FORTUNE Small Business:

Proceed with caution when hiring relatives

Check the rules before hiring relatives - and be sure your board follows procedures in approving the deal.

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(FORTUNE Small Business) -- Dear FSB: Can a church member who is related to several members of the board work for the church and be paid for their services?

- James Munoz, El Mirage, Ariz.

Dear James: The short answer is yes. But according to attorney Harvey Mechanic, who specializes in nonprofit law and works with nonprofits across the country, there are some limitations.

Usually, the board members who are related to the potential hire must recuse themselves from voting during the church board's consideration of the decision, according to Mechanic. The goal is to avoid a conflict of interest.

Mechanic said that under the general provisions of Arizona's Nonprofit Corporation Act, the board must disclose to the directors voting on the transaction the existence and nature of the conflict. According to Arizona code, the deal then requires the affirmative vote of a majority of the "qualified" directors (those who have not recused themselves), comprising at least two directors.

Mechanic says the question of compensation brings up other issues.

"The IRS would require that the employee be given compensation that is not more than what is reasonable," he said.

In other words, the church board is required by law to act for the benefit of the church - not for the benefit of the employee. To establish what qualifies as "reasonable" pay, research what the postion would typically pay at comparable organizations in your area.  To top of page

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