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Tuesday, February 28, 2012

Guidelines for CA Associations and Nonprofits Regarding Exempt vs Non Exempt Employees

One of the most difficult and important assessments an employer must make is whether an employee is exempt or non-exempt from wage and hour laws.

Wage and hour laws exist at both the Federal and California level.  Employers are required to comply with BOTH sets of laws.  However, California wage and hour laws are, for the most part, more onerous than Federal wage and hour laws.  Consequently, compliance with California wage and hour laws will almost always ensure compliance with Federal wage and hour laws.

California wage and hour laws are administered by the Industrial Wage and Hour Commission (IWC), which issues Wage Orders.  The applicable actual wage order for associations is almost always Wage Order #4.

Steps to Proper Classification of Employees

1. Clarify the detailed job requirements and functions of the position
2. Identify the appropriate wage order; review
3. Identify the correct category of the position (executive, administrative, professional), review
4. Determine whether all of the Wage Order exemption requirements are met

Wage Order #4

The following outline pertains to the Administrative Exemption rules:
  • A person employed in an administrative capacity means any employee:
  • Whose duties and responsibilities involve either:
  • The performance of office or non-manual work directly related to management policies or general business operations of his or her employer or his or her employer's customers, or
  • The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and
  • Who customarily and regularly exercised discretion and independent judgment; and
  • Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity, or
  • Who performs, under only general supervision, work along specialized or technical lines requiring special training, experience, or knowledge, or
  • Who executes, under only general supervision, special assignments and tasks, and
  • Who is primarily engaged in duties which meet the test for the exemption.
An administrative employee must also earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Full-time employment means 40 hours per week as defined in Labor Code Section 515(c).

Critical Requirements of the Wage Order

It is critical to note that an employee subject to the Administrative Exemption must be engaged primarily (more than half of the time worked) in activities that entail the regular exercise of discretion and independent judgment.   It is also critical to distinguish between “the exercise of discretion and independent judgment” and “skills and knowledge.”   These concepts are discussed in a California legal case entitled Nordquist v. McGraw-Hill Broadcasting Company, Inc. (1995), 32 Cal.App.4th 555 (available via a Google search).   The case involved a television news anchor/news director, finding that the anchor was not exempt from California wage and hour laws.  The court stated the following:

"The most frequent cause of misapplication of the term 'discretion and independent judgment' is the failure to distinguish it from the use of skills and knowledge. An employee who merely applies his or her knowledge in following prescribed procedures or in determining which procedures to follow, or who determines whether specified standards are met ... is not exercising discretion and judgment of the independent sort associated with administrative work....

A second cause of the misapplication of the term 'discretion and independent judgment' involves employees who make decisions, but not at a level appropriate to administrative work. In some sense, almost every employee is required to use discretion: the shipping clerk may decide the method of packing, the truck driver decides the route, the bookkeeper decides which ledger to post first, but none of these decisions are important enough to count as part of an administrative function. Matters of consequence are those of real and substantial significance to the policies or general operations of the business of the employer or the employer's customers. This does not mean that exemptions are limited to persons who participate in the formulation of overall policies regarding the operation of the business as a whole-the tasks may be directly related to merely a particular segment of the business, but still must have a substantial effect on the whole business.” 

The court further noted:

“The DLSE Manual provides that the use of "discretion and independent judgment" are distinguishable from the use of skills and knowledge.  An employee who merely applies his knowledge in following prescribed procedures is not exercising discretion and judgment of the independent sort associated with administrative work. (DLSE Manual, § 10.62.)”

Important Tip

More often than not associations miscategorize meeting planners, membership directors and coordinator positions as exempt probably based on their misapplication of the administrative exemption.  While these positions entail the use of critical thinking, they primarily involve the application of skills, not judgments of material importance to the organization.  These positions should be carefully analyzed to ensure they truly meet the criteria for exemption.


Unless the position falls clearly within one category or the other (exempt or not exempt), the matter should be referred to a competent advisor.  The decision concerning whether a position is exempt or not should not be made by the person holding that position.   Records should be maintained concerning the basis for the determination.

Wednesday, February 22, 2012

Member Record Inspection Rights (California Outline)

It is not unusual for an association to receive requests for information from its members.  Sometimes the member making the request has a genuine concern about the well-being of the association, and sometimes they have a personal agenda.  Many times the member incorrectly believes that the association is a like a public agency, such as a school district or city council, and subject to more onerous disclosure requirements.  In fact, associations are not public entities, and not subject to those requirements.  This outline explains California mutual benefit and public benefit corporation member inspection rights, and the obligations placed on those corporations/associations.

Member Inspection Demands

An association’s obligations to respond to a member record inspection demand begin upon receipt of a written inspection demand.  A sample demand is provided at the end of this outline.  The association may also wish to respond to verbal requests for information, but it is advisable to always require a written request, and to respond to all written requests for information in a uniform manner.  Doing so helps avoid the appearance of favoritism, and helps ensure that the rights of the member and the association are protected.

The most important components of a record inspection demand are (1) a statement of exactly what is being requested, and (2) a statement of the purposes for which the information is being requested.  This information must be evaluated, as discussed below, to respond appropriately to the request.

Nonprofit Members have Inspection Rights

Members of California nonprofit organizations, including mutual benefit and public benefit corporations have inspection rights that may not be taken away, not even by the bylaws.  See Corporations Code sections 6310-6338, and 8310-8338.  All references in this outline are to the California Corporations Code.

The documents must be produced in writing, or in a format readily capable of being converted into a tangible form.  6320(b), 8320(b).  Alternatively, the entity can provide access to the documents (6330(a) (1) and 8330(a)(1)), and the member has the right to copy the documents.  6311, 8311.

(Note:  It is important to note that member inspection rights vary substantially from director inspection rights.  Directors have “absolute” rights to inspect corporate documents (6334, 8334), subject to various limitations and exceptions.)

What May be Inspected by a Member:

Articles, bylaws, and all amendments to articles and bylaws
5160, 7160
Adequate and correct books and records of account
6320(a)(1), 8320(a)(1)
Minutes of all board, committee and member meetings
6320(a)(2), 8320(a)(2)
Member lists
6320(a)(3), 8320(a)(3)

The meaning of “books and records” is not clearly defined by the Corporations Code, but is widely believed to refer to the journals and ledgers, but not to source documents such as checks and invoices, or specific documents not relating to the operation of the corporation as a whole.

May “the budget” be inspected by a member?  The answer is not entirely clear, but it seems likely that a non-detailed budget is probably subject to inspection.  Should the association provide a budget that shows the exact amounts paid to each contractor or employee?  Probably not.  It would be important to examine the inspection demand and its purposes to assess the circumstances.

It is not uncommon for an unhappy member to demand to see the salaries of staff members, and to plan to use this information to attack the association (oftentimes senior staff members earn higher salaries than the typical member of their association).  Although it is important for many reasons that staff salaries be reasonable, it seems unlikely that disclosing the salaries would benefit the association.  In fact, publication of staff salaries would be harmful in most instances, because of its effect on staff morale, and because it would make it easier for other entities to “poach” the association’s top performers.

Time for Response to Inspection Demands

Within a “reasonable time” after receipt of a written demand.  6333, 8333.  No specific deadlines are included in the law, except for membership list inspections (see below).

Special Rules for Membership Lists

Different, more restrictive rules apply with respect to membership lists. 6330, 8330.  Specifically, a member has the right to inspect and copy all members’ names, addresses, e-mail addresses and voting rights (“the membership list”) at any reasonable time, on five (5) business days’ advance notice (the notice must state the proposed use of the list).  Further, a nonprofit must respond to a member’s request for a copy of the organization’s membership list within 10 days after receipt of the request, or the date specified in the request, whichever is first.  6330(a)(2), 8330(a)(2).  The organization may impose a “reasonable charge” for producing the list.

The nonprofit may respond with an “alternative method” of achieving the same purpose. 6330(c), 8330(c).  The alternate method often takes the form of offering to mail particular materials to the desired members of the organization.  It makes a great deal of sense to offer the alternate method of providing the membership list in most instances.

Members Must have a “Permitted Purpose” For Inspection

A member’s inspection rights are conditioned upon the member demonstrating that the demand is reasonably related to his or her interests as a member.  6330, 6333, 8330, 8333.  This is generally held to refer to “the interests of members” in general, and not the individual interests of the member.  Further, there should be a logical nexus between the documents sought and the interests (of the members in general) to be protected.  Thus, a demand for accounting books and records of a corporation that made available audited financial statements would seem to advance the members’ interests very little, unless there is cause to doubt the competence or integrity of the auditing firm.

Purposes that require Board consent: 

  • Solicitation of money or property
  • Any purpose not reasonably and in good faith benefit the corporation
  • Any commercial purpose
  • For sale to any person
  • 6338, 8338

Use of the member list to solicit votes for a director election is regarded as a legitimate use, and does not require the board’s consent.  Use of the list to encourage votes for a candidate for Congress or other public office is not a proper purpose, and could even jeopardize the corporation’s tax exempt status.

Satisfying the Member

Responding to a member records inspection demand is more of an art than a science.  It is the obligation of the association to comply with the law while protecting the association from unnecessary risks.  Even if an inspection demand is unreasonable, it can be risky to stonewall it.   Stonewalling it merely fans the flame of conspiracy and cover-up theories.   The association should strive to find the right balance in its response to meet its legal obligations, to protect the association and to calm the skeptical or unreasonable member.

Sometimes a member simply cannot be satisfied.  Sometimes the member, upon completion of the lawful inspection, has many questions, demands explanations and wants to argue the merits of this or that.  While a brief discussion might satisfy the member, it generally does not.  Further, it is important not to confuse the obligation to respond to an inspection demand with an obligation to satisfy the member.  The association is legally obligated to respond to the inspection demand, it is not legally obligated to answer the members questions, or to explain the documents to the member.  Again, the association should strive for balance.

Tips for Responding to Inspection Demands

One tip to consider in dealing with an angry or suspicious member who is not satisfied with the association’s lawful response to the inspection demand is to simply state that the concerns the member is expressing will be shared with the board.  This gives the member the sense that they have been heard, and keeps the board in the loop concerning the dispute about records.

Another tip to consider is posting the organization’s tax exemption application, tax exemption letter, and three most recent Form 990 filings on the organization’s website.  This provides a feeling of openness and transparency, while disclosing no more than is required by law anyway.  It also simplifies response to the demand.

Finally, when responding to a hostile or aggressive member, it is wise to draft all responses as if they were being sent to the general membership.  Leave out any indignation or retaliation.  It is the general membership that matters, not the member who cannot be satisfied anyway.  And, third parties seeing the correspondence – a judge, for example – will be able to see that you have been reasonable and cordial.  This can make a big difference in terms of how members and judges will view the dispute.

Judicial Involvement

A corporation may petition a superior court for an order setting aside the inspection demand. 6331(a), 8331(a).  Various technical rules and requirements apply to this process, and it is necessary to involve legal counsel in this process.

A corporation may recover damages that arise from improper use of a membership list (6338(a), 8338(a)), and any profits derived from such misuse, and possibly even exemplary damages.  6338(b), 8338(b).

A member may petition a superior court for an order compelling the association to comply with the demand.  6331(i), 8331(i).  A court may award a member court costs and attorney fees if it finds that the corporation’s failure to comply with a proper inspection demand was unjustified.  6323(h), 6331(h), 6337, 8323, 8331(h), 8337.


Associations have a legal obligation to respond to written record inspection demands.  It should do so methodically and consistently, and attempt to balance the situation to satisfy the member while conforming to the law and protecting the association.

It makes sense to involve counsel when a member inspection demand is received, even if only to ensure that the organization is aware of any changes to the inspection laws.  If it is suspected that the member has hostile intentions concerning the organization, it is important to do so.  In many cases, inspection demands may be addressed by providing access to 990 returns, which must be made available for inspection anyway.

Sample Records Inspection Request

Dear ___:

Pursuant to California Corporations Code section (select one: 6310-6338 or 8310-8338), I request access to the following documents of ______ for the purpose of viewing and copying them:

1. The minutes of all meetings of the board of directors commencing on January 1, 2008 through the present.
2. The budget, annual reports and financial statements for 2008, 2009, 2010 and 2011.
3. The minutes of all meetings of the members commencing on January 1, 2008 through the present.
4. The minutes of all meetings of the Finance Committee, Executive Committee, Building Committee, and Membership Committee commencing on January 1, 2008 through the present.
5. All versions of the bylaws from January 1, 2000 through the present.

The purpose of this request is _____ (that I am concerned that the organization has improperly revised its bylaws and failed to hold elections, that the organization may be near insolvency, and that organization funds may have been misused, etc.).  I wish to review these records in order to determine whether or not my concerns are valid.  The information sought shall be used solely for these purposes, and shall not be used for any commercial purpose.

I am an active member of the organization.  My membership number is _____.

Please provide access to these documents, or copies of them, not later than ______.  Please do not hesitate to contact me at this office with any questions or concerns.

Best regards,


Thursday, February 16, 2012

Association Mergers (California Outline)

The process of merger or consolidation of two or more nonprofit mutual benefit corporations is simpler than one might think in many cases.  It involves relatively few steps, certain approvals by the board and sometimes the members, and filings with the Secretary of State.  If charitable assets are held by either merging corporation, approval by the Attorney General is also required, ostensibly to ensure that the charitable assets continue to be used for charitable purposes, and to prevent those assets from wrongly inuring to the benefit of any individual or entity.  The process describe here is for a California entity, but the laws are similar in most jurisdictions.

For purposes of mergers, a “survivor” or “surviving corporation” is the corporation into which other entities are merged. A “disappearing corporation” is the corporation that does not survive the merger.

The merger process is carried out approximately as follows:

1. The merging organizations meet and agree to the basic concept of exploring a merger.  At that point, the parties should enter into a written agreement (a letter of intent) obligating the parties to explore the matter in good faith, addressing confidentiality, and addressing termination of the exploration (used when one or more of the parties decides not to move forward with a merger).  At this point, a “due diligence” review process may begin.  

2. The due diligence review should be tailored to the circumstances.  With large and complex entities, the review should be much more involved than reviews necessary for merging very small entities.  I recommend that a checklist for a merger be established at the time the letter of intent is drafted, so that all of the parties will know what to expect.  I recommend that both the chief staff officer and chief elected officer sign the letter of intent, just to be sure that everyone is on the same page.

3. Upon approval of the concept and due diligence review by each organization, a detailed Merger Agreement and Certificate of Approval of Merger Agreement (for each merging corporation) is drafted and approved.  (If either corporation has members, the members of that corporation (and any other entity specified in the Articles of Incorporation) must also approve.  This is sometimes complicated when there are different classes of members.  If so, the matter should be reviewed with counsel.)

4. The surviving corporation files the Certificate of Approval of the Merger, along with the Agreement of Merger and the written consent of the Attorney General (if required), with the Secretary of State.

Upon completion of this process, the separate existence of each “disappearing” corporation ceases.  The surviving corporation succeeds to all rights and property, and is subject to all debts, liabilities and trust obligations of the disappearing corporation.  Corporations Code section 6020(a).  The surviving corporation succeeds to any bequest, devise, gift, grant, or promise in a will or other donation.

Although the merger process is not necessarily complex, it makes a lot of sense to involve your business, tax and legal advisors in your discussions of merger or consolidation.