Crowdfunding, employee classification and IRS database... oh my!

NONPROFIT NEWS

The rise of crowdfunding has had a significant impact on charitable fundraising, including both authorized and unauthorized fundraising on behalf of nonprofits, and increased giving directly to individuals to meet a personal need. A new bill in the California Legislature would, if its passes, impact the regulation of online crowdfunding platforms that are raising funds for charitable purposes. The California Supreme Court also recently issued an opinion in Dynamex Operations West v. Superior Court that significantly alters the test used for classifying a worker as an independent contractor or employee. While the decision was limited in its scope of application and did not involve a nonprofit employer, it is nonetheless an important development for nonprofits employers to be aware of and to account for in their employment practices. Finally, the IRS released a new, and much-improved, version of its online database of exempt organizations.

Crowdfunding Charitable Solicitations Bill

The Supervision of Trustees and Fundraisers for Charitable Purposes Act sets forth the requirements for registration and supervision of entities holding property for charitable purposes, as well as for individuals or entities soliciting funds for charitable purposes. With respect to such fundraising entities and individuals, the act currently includes the categories of commercial fundraisers for charitable purposes, fundraising counsel for charitable purposes, or commercial coventurers. It has been a matter of debate for some time whether online charitable crowdfunding platforms fall within the definitions of any of these categories, with most platforms taking the position that they do not.

However, a bill was recently introduced in the California Legislature by Assemblymember Jacqui Irwin to amend the Business and Professions Code and the Government Code to create a new category of charitable solicitors: "crowdfunding solicitors for charitable purposes." If it passes, Assembly Bill 2556, would add language to the Business and Professions Code to require certain disclosures in connection with solicitations by crowdfunding solicitors.

It would also add language to the Government Code defining a "charitable crowdfunding solicitation" as the practice of raising contributions from a large number of people for charitable purposes through means of the internet. It would define a "crowdfunding solicitor for charitable purposes" as a person who engages, whether for profit or not, in a charitable crowdfunding solicitation and who does not fall within the definition of one of the other regulated fundraising categories mentioned above.

The effect of the bill would be to generally require registration and oversight of online charitable fundraising platforms, but also to explicitly give them the ability to solicit funds on behalf of a nonprofit organization without the organization's prior consent if certain conditions are satisfied. The bill would generally require crowdfunding solicitors for charitable purposes to register with the attorney general's Registry of Charitable Trusts in advance of soliciting charitable funds in California, file an annual registration renewal report and pay associated fees, disclose other information as required by the attorney general, and generally obtain the written consent of a nonprofit through an authorized officer or director prior to using its name in a solicitation. If a crowdfunding solicitor fails to comply with these requirements, any solicitation by it of charitable funds will be unlawful and grounds for injunctive and other civil relief.

However, if certain conditions are met, prior written consent of a nonprofit in advance of soliciting contributions on its behalf would not be required. Those conditions include that the crowdfunding solicitor (1) provides only a database or list of nonprofits that may receive contributions; (2) includes in the solicitation only the nonprofit's name and other public information provided to regulators; (3) excludes nonprofits that are not in good standing with the IRS and, where applicable, the Franchise Tax Board or the attorney general's Registry of Charitable Trusts; (4) conspicuously discloses that the nonprofit may request removal from the database or list and complies with any such request within 5 days; (5) conspicuously discloses that the nonprofit has not provided consent for the solicitation; (6) conspicuously discloses that the nonprofit may not receive the contribution, in which case it may be distributed to another nonprofit with a similar charitable purpose unless the donor specifies an alternative nonprofit recipient; (7) provides the nonprofit the contribution and an accounting of any fees imposed for processing the contributions within __ [blank space included in bill] days of its receipt of the contribution; and (8) if requested by the nonprofit, provides donor contact information for donors who consented to share their information without imposing any additional fees. The proposed additional statutory language in the bill goes on to clarify that, for purposes of the proposed section, "good standing" means the nonprofit's tax-exempt status has not been revoked by the IRS or the Franchise Tax Board, and the organization is registered and current in its required reportings with the attorney general's Registry of Charitable Trusts.

Dynamex Decision

In April, the California Supreme Court issued a decision in Dynamex Operations West v. Superior Court, 2018 DJDAR 3856 (April 30, 2018), that upended the longstanding test for determining whether a worker is properly classified as an employee or an independent contractor for purposes of California's wage orders, which establish rules on minimum employee pay and basic working conditions. The prior test, referred to as the Borello standard, applied multiple factors to make a determination with respect to a worker. In Dynamex, the court adopted a simpler test currently used in other jurisdictions, referred to as the "ABC Test."

The decision interpreted precedents as presuming a worker to be an employee and placing the burden on the employer to prove that a worker is instead an independent contractor. To meet this burden under the ABC Test, the employer must establish that the worker (A) is free from control and direction by the hiring entity in performing the work, both based on the terms of the contract and in reality; (B) performs work that is outside the usual course of the hiring entity's business; and (C) is customarily engaged in an independently established trade, occupation, or business. If all three of these elements are not satisfied by the hiring entity, the worker will be deemed an employee.

The decision states "[w]hen a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor by the unilateral action of a hiring entity, there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification." While the ruling specifically applies to claims arising from California's wage orders, the court left open the issue of whether this test would also apply to other statutes, also leaving open the possibility of a worker being classified in different ways for different purposes.

Although the employer at issue in the case was not a nonprofit, the decision nonetheless has potential widespread implications for nonprofits that rely on hired workers. Improperly classifying a worker as an independent contractor can have potentially significant impact on entities with respect to the failure to pay federal Social Security and payroll taxes, unemployment insurance taxes, and state employment taxes, and the failure to provide workers compensation insurance. Managers of the entity, generally including nonprofit directors, can also potentially be held personally liable for the failure to withhold required payroll taxes. California nonprofits would likely be advised to take a close look at the Dynamex decision and to assess whether any changes are necessary or recommended to their own hiring and classification practices.

Modified IRS Database of Exempt Organizations

In early May, the IRS fairly quietly rolled out a new version of the online database for confirming whether an entity is eligible to receive deductible charitable contributions. The new tool, called Tax Exempt Organization Search and available at https://apps.irs.gov/app/eos/, is far more user-friendly than the former EO Select Check database. In addition to being easier to search by either entity name or employer identification number, it also makes images of recently-filed Forms 990 available for the first time. The IRS has indicated that it plans to continue uploading additional Forms 990 on a monthly basis, as well as to eventually make favorable determination letters issued since January 2014 available on the system.