OK or Not? After Getting No Volunteers, President Pays Homeowner to Do HOA Work

This article is part of an ongoing series in which we'll take your questions from the HOAleader.com discussion forum and get you the answers you need from experts who specialize in association management. If you have a question you need answered, post it on the message board.

An HOAleader.com reader asks: “I'm a member of an unincorporated nonprofit HOA in Texas. I volunteered my time and resources to the community for free for more than 13 years. I and other members have repeatedly been asked by the current president to continue to volunteer our time and resources to the HOA for maintenance, repairs, and so on.

When we don't, the president is paying another member (his personal friend) with HOA funds to do work he's expected others to do for free. The president isn't obtaining bids, notifying all members, or taking votes prior to doing anything. He's simply sending emails about the lack of volunteers to do work, and when volunteers don't step, he pays his friend.

It's winter and a slow time for lawn care, which is what this member does. So, in essence, the president is using HOA funds to supplement his friend's income during the off season while expecting other members who don't vote his way to do the same jobs for free. I don't know if this is illegal, but surely it's unethical and a conflict of interest. Are there any legal avenues to address this?

The latest example was the member beginning to do work on fences in the common area. No emails from the board prior. When we inquired about it, the president said I should be out there volunteering my time. Yet he turned around and paid that member $1,700 for work he expects me to do for free.”

Good help is so hard to find! And generally, our experts advise against hiring homeowners for your condo or HOA work. But here we ask about the ethics and optics, plus whether this is so outrageous when the president seems to have sought other options.

5 Concerns, But Many Can Be Mitigated

Look, this isn't ideal. But it's also not unusual.

“A lot of people are doing this,” says Melissa Garcia, a retired former shareholder at Altitude Community Law PC in Lakewood, Colo., who provided advice and counsel to Colorado associations in all areas of community association law and continues to be a resources for communities. “They have no money to go outside, so they're trying to figure for the next year: ‘Can we do this with volunteers?' If volunteers don't emerge, then they ask, ‘Nobody's going to do it, so what's wrong with paying an owner?'”

Matthew Zifrony, who advises homeowners and condo associations at Tripp Scott, a Ft. Lauderdale law firm, and who has also served as the president of a 3,000-home association, agrees that this is a common dilemma for condo and HOA boards.

“On the one hand, hiring the friend or another owner and paying them isn't a good thing to do,” he explains. “There's a perception of favoritism, a conflict of interest—all this stuff.

“What makes this stand out, however, is that there's nobody else to do the work,” says Zifrony. “This is a situation when you have to balance not having the work done at all versus having the only person who can do the work who happens to be a friend of the president and an owner.”

Let's work through five of those factors, plus the steps boards can take to minimize the risk to the condo or HOA for taking this approach: 

1. Your state or documents may prohibit hiring owners. “In Colorado, some governing documents say you can't do this,” says Garcia. “They directly say that. They say you can't pay anyone who's a member or board member—period. That's the number-one legal issue.” 

2. It does look shady. “Other owners will inevitably ask if there's a sweetheart deal happening, with the president paying an owner or maybe getting a kickback,” says Garcia. “At least that's the perception. The optics are bad.”

   
   
   
   

   Zifrony agrees, but he says full disclosure helps avoid those negative perceptions and actual conflicts. “The board president should announce, ‘We need to get this done, and there's nobody available, or people who are available are not who I'd prefer to use because he's my friend and he's going to want to be compensated. So I'm asking: Do you know anybody who can do this work? Because we have to get it done.'”

   
   
   
   

   Having contracts and processes for handling these situations also go a long way toward eliminating risks and perceptions of shadiness. “The questions are always: What exactly are you paying for, who's liable if this person gets hurt, and is this a reasonable price?” says Garcia. “If there are no contracts or policies to cover these situations, owners will often ask if there's something unethical taking place.

   
   
   
   

   “Those issues can be taken care of,” she adds. “The board could say: ‘We've hired a monthly maintenance person who does projects under a standard contract, and here's the scope of the work that owner will do under that contract. That owner has signed off liability, and we'll never ask him to do anything major. It's only minor stuff, maybe small paint jobs.'

   
   
   
   

   “So first, the board president needs to explain the situation,” suggests Garcia. “The president needs to say: ‘This owner is like everybody else. We're not hiring him because he's my buddy. We're hiring him because he's stepping up.' Then the board has to document and create a paper trail and be very regimented in setting the scope of the small, minor services to be done.”

   
   
   
   

   Zifrony would also take that approach, with an emphasis on Garcia's point about minor jobs. “Any time you have someone who's doing work for the community, having it done per the terms of a written agreement and having them be licensed and to carry insurance is always something I'd encourage associations to do,” he states. “But if it's a $500 job to clear brush, I get it. The cost to have an attorney draft a contract would be so much more than the risk of the problem when this person does the work. There are so many factors to consider.” 

3. The risk of a conflict of interest is real. “At least in Michigan, under the nonprofit corporation act, directors and officers can engage in financial transactions with the corporation, but the transaction has to be fair to the corporation and approved by the board,” says Kayleigh Long, a member with Hirzel Law in Farmington, Mich., which represents hundreds of community associations throughout Michigan. “If there aren't enough uninterested directors to vote on the transaction, it has to be voted on by the members.”

   
   
   
   

   There's a similar analysis in Colorado. “If it's a board member doing the work, that's a direct conflict of interest in Colorado,” says Garcia. “That doesn't make the agreement void. You just have to have a policy in place disclosing the transaction, and the rest of the board has to say it's fair to the condo or HOA.”

   
   
   
   

   In our reader's situation, it's not a board member who's being paid. “If it's just a member in the transaction, I'd undertake the same analysis,” says Long. “Also, in the reader's instance, it's just the president, not the rest of the board, signing off on this member doing this work.

   
   
   
   

   “That's something else you want to look at,” she adds. “Is the rest of the board looking at the issues of: ‘These are the conditions under which we'll hire this person, and we think this is fair to the corporation?'

   
   
   
   

   “I don't think this issue is necessarily too hard to fix,” notes Long. “The board should be asking: ‘If we pulled in two or three other bids, is what we're creating with this owner a reasonable agreement and fair to the association?'” 

4. The liability could be astronomical. While there's nothing in Connecticut law that would prevent a board from paying owners to do work, there are risks, says Patricia A. Ayars, founder of Ayars & Associates in Glastonbury, Conn., who has been practicing association law for more than 30 years.

   
   
   
   

   “If owners are injured while volunteering to work for the condo or HOA, they can sue the association,” she explains. “Other people can also sue the association if the volunteer causes injury to them. So are the volunteers covered under association insurance?

   
   
   
   

   “I'd certainly talk to my insurance carrier if I were this board” she suggests. “Sometimes association liability policies don't cover volunteers, nor do the directors' and officers' policies. If this were one of my clients, I'd try to stop this and have them call their insurance carrier, who'd have a heart attack. There's too much danger here.”

   
   
   
   

   Liability is also a danger in Michigan. “If you've hired the guy, you're basically vouching for that person if there's any issue,” says Long. “So there are a host of liability and insurance issues. What if that owner damages association property or someone else's property? Or what if they harm someone else?”

   
   
   
   

   These questions tie into another issue that was a red flag when Long read this question—that the president and individual board members could be taking on personal liability for this action. “The first thing that stood out to me is that the reader says their HOA is unincorporated,” she explains. “In Michigan, when you're unincorporated, you don't get the protections of a corporation.

   
   
   
   

   “That means you're looking at a big bucket of liability,” adds Long. “In that case, when people are suing, they're suing individuals. You don't have a corporation to sue, only individuals. Individuals then are personally liable. That would be a huge concern for me.”

   
   
   
   

   Remember that you can ask the owner to sign a liability waiver, but the effectiveness of such agreements will vary by state—always ask a community association attorney in your state how to address this question. “In terms of waiver for injury for the state of Connecticut, you might as well use toilet paper,” says Ayars. “It's ineffective. You can't waive liability for personal injury.” 

5. When you pay owners, you need to follow legal formalities. “If this owner is an independent contractor receiving more than $600 a year from the association, he should be getting a 1099 form from the association,” reports Ayars. “If the state determines that owner is a condo or HOA employee, you have to do withholding, and your state may require you to have workers compensation insurance.”

   
   
   
   

   Long also raises that concern. “Does the condo or HOA have workers' compensation insurance for that owner?” she adds. “Should they? If it's becoming an employer-employee situation, that's a question you have to address. You end up in all these dicey situations you can avoid if you're using a contractor or vendor, creating contracts for each transaction, and making those lines very clear.”

   
   

Reprinted from HOALeader.com