First Kill All the Lawyers . . .

1. First Kill All the Lawyers . . . Debra Wilson, NAIS

2. Be sure to write . . . • Wilson@nais.org • 202 973 9716 • What do I do? • About this presentation. . . • Ground Rules • Welcome to Las Vegas • Who is your lawyer?

3. How the system works . . . • In the beginning: The Constitution • Running with the Ball: Congress • Running off field with the Ball: Agencies • Referees for today’s game: Courts • Unofficial Referees of Own Teammates: Agencies • Why Can’t My Lawyer Give Me a Straight Answer?

4. Other Concerns • State Law: Second Layer of Confusion • Federal Floor Can be Raised • E.g., Educational records • The importance of counsel • Determining the law: legislation, regulations, cases • Covering your assets

5. What’s new and interesting in the legal world? • What’s been happening in the legal world? • Enron, WorldCom, Martha, Merrill Lynch • Red Cross, United Way, Nature Conservancy • What about us? • Compensation, sexual abuse / misconduct, parent issues • So, what’s the buzz word? • Accountability

6. First Hypothetical: Students Taking Photos So what do you do? • Disciplinary process? • What about your sexual harassment policy? • Do you vary given the nature of the situation? • Variations on the theme: • teacher with school equip, girls filming themselves with each other, couple in India, two boys with the computer video off campus.

7. Second Hypothetical: Senior Party • Brief Facts: • 1 in 5 Americans between ages of 16-20 drove under the influence of drugs or alcohol last year. More than 4 million people. • Highest among those outside metro areas (25%) • What’s the issue here? • What do you do? • Variations on the theme: • Parent chaperones drinking, parents who condone drinking, parents who provide alcohol, etc.

8. Third Hypothetical • Complaining coach . . . • Issue? Title IX • When does it apply? • Supreme Court decision . . . • Retaliation now actionable under Title IX. Can be triggered by any number of types of complaints.

9. Fourth Hypothetical: Head’s Compensation • What is this hypothetical about? • What about this IRS private school market segment study? • IRS Executive Compensation Study • How do we approach the issue?

10. Intermediate Sanctions: Bottom Line • What are they and who pays the piper? • Excess Comp • Those receiving it and those signing off need to be aware • Is there any safety net? • Yes!

11. Who Are Disqualified People? • Basic - Position to exercise substantial influence during past 5 years (any time during) • Automatic-In: vote on brd decisions; implement brd decisions or otherwise supervise management, admin of school; and those who manage the school’s finances (i.e., You)

12. What are they looking for? • Excess benefit given to disqualified person. • Excess benefit - beyond the fmv of compensation for service, etc. Includes anything from building contracts to housing, meals and deferred comp. Value = Broad.

13. Intermediate Sanctions: Safe Harbor • Creating a Rebuttable Presumption: transaction approved by school’s governing board or committee thereof that: • Is independent. Must be no conflicts of interest in those voting or debating. Check your bylaws and current policies. • Relies on comparable data when approving. Gross receipts of less than $1mill only need comp data from 3 other sim schools. Over $1mill, broader pool • Documents basis for decision. DETAIL Minutes. Terms and date; present for discussion and vote; source and substance of data; any conflicts; reasons for any discrepancies. Minutes w/in 60 days or by next meeting of board & reviewed and approved w/in reasonable time. • Do We Have to Do This?

14. Intermediate Sanctions – Who Pays? Disqualified People - 25% tax. If not repaid w/in certain period of time - 200% • Those who knowingly and willfully approve excess benefit arrangement (officers, directors, or trustees). Note, not just board members. 10% or $10,000, whichever is less. Note: check your D&O insurance. • Has actual knowledge is or may be excess ben txn and • Negligently fails to determine if it will occur • Safe harbor here for justified reliance on opinion. • Use the safe harbor provisions!

15. IRS Guidance to Agents . . . • “If the benefit is treated as compensation under IRC 4958, Agents should consider the benefit along with any other compensation the disqualified person may have received to determine whether the aggregate compensation was reasonable.” • Did org provide written substantiation? • Form 990, W-2, or Form 1099, or amended tax return before examination of individual or org. • Contract laying it out, appropriate doc from authorized body. • If not, “automatic excess benefit transaction.” • Doesn’t matter if reasonable, any other compensation is reasonable, or if aggregate is reasonable.

16. What else is automatic excess benefit? • What else have we got in this guidance from the IRS? • You better be reimbursing through an accountable plan. • Accountable Plan - Receipts and reasons for reimbursements. • Otherwise, likely neither will report, won’t have documentation, won’t be reasonable cause for failing to report, and suddenly may have both the 25% excise tax and the 200% excise tax • Likely not willful violation . . .

17. So here is what they tell the agents to look at • Consider all • Agreements • Employment • Deferred Comp • Bonus Agreements • Retirement Agreements • Severance • Purchase and sale of any goods or services • Loans • Expense reimbursement or payments

18. Wait a minute – now we are crossing into 990 world • Suddenly, we have gotten into filing requirements (also on the private study hit parade). • 990 Compensation: all cash and noncash forms of compensation for each listed employee whether paid currently or deferred • salary, fees, bonuses, and severance payments received by each listed employee • all forms of deferred compensation and future severance payments (whether or not funded, whether or not vested, and whether or not the deferred compensation plan is a qualified plan. Include in this column payments to welfare benefit plans ... Such plans provide benefits such as medical, dental, life insurance, severance pay, disability, etc. Reasonable estimates may be used. • Taxable and nontaxable fringe benefits – except for de minimis under 132(e) . Includes: the value of the personal use of housing, automobiles, or other assets owned or leased by the organization (or provided for the organization's use without charge), as well as any other taxable and nontaxable fringe benefits

19. The IRS knows that many, if not most, nonprofits do not properly fill out the 990. • The 990 is under review • We will all be filing electronically by the end of the next 5 years. • $100 million assets – 2005 tax year • $10 million assets – 2006 tax year • All charitable trusts and foundations 2007 • Everyone else will likely proceed thereafter. • Why? Harder to mess it up, easier to catch people.

20. Fifth Hypo: What about the trustee builder? • Trustee Builder • Very real scenario • Is there anything wrong? • Cover of the NYT test.

21. Sixth Hypothetical: Salary Adjustments • What are we worried about here? • What are we basing this adjustment on? • Is this a problem? • Recent Supreme Court case: Is adverse impact attributable to nonage factor that was “reasonable”? • Different from business necessity which is the test for most other discrimination suits based on disparate impact.

22. Seventh Hypo: Board Members & the Books • What do you say? What are your practices here? • What about Sarbanes Oxley for Nonprofits? • Pending up on the Hill – hearings, investigations, etc. • In the meantime . . .

23. SOX for NonProfits • Two Provisions Must Follow • Document Destruction – a la Arthur Anderson • Whistleblowers Protection • Other Suggestions for NonProfits • Intermediate Sanctions and safe harbor • Audit committee – independent, one financial expert, works with auditors and business officer • Financial Ethics Code – business officer, head, board • Review Bylaws • Educate Board (duties of care and loyalty, update conflict of interest policy) • Review D&O

24. Hypo Eight: Document Management • How do you manage your documents? • General Records • Records Relating to Students • What are the statutes of limitations in NY? • 6 yrs for contracts, 3 yrs for personal injury • Tolling for minors – Majority age New NAIS Publication . . .

25. Ninth Hypothetical • NASA Grant being handled by your school • What is the issue? • Why is it a problem? • NAIS publication on this doc . . . • How do you track what it triggers?

26. Tenth Hypothetical • Parent Organizations • How are they structured? • How is the money handled? • Whose money is it? • What is the issue?

27. Contact Info: • Wilson@nais.org • 202 973 9716 • Questions?

28. Second Hypothetical • What is up with wage and hour? • Why is it a big deal for schools? • What are schools doing?

29. Figuring out Wage & Hour • How much are you paying? $455 per week or $23,660 per year, paid same every week • Does not apply to teachers. • Which exception? – note title not determinative • Really want to have good, accurate job descriptions.

30. Executive • The employee’s primary duty must be managing the School, or managing a customarily recognized department or subdivision of the School; • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and, • The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

31. Administrative • The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the school. • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

32. Administrative Employees in Educational Setting • Primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment or department or subdivision thereof. • “Performing administrative functions directly related to academic instruction or training” is defined as performing work related to the academic operations and functions in a school rather than to administration functions such as general business operations.

33. Professional Exemption • The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; • Note on the teacher salary . . .

34. So how do you approach • How much are they making? • 23,600 or $455 per week • Even for part –time • Unless teacher or Admin / Educ. • What do they do? (primarily) • Executive • Administrative / business • Administrative / education related • Teacher / other Professional

35. Third Hypothetical • Dedicated employee • What if you tell her not to do this? • What if she says she is happy to volunteer this time? • What do you do?

36. Fourth Hypothetical: Coaches • Coaches and stipends • Same test • Unless you do as independent contractors. • Be careful here.

37. Fifth Hypothetical: Sexual Predators in Schools • New Department of Education report • 9.6 % of student grades 8-11 reported unwanted educator sexual misconduct (either touching or inappropriate comments) • 57% male and 43% female • Same-sex in 18-28% of cases • 100% of predators self-describe as heterosexual

38. Grooming process • Anywhere, anytime • Reporting by the victim is low • Who do these kids tell? • Friend • Parent • Teacher • Other school employee

39. Sexual Predators – now what? • What does your school do when a child reports? • Many schools fail to report to the state • What is the liability? • Once someone knows or reasonably should know, have liability. Particularly if you don’t follow up. • What can you do? • Create policies and procedures: including individual responsibilities for staff, where the information goes, how to follow up on it. • Train: staff, kids, parents • Background checks

40. Fifth Hypothetical: Improper Behavior So what have you done and what do you do? • How do you investigate? • Confidentiality procedures • What are your reference policies? • What are other things you can put in place? • Training: staff, students, volunteers, others • Background checks: what about workers and others on your campus

41. Ninth Hypothetical: Bully Parent • Add to the hypothetical: Teacher is a poor teacher you are planning to lay off. • Head of school speaks with the board chair. • Board first backs the head on not having the two kids back after winter break • Then when push comes to shove with the parents, the board decides to meet privately with the teaching parent

42. Eleventh Hypothetical: 117(d) & Margaritas • 117(d) • Only for employees • Must not discriminate in favor of highly compensated • What if head gets bigger benefit than others? • Margaritas • What would you do?

43. More Resources • NAIS WebSite • www.nais.org • Government Relations • Advisories and Resources • BoardSource • www.boardsource.org • Me • Wilson@NAIS.org • 202.973.9716