Maine Nonprofit Law E-Bulletin

June 16, 2017

In this issue:
  • When Is a Nonprofit Volunteer Really an Employee? Pending Maine Supreme Court Case To Address the Issue
  • Recent Maine Supreme Court Opinion Sheds Light on Nonprofit Bylaws Indemnification
  • E-Bulletin Information

When Is a Nonprofit Volunteer Really an Employee?  Pending Maine Supreme Court Case to Address the Issue

A case currently pending before the Maine Supreme Court will tackle the question of whether an individual who was treated as a volunteer by a nonprofit organization could nevertheless be deemed an employee for the purposes of Maine’s workers’ compensation law.  The case is Huff v. Regional Transportation Program, and the Court has asked interested persons to submit amicus briefs by July 14.

If any Maine nonprofit corporation is interested in joining or supporting such an amicus brief, please let me know right away, as I am considering whether to draft a brief.  

Here’s what happened in the case:  In 2011, Lawrence Huff became a volunteer driver for the nonprofit Regional Transportation Program (RTP), which provides transportation services to clients of social service agencies in Cumberland County. Huff signed a memorandum of understanding indicating that he was a volunteer, and used his own vehicle to drive RTP constituents.  He was reimbursed for expenses at a rate of 41 cents per mile, the then-current IRS rate for employee reimbursement.  Because he volunteered almost full-time, the reimbursements amounted to $700 to $800 per week, and Huff claimed to have pocketed half this amount as income net of his vehicle expenses, although that figures apparently didn’t include insurance and depreciation.  Unfortunately, in 2012 Huff suffered a life-threatening accident while driving for RTP.  He later claimed workers’ compensation benefits as an RTP employee.  The Workers’ Compensation Board denied his claim, determining that he was a volunteer and not an employee.  The Appellative Division affirmed, and Huff has now appealed to the Maine Supreme Court.

The crux of Huff’s argument is that because RTP’s mileage reimbursement rate matched the IRS’ rate for employees, and is much higher than the 14 cents federal mileage rate that volunteers can receive on a nontaxable basis, he must be considered an employee for workers’ compensation purposes.  However, this argument is not very persuasive in light of the fact that the volunteer mileage rate has not been changed since 1997, as it takes an act of Congress to do so.  Thus, it is widely acknowledged that the volunteer rate does not reflect the true cost of driving and maintaining a vehicle, and many nonprofits choose to reimburse at the higher employee mileage rate, even if the amount over 14 cents must be reported as income by the volunteer.

If the Maine Supreme Court were to agree with Huff and reverse the Board’s decision, it could have widespread implications for Maine nonprofit organizations.  Many Maine nonprofits benefit from volunteer drivers in the same way that RTP does, and a reversal would mean that these organizations would either have to reduce the reimbursement rate to the artificially depressed IRS charitable rate, or else pay high workers’ compensation costs for driving volunteers. An outcome in favor of the plaintiff could also increase nonprofits’ liability exposure and insurance costs in a variety of other contexts, such as the Maine employment law violations, Maine unemployment compensation, and anti-discrimination laws.  The decision could also have similar spillover effects for nonprofits in other states, as there is little to no case law on this issue across the nation.  Although volunteers should of course be treated fairly by nonprofits, that does not mean that volunteers should have standing to claim the protection of these various employee protection laws.

Once again, if any Maine nonprofit corporation is interested in joining or supporting such an amicus brief, please let me know right away, as I am considering whether to draft a brief.  

Recent Maine Supreme Court Opinion Sheds Light on Nonprofit Bylaws Indemnification

Another recent Maine Supreme Court opinion, Lalonde v. Central Maine Medical Center, 2017 ME 22, is a good reminder to Maine nonprofit Board directors and employees to understand the indemnification provision in their bylaws.  Indemnification can be a big, scary word for non-lawyers (and even some lawyers).  Let’s unpack the concept a bit and see how it recently played out in this Maine Supreme Court case.

In short, to indemnify someone is to promise to compensate that person if she is found to be responsible for monetary damages to a third party or has to pay attorney fees to defend herself in a legal proceeding.  Many kinds of contracts, including nonprofit bylaws, include indemnification provisions to protect individuals or entities in the event something goes wrong and a lawsuit is brought by another party.

A grasp of how the Maine Nonprofit Corporation Act treats the issue provides helpful context for understanding a bylaws indemnification provision.  Under the MNCA (see 13-B M.R.S. § 714(2)), a nonprofit corporation must indemnify a director, officer, employee or agent for expenses (including attorney’s fees) if that person is successful on the merits in defending any court action or administrative proceeding against him.  In contrast, a nonprofit corporation is prohibited from indemnifying a director, officer, employee or agent who is found by a court or administrative official not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation, or in certain criminal-related contexts.

Are you with me so far?  To paraphrase, if a director or employee is ultimately judged to have acted without fault, then the nonprofit is obligated to indemnify that person.  On the other hand, if a director or employee is ultimately judged to be in the wrong, then the nonprofit cannot indemnify.  But there are many situations in which a lawsuit or administrative proceeding never reaches a final determination in favor of or against an accused person.  And even if a final determination is reached, there is a usually a significant lag time between when the suit is initiated and when it is resolved.  Thus, the details of the bylaws indemnification come into play in these situations, in particular by spelling out whether a nonprofit must or may advance funds for a defendant’s legal expenses, and when no ultimate decision on the merits or the individual’s wrongdoing is reached.

The key decision in a bylaws indemnification provision is whether to make indemnification mandatory or discretionary in these gray areas not expressly covered by the MNCA.  Most nonprofits have a mandatory indemnification provision with respect to its volunteer directors and officers, so as to be able to recruit the best talent for the Board and reassure potential directors about any liability concerns.  (Directors and Officers insurance can also help with recruitment, because an indemnification provision without the means to back it up is somewhat of an empty gesture.)

As for employees, in my experience some nonprofits offer mandatory indemnification, while others offer only discretionary indemnification, where the Board can choose whether to indemnify based on the circumstances of the dispute.  Although there are valid reasons to go one way or the other, I generally prefer the latter approach, because in many contexts where an employee has been sued or is the subject of an administrative proceeding, there is a valid accusation of wrongdoing.

That’s exactly what happened in the Lalonde case.  CMMC, a hospital in Lewiston, hired Lalonde as a physician in 2005.  CMMC fired Lalonde in 2012 and shortly thereafter notified the Board of Licensure in Medicine of its “concerns about his clinical competence and behavior.”  The Board of Licensure then initiated an investigation of Lalonde.  In 2014, the Board dismissed the complaint without action, although it’s unclear whether the Board’s dismissal was based on a successful defense on the merits of the claim or on some other grounds.  Lalonde then filed suit against CMMC to indemnify him for all expenses, including attorney’s fees, incurred during the Board’s proceeding.  In its defense, CMMC pointed to the broad immunity provisions of the Maine Health Security Act, 24 M.R.S. §§ 2501-2988 (2016).  However, the trial court and then the Maine Supreme Court held that CMMC’s mandatory indemnification of employees via its bylaws was not trumped by the immunity provisions of the Health Security Act.  The bottom line:  CMMC had enough concerns about Lalonde’s competence to fire him and file a complaint before the regulatory body, but still had to pay Lalonde’s legal fees in defending against this complaint.

To avoid this kind of result, here is the indemnification language that I typically use when drafting bylaws for a Maine nonprofit corporation that does not have members (language is slightly different for membership organizations):

  • The Corporation shall have the power to indemnify and, without formal action by the Directors or other persons, shall indemnify any Officer or Director, in respect of any and all matters or actions for which indemnification is permitted by the laws of the State of Maine, including, without limitation, liability for expenses incurred in any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative.  Indemnification under the preceding sentence with respect to persons other than Officers and Directors, such as employees, agents, or other persons acting for or on behalf of the Corporation may be made only upon the affirmative vote of the Board of Directors in specific instances.

As you can see, this provision includes mandatory indemnification for directors and officers and discretionary indemnification for employees.  If CCMC had used this provision in its bylaws, then it likely would not have been required to indemnify Lalonde unless the record showed that the Board of Licensure dismissed the complaint against him based on a successful defense on the merits.

After all this legal mumbo jumbo, here’s some good news: Because lawsuits and administrative proceedings against nonprofit directors or employees are exceedingly rare, most nonprofit Boards never have to resort to their indemnification provision.  But in the one-in-a-million situation where it does come into play, you’ll want to know that your bylaws say what you think that they should say.

E-Bulletin Information

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