“Top Ten Legal Hotspots” for Lawyers Serving on Boards for Churches and Non-Profits
If you are “THE lawyer” on a church or non-profit Board of Directors, then you’re familiar with the unwarranted expectation that, despite your actual area of legal expertise, all potential legal liabilities are now covered by your presence. However, you also know that this is tantamount to expecting that a talented orthopedic surgeon can competently cure a brain tumor. In both medicine and law, the days of the “generalist” are over; even family practitioners routinely refer patients to specialists. To help educate your Board on how these principles apply to the specialist body of law governing churches and non-profits, we have provided short summaries of the top ten legal issues facing churches and non-profits.
- Governance: Don’t Lose Your Church or Assets.
Though incorporation provides significant protection to churches, most governing documents are often standardized and imprecise. We have witnessed firsthand the nasty disputes resulting from poorly-worded governing documents or from misunderstood governance structures and principles. An attorney on the church board should be on the look-out for at least two key elements to minimize the fuss: First, do the Article and Bylaws clearly describe the actual practice and doctrine of the church? When disputes arise among members or leaders, one of the first questions is always “what do the documents say?” When documents are outdated by ten or twenty years, haven’t been followed in decades, or don’t reflect the current doctrinal position of the church, what could have been a fairly tame discussion suddenly turns into a free-for-all. Second, do your governing documents take full advantage of the religious “shield” available to churches? The best way to analyze this is to look at whether a neutral IRS agent, by reading your church’s governing documents and observing their practices, could easily conclude that your choices and decisions are made based on your sincerely-held religious beliefs. If the answer to this is, “No,” particularly on an issue that’s potentially “on the line” legally (like discriminating against an employee), your church will have a harder time justifying its tax-exempt existence.
- Membership and Leadership
These principles of governance spill over into disputes over membership and leadership. Four key points should be kept in mind. First, make sure your governing documents (articles, bylaws, constitution, etc.) have binding and mandatory Christian mediation/arbitration clauses. A disgruntled member who cannot sue the church in civil court will resolve the dispute in a much healthier and confidential way than a disgruntled member who can make a public spectacle in open court with secular juries, judges and media. Check your state’s laws on the language needed to enforce such clauses in court, if they are challenged. Second, ensure your statement of faith addresses the key doctrinal points that your church practically emphasizes. If, for example, you would never allow a transgender who identifies as a Christian into membership, but your statement of faith or member covenant says nothing about sexuality or gender, you may be stuck. This can take churches by surprise when discipline becomes necessary. If you know you would discipline and possibly excommunicate a member for some kind of misbehavior, think carefully about whether that behavior is tied to your sincerely held religious belief and how your statement of faith shows that. Third, make sure that contract approval and access to and use of funds is clearly circumscribed in your governing documents and policies. This is a particularly sticky wicket when a new pastor or elder signs unauthorized agreements or tries to make changes and access funds that are part of a church’s long-standing heritage. Lack of clarity on this simple issue can tear churches apart and muddy the waters, bringing into play state law defaults, denominational rules (if applicable), and case-law stop-gaps. Fourth, make sure your governing documents clearly state how authority is delegated in leadership so that committees and/or board are not colliding on who has the authority to do what.
- Approaching Same-Sex Issues.
Homosexuality in the church may become, if it isn’t already, the defining issue of faith communities in this century. Obviously, your church must first decide what doctrinal position it will take on this issue. Accepting homosexuality as a form of Biblical, loving marriage will eliminate most, if not all of the current legal problems surrounding this issue. On the other hand, defining marriage as between one man and one woman will likely open your church up to attack in the near future. However, there are a few ways to prepare for the onslaught.
First, make sure that your statement of faith and governing documents include a discussion of the definition of Biblical sexuality, complete with Scripture references. This lays the groundwork for everything else; it establishes that your church’s position on homosexuality is firmly grounded in its sincerely held religious beliefs and nowhere else. Second, make sure that this statement clearly governs how you admit members, hire employees, and take on volunteers. This is most readily done through the policies, covenants, and applicable manuals and third party use and special event (marriage/wedding) agreements.
- Unrelated Business Income Tax and Para-Church Activities (For-Profit)
Many excellent fundraising ideas involve pursuing a venture that creates the potential for a non-profit or church to realize income that is unrelated to their tax-exempt purpose. While income is not a bad thing, this type of income generates a tax, otherwise known as the “Unrelated Business Income Tax,” or UBIT. This can happen in a variety of situations, such as a nonprofit youth camp that leases its facilities for weekend business conventions, to a church that sells Christmas trees at twice their cost to raise money for a mission trip or a church that leases its parking lot to a local university during the school year. First, familiarize yourself with the following principles for UBIT: 1) the income is from a trade or business: 2) the trade or business is regularly carried on; and 3) the income is not substantially related to the exempt purpose of the entity. Second, know when UBIT does or does not apply. For example, while UBIT generally applies to income from land, there are exceptions available when the use is substantially related, and when the property is not debt-financed. Check with a knowledgeable tax exempt attorney who can guide you through the details of UBIT, even in unexpected places.
If your church or non-profit wants to undertake an unrelated (or even a related) business venture on a larger scale, you should also consider the possibility of conducting that business through a wholly-owned subsidiary entity. This can help avoid negative tax consequences such as losing your tax exempt status while balancing the control and separation of assets needed to keep tax-exempt status.
- Third-Party Facility Use
If your church or non-profit chooses to use its facilities to serve the community, there can be a number of potential problems if proper steps are not taken at the outset. Letting someone onto your property is an intimate act and should only be done with careful planning. One of the first mistakes many churches make is to allow the use of their premises without any written agreement concerning the types of uses that are permitted and prohibited. For example, if a church doesn’t allow gay marriages to be performed on their premises, it cannot expect to enforce that restriction unless that restriction is included in a facilities use policy, or somehow tied to the terms controlling the use of the property. Allowing use of your premises can also impact your tax exemption and may endanger your status if you dedicate too much use to non-exempt purposes if that use is not securely tied to your exempt purpose. Your church may also come under the purview of your state’s public accommodation non-discrimination laws. Although these laws often have exceptions for religious organizations, increasingly states are prohibiting discrimination by places of public accommodation based on sexual orientation. Be sure to consult an attorney to determine if holding you premises open for use by the public could cause problems by conflicting with your use restrictions.
- Child and Youth Protection
Very often youth and children programs are a significant part of a non-profit or church’s ministry focus. It is easy to get involved with serving children in the community, but much trickier to develop the proper safeguards to shield your program from liabilities. There are at least four key steps that you should implement. First, you must have a program to screen your workers and volunteers. Getting people to work with youth can be a challenge, so it is tempting to welcome with open arms anyone who is willing to help and check them out later. After you’ve conducted proper background and reference checks, make sure to train your workers properly. If volunteers and employees don’t know how to report suspected abuse or even spot it, your liability increases significantly. Third, make sure you properly supervise your workers. Training is not enough—supervision ensures the policies and plans you have in place are actually being followed. Finally, have in place protocols that dictate exactly how to report and investigate alleged abuse. When an allegation is made, you need to have a system to address that allegation quickly and clearly, without hesitation.
- International Ministry and Fundraising
Now more than ever, ministry is being done through partnerships and relationships developed with overseas organizations and individuals. US churches and non-profits are working to raise funds in the US that can be sent to support those laboring internationally. While these are often noble pursuits, they can violate laws restricting the transfer of funds to such organizations by a US tax-exempt organization. Because the IRS has no way of knowing whether the recipient of the money sent overseas is truly an exempt organization, they are much more skeptical about international transfers. Include the added scrutiny of the Office of Foreign Asset Control looking for potential violations of trade embargoes and sanctions, and it can be highly risky for a church or non-profit to send money to foreign recipients. It is important to consult with an attorney on these types of relationships, since they are best structured on a case-by-case basis. As a general rule of thumb, however, the IRS is looking for factors that demonstrate the US charitable organization’s control over the use and direction of the funds. Any such transfers have to be structured so that it is apparent that the US charity is not just a temporary resting place for funds as they exit the country.
- Church Health Insurance.
Thanks to the Affordable Care Act, it has become more difficult for churches and small non-profits to navigate the nuances of healthcare for their employees. Some churches can’t afford to comply, and some can’t afford to the actual insurance premiums. As an attorney for a church or non-profit, make sure that your church has sought competent legal and financial counsel when setting up its health insurance plan. Some practices that used to be perfectly acceptable can now get your church in big trouble. For example, many churches used to provide their employees, in lieu of a full health-care program, tax-free reimbursements of their individual health care premiums. Under the ACA, those reimbursements can no longer be tax-free and employers can be severely penalized for failing to withhold taxes. The ACA now also prevents employers from providing a Health Reimbursement Arrangement or Flexible Spending Arrangement (HRA or FSA) to employees without providing full healthcare coverage through a group plan. These types of changes may come as a surprise to churches that are used to the way things had been done before, and can drastically change the financial landscape for churches and their staff.
- Employment Issues
Although churches are entitled to many unique exemptions concerning employment, they also have a reputation for making ill-advised employment decisions and running their human resources department without knowledgeable legal counsel. For example, churches expose themselves to significant liability when they grant housing allowances, tax-free, to “pastoral staff” members who are not licensed, ordained, or commissioned as ministers. This practice is especially dangerous given the recent challenges to the housing allowance and the subsequent increased scrutiny. Churches can also be slapped with penalties for classifying employees who are subject to the control of the church in performing their job as “independent contractors.” Counsel your church to pay special attention to their employment practices and to invest in legal review of their employee classifications, pay practices, fringe benefit programs, and policies and manuals. Employment law is not only constantly changing, but is state-specific on many issues; it is paramount that you invest time and energy to address these concerns.
10. Violence in the Church and Nonprofits and Key Security Issues
Twenty years ago any church business administrator and facilities director for a growing church or nonprofit would not even contemplate, let alone address, the need for creating a comprehensive safety and security team. Sure, there was a volunteer patrolling the parking lot during weekend services to protect the cars, but the need to protect the people just didn’t really exist. Times have changed, and the idea that churches are off-limits to violence has disappeared.
Although the public generally consider churches and religious nonprofits safe havens free of danger, statistically the number of violent activities on church property increases every year. In 2012, 135 “deadly force” incidents occurred on church property which resulted in the death of 75 individuals. Since 1999, 706 deadly force incidents have occurred on church property where it was known the suspect used a weapon; a firearm was the weapon of choice in nearly 60% of these incidents. As a result of the continuing increase, your church needs to consider taking some of the following steps to better secure your church to protect its greatest asset, its members.
Consider the following Crime Prevention Best Practices in your security and safety procedures:
- Conduct a security review. Take a good look at all of your church buildings and the immediate neighborhood to identify risks. You may need to call in outside help to objectively rate your security.
- Consider a security system. Ask for recommendations and invite a sales representative to do a free security survey.
- Appoint a security team. The security team can explore all options to improve security and conduct regular inspections.
- Be prepared for visitors. It’s no secret that helping the poor is a mission of the church. Be prepared for visitors asking for assistance. Train your workers on what information to collect and how to respond when approached by a stranger in need.
- Be wary of the con artist. Con artists may have legitimate needs, but they rely on deception to garner assistance. Alert workers to red flags that they may be dealing with a con artist—like the use of guilt or urgency as a way to get what they want.
Also consider these Violence Prevention and Responses in your overall security plan:
- Work with local police. Meet with police to discuss a violence response strategy. Offer to share blueprints of church facilities in the event a violent act occurs.
- Create a lockdown policy. A lockdown policy helps limit a shooter’s access and prevents innocent bystanders from getting in harm’s way during police intervention. A well-conceived policy can save lives.
- Train key personnel. Workers and select volunteers should know and employ de-escalation tactics when dealing with a potentially violent person. Point out individuals at risk for violent behavior as situations arise so additional monitoring can take place.
- Educate the congregation. Inform the congregation of your violence prevention and response plan. Highlight any changes to existing procedures as a result of your planning efforts.
We will note that there is a big difference between claims that end up in court and those that don’t. The top 5 list of types of lawsuits against churches involve insurance claims, child abuse, property disputes, religious freedom and personal injuries whereas the top ten areas we have identified above, while some overlap with lawsuits, are issues that, in our interaction with churches and non-profits, cause crisis and occur frequently. They can be raised internally, by leadership, through legal counsel, or by a frustrated member or employee. Many times these claims are resolved or settled before a lawsuit results and never see the light of a courtroom. Hopefully this list will be useful as you meet with your Board and help spot issues and liabilities that, down the road, may require specialized legal counsel. Prevention and risk management for churches and nonprofits in the 21st century is a necessity that can prepare your church for unexpected incidents and the debilitating legal fees that may ensue.
Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact Robert Showers at firstname.lastname@example.org or Daniel Hebda at email@example.com for legal advice that will meet your specific needs.