fast rule that if two or more of the tests are satisfied, a "volunteer" will be an "employee" and thereby subject to worker’s compensation and overtime. Even more confusingly, it may be that different tests are used for different purposes; that is, the definition of "volunteer" may not be the same for purposes of wage and hours claims as it is for worker’s compensation insurance.

Volunteers as Employees.

Many persons associated with nonprofit corporations are volunteers and not employees. While a volunteer is usually still an agent, as discussed in the preceding section, it is not at all clear whether all of employment law applies to volunteers as well. The law in this area is regrettably murky. Subjects here are divided into three categories: probably not applicable, probably applicable, and applicability unclear. There is almost no case law in this area. There are few statutes that clearly apply. Readers are cautioned that this section is largely speculative.

Probably Not Applicable. So long as nothing resembling consideration is given to a volunteer, it is more likely than not that the following general areas of employment law are inapplicable to volunteers.

Probably Applicable. It is more likely than not that certain kinds of labor laws, generally those that are codifications of case law, will apply to volunteers more or less to the same extent as employees. In most cases, the law probably applies because the duty already exists as a matter of tort law anyway.

Applicability Unclear. In most cases, it is not possible to determine whether or not other labor laws apply to volunteers. These areas of uncertainty present real problems for nonprofit corporations. The areas mentioned here are some of the matters which a nonprofit corporation should consider with particular care.

Volunteers as Replacement for Employees. There are troubling issues when a nonprofit corporation determines to discharge employees and replace them with volunteers. On one side of the issue, it may be important for the nonprofit corporation to continue to deliver services, and it may only be possible with volunteers; on the other side, such a course of action carries a grave risk that resentment will arise, and affect volunteers in general. Policy issues are beyond the scope of these materials, but there are a few legal questions in the fact pattern.

When a nonprofit corporation asserts it had no economic choice but to replace paid staff with volunteers, it is really saying that the financial priority was to make such a decision. There are likely still paid staff at the nonprofit corporation; just not in those positions. That raises questions of the good faith of the nonprofit corporation in treating programs and personnel differently. Substituting volunteers for employees also provides a justification for a court to characterize the volunteers as employees: the only thing different about the situation is that you aren’t paying for the delivery of services for which you previously paid wages. Finally, to the extent you have paid staff and volunteers working side-by-side at the same tasks or similar tasks, you have an invitation to litigation and terrible morale, not necessarily in that order.

The general rule in evaluating decisions of a board of directors is that a court will not “second guess” the business decisions of a board of directors. See page 87. But the rule is not strictly followed. The courts will substitute their judgment for that of the board of directors, particularly where the court thinks that the board of directors may have acted improperly. In making its “employee versus volunteer” decisions, the board of directors should always assume that their actions or inactions will be scrutinized by a court. A useful test for directors is for them to ask themselves if they would be comfortable explaining their decision to a judge or jury.

Volunteer Legal Handbook, 9th Edition
Handbook > Law > Contracts

Revised Sun, Dec 27, 2009