Top 10 Legal Action Items for Nonprofits in Light of COVID-19
Posted in News Story
By Benjamin Takis
April 8, 2020
Benjamin Takis is an attorney and the founder of Takis Nonprofit Law PLLC, a Washington D.C. law firm practicing in the fields of tax, corporate governance, employment law, and business transactions for nonprofit organizations and social entrepreneurs. This article was originally published on the website of Sustainability Education 4 Nonprofits.
As the Center for Public & Nonprofit Leadership has emphasized throughout this “Leading in Times of Hyper Change” series, the COVID-19 pandemic has thrust all of us in the nonprofit community (and, indeed, most of the rest of the world economy) into a period of “hyper change (new window),” in which we must collectively shift our focus to short-term (new window) and super-short-term (new window) issues.
This advice certainly applies as much to legal compliance as it does to financial matters. While the usual legal compliance issues affecting nonprofit organizations (tax compliance, corporate governance, privacy issues, charitable solicitation registration, etc.) have not gone away, the massive wave of new legislation passed in response to the pandemic has made adapting to these new circumstances the number one legal priority for all nonprofits.
As of the date of this article, I believe the following are the Top 10 legal action Items on which to focus in light of COVID-19 and the rapidly changing circumstances this pandemic is causing. Please note that this is a brief summary of complex legal matters and is intended merely to alert you to areas requiring further research and legal advice.
1. Submit your Paycheck Protection Program (PPP) applications as soon as possible and start preparing for the future PPP compliance requirements.
Staying afloat is the number one priority right now, and federal assistance will be crucial for many organizations to avoid shutting down or laying off a substantial number of employees. The Paycheck Protection Program (PPP), an SBA program created under the recent CARES Act, currently appears to be one of the most attractive forms of financial assistance currently available for 501(c)(3) organizations with 500 or fewer employees. Availability of PPP funds is limited and first-come, first-serve, which means you need to gather and organize supporting documentation (including payroll reports, recent Forms 990, profit & loss statements, and proof of payments for employee benefits) and submit an application as soon as possible, if you have not already. As of the date of this article, some banks have already begun accepting applications, while others are still getting their application process ready and waiting for further clarification by the government. The SBA has released a final version of the application form (new window), as well as Interim Final Guidance (new window).
As you have probably heard by now, the PPP generally provides for low-interest loans in an amount up to 2.5 times average monthly payroll (capped at $10,000,000) to be used for certain permitted purposes, which generally include (subject to certain limits and restrictions) payroll costs, employer group health care benefits, rent, utilities, and certain debt payments (e.g.
mortgages). Recipients may apply to have the loans forgiven in the amount of 8 weeks of such costs, to the extent that employees have not been terminated or subject to a reduction of pay of more than 25% (with certain exceptions for employees making more than $100,000 per year).
Applications are being handled by banks and other entities that are SBA 7(a) lenders. Be warned that banks are scrambling to figure out application and verification requirements and are expected to be swamped with applicants. You will want to focus on banks (and other SBA 7(a) lenders) with whom you have a pre-existing relationship, as it is unlikely that banks will accept applications from organizations that are not current customers.
If your application is approved (it is unclear at this point how quickly the approval process and the disbursement of the funds will happen), you will need to start preparing for the cash flow impact of receiving these funds later than you may have expected, and for properly handling of these funds, once received. Additionally, you should prepare to gather documents necessary to submit with the subsequent application to have the loan forgiven. PPP funds can only be used for specified purposes and should be separately tracked. Documentation required to have the loans forgiven is likely to include quarterly IRS payroll filings, cancelled checks, receipts, and/or invoices showing payments for rent, utilities, and debt, and other documents.
2. Look into other available federal relief, including Economic Injury Disaster Loans (EIDL) and payroll tax deferral and credits.
While the PPP is rightly getting most of the attention, organizations with 500 or fewer employees should also explore applying for an Economic Injury Disaster Loan (EIDL) through the SBA (new window) (an additional program under the CARES Act), as 501(c)(3) organizations can receive EIDL funds while also receiving PPP funds so long as the funds are not used for the same purposes. And EIDL funds are open to non-charitable nonprofits such as 501(c)(4) and 501(c)(6) organizations. Eligible organizations that need an immediate infusion of cash may request that up to $10,000 of the amount applied for under the EIDL program be paid quickly as an emergency grant (which does not have to be repaid if the EIDL application is denied).
The CARES Act also provides for deferral of payroll taxes, and (more importantly) refundable payroll tax credits called “Employee Retention Payroll Tax Credits” (which are available in an amount up to $5,000 per employee). To be eligible for the Employee Retention Payroll Tax Credits, the organization must demonstrate a full or partial suspension in operations due to COVID-19, OR a 50% reduction in revenue in the latest quarter as compared to the previous year. Note that you are not eligible to receive the Employee Retention Payroll Tax Credits if you also receive a PPP loan, and you are not eligible to defer payroll taxes if you have received forgiveness of a PPP loan.
And if you have employees who utilize the new federal leave benefits under the Families First Coronavirus Response Act (FFCRA), discussed further below, there are also payroll tax credits to offset these costs.
You should start working with your CPA and payroll administrator to determine whether you are eligible for these forms of payroll tax relief and learn how to take advantage of them.
3. Look into financial assistance that may be available under State law.
In addition to federal financial assistance under the CARES Act, some State governments are also providing grants and loans to certain organizations (Maryland (new window) is one example). As you are working on obtaining assistance under the CARES Act, you should not overlook these forms of financial assistance that may be available from your State.
4. Implement new leave benefits required under the Families First Coronavirus Response Act (FFCRA) and start tracking this leave separately.
If your organization has fewer than 500 employees, you should have already communicated the new leave benefits required under the FFCRA, which took effect on April 1, 2020 (new window). Namely, 2 weeks of Emergency Paid Sick Leave for certain COVID-19-related absences, and up to 12 weeks of partially paid Emergency Family and Medical Leave for employees who are unable to work (or telework) because of childcare responsibilities arising as a result of COVID-19 related closures of schools, daycares, and childcare providers.
However, implementation of these leave benefits will raise additional questions and complications, some of which should be addressed in a supplement or addenda to the organization’s employee handbook. First, you will need to communicate how these new leave benefits interact with existing leave policies. For example, whether previously taken FMLA leave counts against the 12 weeks made available Emergency Family and Medical Leave (according to the DOL, it does (new window)), and whether an employee can substitute other employer-provided paid leave in place of these benefits (these benefits must supplement existing paid leave benefits – which means other accrued employer-provided paid leave should not be reduced while the employee is using paid FFCRA leave, though an employee can choose to use other employer-provided paid leave during the unpaid portion of Emergency Family and Medical Leave).
Additionally, you will need to make sure that you are recording, coding, and tracking FFCRA leave separately, to ensure that employees do not have their other paid leave benefits incorrectly and illegally reduced, and to substantiate use of FFCRA payroll tax credits to offset the costs of FFCRA leave.
And keep an eye on State law, as some jurisdictions (the District of Columbia (new window), for example) have enacted legislation in response to the pandemic that affects required leave benefits under State law.
5. Review the “force majeure” provisions in all contracts that may be affected by the pandemic.
For organizations that rely on conferences and in-person events, the COVID-19 pandemic has been particularly disruptive. These types of events typically have contracts that are negotiated one or more years ahead of time (room block agreements, space rental for the event, etc.) and cancellations are now necessary into the Spring, Summer, and possibly Fall and Winter.
Many agreements have a “force majeure” (sometimes called “Acts of God”) provision that allows termination of the agreement or delay of obligations without penalty. However, you will need to read these provisions closely, as they vary widely depending on the contract and applicable jurisdiction.
In these contracts you will likely find a litany of “force majeure” events (e.g. acts of God, war, government regulations, disaster, strikes, etc.). There may or may not be language that covers the current pandemic. Even if the COVID-19 pandemic does fit within the list of force majeure events, some contracts further require that performance of the contractual obligations be “illegal or impossible” in order to allow for termination without penalty (a standard that is rarely met). While the current circumstances (with many jurisdictions under “stay at home” orders) could satisfy even the narrowest force majeure language, this may not be the case a few months from now. And many force majeure provisions do not allow full termination – only delay of performance, which means that you can only escape termination fees if you postpone rather than cancel your event.
Side note: if your organization is one that traditionally holds large conferences and events in different parts of the country each year, this may be a time to reconsider that approach. Most hotels, convention centers, and other event-providers are much more lenient about termination if you are planning to come back in future years.
6. Identify restricted funds that may be at risk of being affected by the pandemic, and (if necessary) ask donors and grantors to release or modify these restrictions.
Many nonprofits have raised funds for specific projects that are no longer viable in the current economic environment. At the same time, many of these same organizations are (or will soon be) facing cash flow shortages that could threaten their ability to continue paying for necessary operational expenses like payroll, rent, and supplies.
Despite this situation, it is still a legal requirement that “restricted” funds cannot be used for purposes inconsistent with the restrictions unless the donor consents to release or modify the restrictions. These restrictions can arise based on donor instructions or communications by the organization when the funds were solicited. Thus, you will need to identify all restricted funds that may be needed to cover general operating expenses or other programs, and (If necessary) begin the process of asking donors and grantors for permission to use the funds for other purposes. If donors or grantees consent, you need to document these approved modifications.
Note, it is important to distinguish funds that are restricted by the donor from Board-designated funds (i.e. funds that the Board has directed to be set aside for certain purposes). Board-designated funds are not actually “restricted,” and can be released (i.e. “undesignated”) for other purposes by an act of the Board.
7. Communicate with grantors regarding deadlines and deliverables under current grants.
Related to the item #6, many nonprofits are in the middle of grant cycles that require certain benchmarks and deliverables be achieved with the grant funds under a time frame that is no longer realistic. Your organization may need to plan for reduced capacity to perform under the grant or you may be forced to delay certain planned programs in light of the current and pending financial constraints. If this affects current grants, it is imperative to communicate with your grantor about this. While most grantors should be sympathetic and flexible under the circumstances, you cannot assume that they will be, so obtaining the input and approval of your grantors is extremely important.
8. Implement virtual Board and member meetings and review Bylaws to determine what amendments may need to be made.
With much of the country subject to restrictions against public gatherings (and a growing number of States and counties issuing “stay at home” orders), many organizations cannot continue their normal Board and member meeting processes. However, Boards should continue to fulfill their usual oversight duties, so organizations will need to adapt to Board meetings by conference call and video conference technology, if they haven’t already.
It is important to review your Bylaws and applicable State nonprofit corporation statute to determine what you are currently allowed to do, and whether amendments to your Bylaws are necessary. The law varies depending on your State of incorporation, but State nonprofit corporation law typically provides that a Board meeting held by conference call or similar technology counts the same as an in-person meeting (so long as all attendees can communicate simultaneously), unless the Bylaws provide otherwise. You will want to make sure
that your Bylaws are not unduly restrictive on this point. It is also a good time to review your processes for Board voting by email and in writing in lieu of a meeting (which typically requires unanimous signed consent from all Board members, depending on State law).
For organizations with members who vote on governance matters, the issue is a bit more complicated. If your Bylaws do not currently permit virtual member meetings, you may need to explore other processes such as voting by ballot in order to bring your Bylaws up to date with the current circumstances.
9. Implement (and adjust) remote work policies and processes as needed.
By now, most nonprofits across the country have already shifted to having employees work from home instead of coming to the office (assuming this is feasible in light of job requirements, and to the extent the organization has not already had to lay off employees). While some nonprofits are accustomed to having a large portion of their employees working from home, this may be uncharted territory for many organizations and will require a period of adjustment and fine-tuning.
Organizations that are new to remote work may need to create and distribute new policies that deal with issues such as requiring daily check-in calls with supervisors, expectations regarding replying to emails, information security (e.g. requiring employees to use a VPN and work email), workplace safety, and financial controls (e.g. the process for approving and paying invoices and other expenses).
10. Research state laws where you may have additional compliance obligations in the event remote working becomes a longer-term practice.
State and local employment, payroll, and tax withholding laws typically apply based on where the employee performs most of the work. For organizations where employees work at the organization’s office or headquarters, this is usually simple to figure out. If employees start working from home on a regular basis for an extended period of time, this is going to get more complicated – particularly in metropolitan areas where employees frequently commute from other states (such as the DC/Maryland/Virginia area).
Additionally, some States take the position that having employees working in the State constitutes “doing business” in the State for purposes of foreign corporation registration requirements and State corporate income tax laws, and “solicitation” in the State for purposes of charitable solicitation registration requirements.
Organizations will need to start researching and preparing for these additional compliance obligations in the event remote work becomes more than a short-term, temporary situation.