New tax reform law further ratchets up the pressure on nonprofit pay practices

Compensation for senior executives of not-for-profit organizations has been growing steadily for several years — as has the scrutiny it receives. A widely quoted study reported that tax-exempt organizations in the U.S. provided seven-figure compensation to roughly 2,700 employees in 2014, up one-third from three years earlier. Meanwhile, charities received federal-tax benefits worth upward of $100 billion per year, according to a March 6, 2017, Wall Street Journal article entitled, “Charity Officials Are Increasingly Receiving Million-Dollar Paydays.”

“This is a problem,” Elliot Dinkin, president and CEO of Cowden Associates, a specialist in risk management and compensation plans, said in a news release. “When unreasonable compensation levels for executives of nonprofit organizations are brought to light in the news, the result can be a public relations nightmare, reduced contributions to the charity, and executive turnover in the organization.”

Cowden Associates (www.CowdenAssociates.com) is a Pittsburgh, Pennsylvania–based consulting firm helping corporate clients on compensation, health-care benefits, retirement, pension, and Taft-Hartley fund issues. 

Despite the risks, Dinkin noted, the upward pay trend continues. The Chronicle of Higher Education reported last summer that the nation’s three highest-paid public university leaders had each taken home more than $1 million in the preceding fiscal year, and that seven had earned more than $700,000. Universities, said the report, are increasingly paying these salaries with foundation or donation money; the chancellor of the University of Texas, for example, is paid entirely from donations. A leading academic who researches university leadership performance referred to this as a “sleight of hand,” saying public universities claim to lack funding for tenured faculty while awarding large paychecks to their presidents, according to a July 17, 2017, Forbes article, entitled “The Highest-Paid University Presidents.” 

A perceived dissonance between a nonprofit’s mission and what it pays its leadership can have serious consequences, according to Dinkin. In 2016, a local newspaper investigation revealed that most of Goodwill Omaha’s thrift-store profits were going to administrative overhead, rather than to the organization’s mission of helping the disabled. Donations plummeted — a new CEO was recruited, and over the course of the following year, Goodwill Omaha reduced its number of executives from 19 to nine, reduced the number of employees receiving more than $100,000 per year from 14 to three, and cut the CEO’s base pay nearly in half. The pubic reacted favorably. By April 2018, contributions were nearly back to the level they had attained before the scandal broke, per an April 9, 2018, Omaha World-Herald article entitled, “Goodwill Omaha is ‘on the right path’ to improvement, new CEO says.” 

Meanwhile, the Tax Cuts and Jobs Act of 2017, which imposes a 21 percent excise tax on nonprofit employers for salaries over $1 million, seems certain to increase pressure on nonprofits to moderate — or more clearly explain — their pay practices. In an environment in which every dollar counts, nonprofit boards will need to justify that it is worthwhile to pay the additional excise tax rather than cut back on salary, according to a Dec. 20, 2017, story by Lydia DePillis, called “Tax bill makes nonprofits pay up for millionaire execs.”

Industry experts agree that nonprofits will be helped both in the search for talent and the battle for public perception by establishing appropriate levels of compensation. Factors that the hiring authority, usually the board of directors, should take into consideration include:

– Job description

– Required experience and education level

– Compensation averages in the nonprofit’s geographic area

– The number of hours worked and

– The organization’s overall budget, according to the Foundation Group

“The time to take action is now,” said Dinkin. “Nonprofits were already faced with challenges in competing with their for-profit counterparts, and the new tax law didn’t help.” 

 Rather than compete head-on with salaries and bonuses, nonprofits may want to develop more attractive non-salary related opportunities having to do with time and lifestyle, along with other options. Dinkin contends that it doesn’t have to be a “win-lose proposition.” There are effective ways to strike a balance between what’s reasonable and what’s necessary in the competition for talent.

In a close 5-4 decision in Epic Systems Corp. v. Lewis, the U.S. Supreme Court recently ruled that the Federal Arbitration Act unequivocally provides parties the ability to enter into arbitration agreements requiring individual arbitration proceedings, such that employees waive their ability to bring or join a class action. Likewise, the Court rejected the employees’ argument that Section 7 of the National Labor Relations Act prohibits employees from waiving such class-action rights.

So, what does this mean for employers? Obviously, many employers are thrilled that they are able to prevent the spectre of a class action by requiring employees to enter into agreements for individual arbitration proceedings as a condition of employment. But employers should consider two things before doing so.

First, are you prepared to conduct multiple individual arbitration hearings? Class actions were created as a device to allow plaintiffs to band together to bring claims as a group, when a single plaintiff had little or no incentive to bring a claim individually. A plaintiff with a $100 claim probably won’t bring suit. But, if an employer’s arbitration agreement with an employee requiring individual arbitration provides that the employer will pay the expense of an arbitrator, an employee with a minor claim has nothing to lose by seeking arbitration — and hundreds or thousands of individual arbitration proceedings can drive up costs just as easily as potential class-action liability.

Second, if you do wish to have employees waive class claims in favor of individual arbitration proceedings, make sure the arbitration agreement actually contains such a provision. It’s possible for an arbitrator to handle class claims — the rules of the American Arbitration Association provide for it, for example — so it is not sufficient simply to state that employees agree to arbitration; the agreement would also need to state that arbitration proceedings would be on an individual basis, with employees waiving class claims. Of course, an employer may decide that a class-wide arbitration is preferable to multiple individual arbitration hearings, and draft the agreement accordingly.

Bottom line, the Supreme Court majority found that arbitration agreements are enforceable as the Federal Arbitration Act intended — a result that turned out to be quite epic for employers.       

Michael D. Billok is a member (partner) in the law firm of Bond, Schoeneck & King PLLC. He regularly represents employers in state and federal court, defending against actions alleging violations of employment laws, including class actions, as well as collective and class actions under the Fair Labor Standards Act and New York Labor Law. This viewpoint article is drawn from a May 22 posting on the law firm’s New York Labor and Employment Law Report.