Every few months I receive a call or email inquiring about paying Board members for serving on the Board. I get it, it can often be a very big responsibility and is often a thankless position. Boards or managers often contact me and point to language in their bylaws that allows the association to pay its officers and want to know how it is done. However, even if your governing documents allow for payment to the Board, it’s a bad idea.
To understand why paying your Board is not advisable, you first have to understand the difference between an officer and a director, as well as a bit about the Non-Profit Corporations Act (“NPCA”). In addition to the applicable HOA and Condo Acts (RCW 64.32, .34, .38, and .90), nearly all Associations are nonprofit corporations formed under the NPCA. The directors of a nonprofit corporation hold and exercise the Board’s voting power. Many nonprofit corporations (which are not homeowner or condominium associations) will also hire professional officers (a Treasurer, Secretary, President, etc.) with expertise for the particular position. Those officers advise the directors, and the directors govern the nonprofit corporation. The officers do not have any voting powers. In short, for many nonprofit corporations, the directors may be volunteers, but the officers are not volunteers as you would find in a homeowners association. Coincidentally, this is why most association bylaws say something akin to, “the members vote for the directors, but the Board appoints the officers;” why a vote of the board is necessary to remove officers, but a vote of the members is required to remove a director; and why it is generally not appropriate for the members to vote in a particular officer when voting for the board at annual meetings, but rather to vote for directors in general.
I believe this language allowing payment to officers found in many association bylaws is a holdover from the NPCA-type of corporation that would hire professional officers (separate from the directors), but was not really intended for associations, or at least not the standard association, where the officers are the same people as the directors. In my experience, when associations ask if they can pay their officers, they are almost always actually asking if their directors can be paid, because officers and directors are one and the same. Notably, many association bylaws expressly state that directors cannot be paid, while simultaneously stating that officers can be paid – further proof that many developers lack even a basic understanding of how associations function after turnover.
While an association can always amend out any language prohibiting payment or add in language allowing payment to its officers and directors, I strongly advise against doing this. My biggest concern with an association paying their board boils down to the unnecessary creation of liability for the individual directors. Unpaid officers are volunteers and are presumed to make decisions using reasonable care, so they are given broad legal protection and are shielded from liability except in rare occasions of gross negligence. However, if an association were to pay officers, even just nominally, the officers are held to a higher standard than they would be if they remained volunteers. This in turn increases the potential liability not only to the association but also to the individual director’s personal liability. Essentially, paying directors removes much of the protections afforded by the Volunteer Protection Act, because the directors are no longer volunteers if they are being paid. To put this in perspective, gross negligence could involve stealing money from the association and stashing it in an offshore account; mere negligence could involve miscalculating the budget because a decimal point was misplaced. A volunteer would be forgiven for misplacing a decimal point; whereas a paid director, who is expected to have expertise in governing a corporation, could be legally responsible for this same error.
Another issue with paying association officers is the appearance of a conflict of interest – the board votes on how much money to pay themselves out of the association’s funds. This is of great concern to the IRS and is likely to cause heightened review come tax time. Additionally, the association will be at a higher risk for liability generally just because of the increased likelihood, and even just the appearance, of unfair dealings or using association assets for individual benefit and gain.
Please do not read the above to mean that board members may not be reimbursed for expenses incurred in service of the association. For example, if a board member attends a CAI function on behalf of their association or buys lightbulbs to replace those in the hallway or clubhouse, those types of expenses can and should certainly be reimbursed – make sure to save receipts! In summary, you can reimburse board members, but you should not pay them for their service as a board member. If a board is adamant about paying itself it should first thoroughly understand the risks to both the association and to the directors individually, and discuss doing so with its insurance broker and legal counsel, before beginning this practice.
