Common Legal Pitfalls for Charities

Charities increasingly need to show how they are assessing and responding to risk. Medium sized charities are also increasingly likely to be visited by the Charity Commission and to be assessed on legal and other issues. Rather than have to react to scrutiny and possible criticism, charities should address legal and other issues by internal review or with the help of outside advisers. This article looks at some of the basic points which charities need to keep on top of.

A charity must be set up for "exclusively charitable purposes" - ie the charity's objects or purposes must all be recognised in law as charitable, A charity must also only do things that its constitution allows it to do. So for example a charity limited to providing education services in Devon cannot provide education in Cornwall or anywhere else outside Devon, nor can it provide other services in Devon, say care services for disabled people, even though that would be a charitable purpose. So objects are important and charities should review them regularly and, if appropriate, seek Commission consent to change them.

There is no absolutely "right" or "wrong" legal structure for any given charity. However if your charity owns property, employs staff or regularly enters into contracts, perhaps with funders, an incorporated structure is likely to be appropriate. At the moment this usually means a company limited by guarantee, although the charity-specific Charitable Incorporated Organisation may be with us shortly, subject to progress of the Charities Bill. An incorporated structure will better protect the trustees in terms of personal liability.

The people who work for and support your organisation may be its greatest asset. But are you sure which legal category they all fall into? The tribunals and courts regularly examine whether people regarded as volunteers might in fact be employees or workers. Make sure your volunteers are not entitled to regular, standard payments in respect of "expenses"; any payments for expenses should only be for necessary payments supported by receipts. Also make sure your volunteers are not required to work for fixed minimum periods and that you do not guarantee to provide them with any fixed amount of work. These and other factors can indicate that volunteers should be treated as employees or workers, with employment rights.

Also be very careful with people you treat as self-employed consultants - they may be treated as employees with serious cost implications for the organisation, which would then have to pay PAYE and National Insurance - and possibly face employment claims. Our own experience is that charities are sometimes over optimistic in their assessment of who is self-employed and charities often do not use proper contracts.

If you are carrying out commercial activities and setting up one or more trading companies, there are various points to address. You should treat a trading subsidiary as an investment; insist on a credible business plan; review performance regularly; and set up written agreements by which the charity charges the trading company a realistic price for any services such as staff time and use of offices. Take particular care in dealing with goodwill and other rights. If the charity gives the subsidiary all the rights in the charity's logo, which turns out to be valuable, and at some stage the subsidiary is liquidated, a liquidator will sell that asset for the best price - quite possibly not to your charity. You should grant licences of these rights, after taking legal advice.

If you use an external agency or individual (not one of your employees) to provide certain services, be careful about copyright. For example if you commission someone to take photographs, or create artwork for a logo or campaign, or write copy for mailshots, copyright may apply. The fact that you pay these people does not give you the rights. Equally, if someone other than an employee does this for you on a voluntary basis, they will have the rights. You should ensure you get either a written assignment of the copyright, or at least a licence to use the material for all the purposes you might need and for as long as you need. In either case you should document things properly.

Charities need to help their trustees comply with the law and with best practice. So for example trustees should not receive any sort of benefit, however indirect, unless there is clear authority in the governing document or permission from the Charity Commission. For example a trustee who has recently resigned cannot apply for paid employment with the charity. The Charity Commission has in certain cases required individuals to repay money to charities. Trustees also should not receive "indirect benefits"; for example the charity should not pay a trustee's employer any amount to recognise the time the individual spends on the charity's work - even if no payment reaches the individual. To avoid difficulties later, it is a good idea for all trustees to sign up to a code of conduct, covering issues such as conflicts of interest, and to sign a confirmation that they are not disqualified from being a charity trustee.

The law moves on - very quickly in areas such as employment. Your organisation needs to keep up to date and to respond to legal changes appropriately. For example are you still using fixed-term employment contracts? They are generally now not a good idea. What about your funding contracts? Although they may look much the same as last year you will have to read them carefully. For example many local authorities are now including obligations on charity service providers to comply with the Human Rights Act. On a proper analysis this law may well not cover your organisation, but if you agree in your contract to abide by it you are taking on a range of additional responsibilities - and possibly also letting the funder reduce its responsibility.

Summary
Our experience from helping charities with risk and legal reviews is that the sort of issues outlined above come up time and again. Organisations do occasionally need to step back from the day to day to identify issues before they become a problem.


Written by David Mears a Partner in Russell-Cooke's Charity Team
E: mearsd@russell-cooke.co.uk
T: 020 8394 6484

This article first appeared in Charity Finance magazine.