Legal Issues- An Overview

Serving on a board of directors is not the perilous activity that some would have you believe it to be. Ordinary caution, honesty, and knowledge of how the organization conducts its business enable volunteer board members to direct the organization faithfully and to avoid the pitfalls of breach of confidentiality, conflict of interest and personal liability.

 

All activities involve a certain amount of risk. This is true for not-for-profit and charitable organizations as well as for the individuals who serve on their boards of directors. When an individual agrees to serve on the board of directors of a community-based voluntary organization, he or she assumes a degree of personal risk.

 

Board members have duties and obligations to the organization and its membership, to government, and to those with whom the organization interacts (such as employees, volunteers, clients, suppliers). These responsibilities carry with them the potential for liability. For example, board members are liable for unpaid employee wages.

 

Unfortunately, there is no simple rule that defines potential liabilities. The best way to avoid pitfalls and minimize risk is to learn about and understand the obligations of being a board member. A deliberate or negligent lack of knowledge of the affairs of the organization is not a satisfactory excuse.

 

In order to minimize risks, board members should understand their legal responsibilities and consider adhering to guidelines for minimizing risk of personal liability. Board members need to be familiar with their organization’s bylaws or the rules and procedures that the organization follows in conducting its business.

 

It is important for board members to be aware of the ways in which their organization manages risk. Practicing risk management helps organizations limit their liability and deal with situations that have the potential to harm the organization.

 

Legal Obligations

Board members must adhere to the following three types of obligations:

1. Obligations to the Corporation and its Members

In terms of fiduciary duties, board members are expected to:

• Act in good faith and in the best interests of the organization
• Abstain from taking part in discussions or decision-making about a matter that may benefit themselves or someone close to them
• Keep all information confidential

As well, board members have the duty to use a level of skill that may reasonably be expected of someone with their experience and expertise. Before making decisions board members are expected to:

• Consider all information available to them
• Inquire into the affairs of the organization  
• Attend meetings regularly

Courts have effectively said that it is no longer possible to be a passive director. Lack of knowledge or passive participation will not absolve the director of legal responsibility. To discharge this obligation to the organization, board members should familiarize themselves with or ensure that they have reliable advice as to the organizations’ obligations in the areas of:

• Taxation
• Employment
• Human Resources Management
• Services for Business
• Employment Legislation Information
• Legislation related to the work they do and the clients they serve. (For instance, child care agencies will require special licensing and will have to meet certain standards of care)

Board members should understand the need for appropriate property and liability insurance to protect the organization from sudden financial calamity. Board members of charities should understand the additional requirements imposed on the organization by that status, such as guidelines for how much they are allowed to spend on administration and advocacy.

 

For more information on the legal obligations of charities, please visit the following link:

Advocacy on the Agenda – Preparing Boards for Public Policy Advocacy – a Volunteer Canada Report

 

2. Obligations to Government

Organizations are affected by both federal and provincial legislation:

 

Income Tax Legislation

 

Board members are responsible for ensuring that staff income and payroll taxes are withheld and submitted to the Canada Revenue Agency (CRA). If they fail to do so and the organization is unable to pay these, board members will be personally liable unless they can show that they acted with due diligence. If the organization is in financial trouble, the CRA or a knowledgeable professional should be contacted to determine the measures that must be taken to avoid personal liability.

 

Criminal Legislation

 

When the corporation is charged with an offense under the Criminal Code, a director may also be charged as a party to the offense if he or she actively participated in, assisted in, or encouraged the crime. Some regulatory matters are of such public importance that penal liability is imposed on directors of offending corporations even where they did not know of or participate in the wrongful conduct. Environmental offences are the best example of this.

 

Employee Legislation

 

Most provinces impose personal liability on directors for an employee's unpaid wages and vacation pay. These wages may include severance pay, termination, and overtime pay.

 

A director must take all reasonable care to ensure that the organization complies with the following Acts and regulations:

• Unemployment Insurance
• Canada Pension Plan
• GST
• Occupational Health and Safety Act

 

3. Obligations to Those with Whom the Organization Interacts

 

Civil Liability

 

When a corporation has caused damage to a third party, liability is normally limited to the corporation as a whole- board members are not at risk. However, personal liability may exist if the directors acted outside their authority or participated in the act that caused the damage. Most organizations purchase “third party” liability insurance in order to protect such participants (as well as the organization itself). The risk to personal liability can be wholly or partially addressed by arranging a special type of liability insurance commonly know as “directors and officers” and by ensuring that the bylaws contain a clause permitting the indemnification of directors for such mistakes made in good faith.

 

Please visit the following link for more detailed information on liability issues for directors:

Director’s Liability: Legal Liability, Risk Management, and the Role of Directors in Non-Profit Organizations

 

Guidelines for Minimizing the Risks of Personal Liability

 

Individual responsibility

 

1.   Attend board meetings whenever you are reasonably able to do so.

2.   Read the minutes of board meetings.

3.   Ask that all reports be written and circulated or given orally at board meetings.

4.   Be familiar with your organization's purpose, objectives, goals and programs.

5.   Satisfy yourself that the organization is fulfilling the requirements of its bylaws and those of the 

      Canada Revenue Agency.

6.   Ensure that the organization's affairs are being managed in a manner consistent with its 

      mission and mandate as stated in its constitution.

7.   Be certain that you are a member of the organization as outlined in the bylaws.

8.   Avoid any conflict of interest or any appearance of personal gain.

 

Financial responsibility

 

9.   Become familiar with your organization's finances, including the budget and budget process.

10. Know who is authorized to sign cheques and for what amount.

11. Be sure your organization's books are audited on an annual basis by a reputable firm of 

     chartered public accountants. Ensure that staff income and payroll taxes are withheld and 

     submitted to the CRA. In case of closure of the organization, directors may be liable for

     employee wages if these have not yet been paid (except in Quebec ). This is an important

     consideration in planning the closure of an organization.

Responsibility for organizational policies

12. Be certain that policies are written in a clear and unambiguous manner and are put into practice

     appropriately.

13. Insist that personnel policies, including job descriptions and annual staff evaluations, be clear

     and accurate.

14. Insist that nomination and membership procedures set out in the bylaws are followed.

15. Be sure that your organization has a policy on volunteer responsibility, authority, and eligibility.

16. Question all matters concerning policy and practice as necessary.

 

Responsibility for public profile

 

17. Discover how the organization is viewed in the community.

18. Scrutinize and monitor any publications put out by the organization.