Conflict of Interest with hiring of relative

Started by JudithE1 • 22 replies • 2538 views

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JudithE1 (Arizona)
Posts: 21

Posted:

Our by-laws state specifically that Board members cannot hire relatives. Board president took office in March 2012 and majority of board voted to hire her grandson for maintenance against our CC&R's in April 2012. She found a item in the CC&R's that we could hire Independent Contractors for needed work. He was hired with an "Independent Contractor's Agreement" temporarily for three months and after three months she would resign and he would become an employee. It is now March, and he still has title of Indepenendent Contractor with a new contract until 12/31/13. She has his contract locked up in Personnel file with only she and Vice President having key. Members must request in writing to view contract,at which time she will meet with them and unlock the drawer. His contract and extended contracts have all been in a closed meeting with no other bids. President and Board continue to state no wrong doing. We have 640 homeowners and it is quite expensive to do mailings. It is difficult to get homeowners involved. Besides a recall election - what can we do?

GlenL (Ohio)
Posts: 5,491

Posted:

Sue them.

Vote them out at the next election.

Studies show that 5 out of 4 people have problems with fractions

DaveD3 (Michigan)
Posts: 796

Posted:

What's the actual problem that you're trying to correct? Is it just that there is a relative hired to do work? Is there an issue with the cost of the work, or the quality of the work being performed?

Regardless, if someone related to a board member has a business and the HOA needs something done for which they're qualified, I would see no issue or violation of CC&Rs if they're hired so long as the related board member abstained from the decision. Did that happen?

MelissaP1 (Alabama)
Posts: 13,836

Posted:

What is the actual issue besides this? I agree. So what if they are related? Are they doing a good job and the bid competitive with other contractors? How do you know they are competitive with other contractors if you have NOT gotten a bid from a contractor to present to the board?

I say if you want to change contractors then you have to do the legwork to get another contractor to bid on the job. What is stopping you or anyone else from doing that instead of complaining about conflict of interest? You want change in your HOA YOU have to make it...

Former HOA President

JudithE1 (Arizona)
Posts: 21

Posted:

Thanks for your response Melissa.
Our By-laws and Az revised State Statute both agree hiring should be done in an Open meeting with discussion on both sides before voting. This was not done. Grandson does not have a business license and will not provide requested references for verification. We had appllications to review at the time, but before selection was made, vote taken on hiring of Grandson of president. This meeting took place in a period of 15 minutes with majority of board voting "yes", as I feel it was pre-planned. Also, as to your question on bids. This particular job has always been designated for employees. We had no bids, only applications.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Judith,

ARS 33-1811 deals with conflicts of interest. The statute requires that a board member who has a conflict of interest disclose it in an open meeting. Once disclosed, however, the board member may still participate in voting. If the conflict was not disclosed, you may sue to void the contract.

What kind of "business license" do you believe the grandson needs? What kind of work is he doing?

KevinK7 (Florida)
Posts: 1,343

Posted:

I think you should go door to door with the facts and notify homeowners. Maybe door hangers or flyers to raise awareness, and yes, legal action is also an option. I would ignore the comments that say "what's the big deal if they violate the covenants and restrictions, and essentially the law" and pursue this matter further to get the HOA running properly.

If the board members are hiding, holding special meetings and keeping this contract under lock and key then something is definitely up. Does the work this person provide the association require licensing? Maybe report them to the appropriate government agency (if there is one). After all, operating an unlicensed business can be a serious liability for the neighborhood and one that could cost you and your neighbors lots of money should something go wrong.

Is it possible to see this contract and take a picture? Maybe a well worded letter witha law firm's letter head could scare them into disclosing the documents they are hiding.

There is also the question that if they are breaking the rules regarding hiring this person what else are they violating.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Judith,

You should also be aware that the statutes are none to helpful in this matter.

The Open Meeting Statute (ARS 33-1804) allows the board to hold executive sessions to discuss:

"3. Personal, health or financial information about an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association, including records of the association directly related to the personal, health or financial information about an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association.

"4. Matters relating to the job performance of, compensation of, health records of or specific complaints against an individual employee of the association or an individual employee of a contractor of the association who works under the direction of the association."

ARS 33-1805 likewise restricts your access to the records:

"B. Books and records kept by or on behalf of the association and the board may be withheld from disclosure to the extent that the portion withheld relates to any of the following:

* * *

"4. Personal, health or financial records of an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association, including records of the association directly related to the personal, health or financial information about an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association.

"5. Records relating to the job performance of, compensation of, health records of or specific complaints against an individual employee of the association or an individual employee of a contractor of the association who works under the direction of the association."

I did note however, that a person who is hired as an independent contractor would not fall under this protection (in my opinion) as he is neither an employee of the association nor an employee of a contractor.

The way I read this is that if the association contracts with Adam to mow the lawns and Adam hires Bob and Charlie to do the work, Adam's contract must be discussed in open meetings and the records relating to the contract with Adam are open for inspection, but any complaints about Bob or Charlie or concerns about their pay may be discussed in executive session and withheld from a records request.

JudithE1 (Arizona)
Posts: 21

Posted:

Kevin,
At time of hiring, both president and grandson, stated he had an arizona busiess license, but license has never materialized. No, I cannot take a picture while president is present. This would definitely lead to an unwanted confrontation. Our HOA attorney validated by e-mail to the Board that they should correct this matter. Board contacted Attorney that he was not to correspond with me or answer any of my questions. He did offer the Board to negotiate, but they apparently did not agree. I received a lot of helpful info from an on-line attorney at my own expense and presented at an open meeting of the members, but was belittled and brought down by friends of the presidents family. I resigned last October after President said I would no longer be needed to audit our Financial Statements. I felt the situation was futile to continue. After a letter to the homeowners in February of this year, at my own expense, I was again elected to the Board until April of this year, as this is when my original 3 year term would have ended.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

The HOA attorney is NOT your attorney.The board had every right to tell them NOT to talk or interact with you. The HOA attorney represents the HOA as a WHOLE and is answerable to the board. So any inquiries you want to make like this will have to be on your dime. Suing your HOA is suing yourself and your neighbors. Something I post to nuasium on here. The more you make the lawyer reply the more money it costs everyone.

Your best in trying to change the bidding policy instead. That is have a 3 bid 1 year contracts with license and insurance. ANYONE can bid for the position or nominate anyone. It will all wash out if there are multiple bids.

Former HOA President

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Former HOA President

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By JudithE1 on 03/12/2013 9:41 AM
Our HOA attorney validated by e-mail to the Board that they should correct this matter. Board contacted Attorney that he was not to correspond with me or answer any of my questions. He did offer the Board to negotiate, but they apparently did not agree.

It sounds like your board has decided to ignore the counsel and advice of its own attorney.

I would recommend making a written request for a copy of this document pursuant to ARS 33-1805 and sending it to your association's statutory agent. If they do not respond within ten business days (per statute), your next step will be to seek an order from the Superior Court. This sounds like an open-and-shut case as they have no leg to stand on. It will cost you a few bucks but it is all recoverable from the defendants.

CarolR11 (Colorado)
Posts: 2,563

Posted:

Judith, please show us the exact quote from your bylaws that prohibits the board from hiring relatives. Unlike some others here, I do think that violation of your governing documents is a serious matter.

Do you documents state that employees of your HOA must be bonded, have licenses & insurance?

Who elected you to the board as of Feb. of this year? The membership?

Our bylaws state that directors may review all association materials, which would include contracts, licenses, etc. Do yours?

JudithE1 (Arizona)
Posts: 21

Posted:

Carol,

"No paid employee of the Association or their relatives may be a member of the Board."

President & majority of the Board do not consider him an employee, but an Independent Contractor responsible for paying for his own insurance and taxes.

I was elected to the board with the exact number of votes as the president (61). I did expect her to lose, but now I again am on the Board with her.

I believe her agenda is to have grandson become manager over the 640 homes here. She protects him in anyway she can and he is to follow only orders given by those members in the majorty. I am one of two board members willing to oppose her scheme.

After the election March 5th, we met to elect officers. As the same members were on the Board, the majority elected themselves as the four officers.

JudithE1 (Arizona)
Posts: 21

Posted:

Larry,

I am very familiar with the above, but he is not considered an employee according to the majority of the Board. I presented this to the majority members of the board to no avail. Before the election friends of the majority members handed out cards stating "our character and reputation have been tarnished by false accusationns made by (names omitted)". All accusations are very true and I am not afraid of any challenge. It seems our HOA attorney has left it for the community to handle. President keeps telling me she has legal opinions, but I have seen these opinions in print yet.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By JudithE1 on 03/12/2013 3:30 PM

"No paid employee of the Association or their relatives may be a member of the Board."

That's vague. It prohibits someone who is a paid employee from being on the board. It also prevents their second cousin's great aunt from being on the board. But it does not address whether the board may award a contract for services to a relative of someone on the board.

I am still curious as to what "business license" you believe the grandson needs. You wrote that "I believe her agenda is to have grandson become manager over the 640 homes here." The last I checked there is no licensing of HOA managers in this state. If he is not reselling goods, he does not even need a sales tax permit. His Social Security card is really all the license he needs.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Most HOA'S do not have employees as it is a VOLUNTEER organization. Board members are not to get paid or compensated for their work. There are HOA'S out there that do have employees but those are those that are typically for profit or offer bisinesses such as a golf course.
The lawncare service would always be a paid independent contractor just like the management company if you have one. That means that hired contractor must carry their own insurances and licenses. The HOA does not cover them or pays them a salary. They pay what the contract says they will pay for that term.

I am getting the feeling your just not happy with other things and focusing on this issue. You are doing more damage than good unintentionally. You could resolve this without all this legal expenses but you choose otherwise.

Former HOA President

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By LarryB13 on 03/12/2013 4:22 PM

Posted By JudithE1 on 03/12/2013 3:30 PM

"No paid employee of the Association or their relatives may be a member of the Board."

We can quesion how far a relative relationship goes (especially ex-relatives), but what we have here is another person searching for an answer they like/want as they do not like what is going on. This seems to be a recent "trend" on this chat.

I do admit hiring/contracting with relatives/friends can be tricky and while usually allowed and might be the best deal, it should/must be treated with a 10 foot pole but rarely is it against any rules.

I will keep "shopping" for an answer I like, even if it is a wrong answer.

JudithE1 (Arizona)
Posts: 21

Posted:

Melissa,

Our common grounds include (2)clubhouses,(2)pools,(1)spa and two employees in the office to handle our busness affairs. We have never hired an independent contractor, only (1) employee at a time for maintenance. We are a non-profit corporation. Grandson stated he had a business license when Board hired him and references. None were supplied. We pay him by the hour for a 40 hr week plus overtime and travel expense for picking up supplies. His Independent Contract is locked up in personnel file with President having key. He does not fall into category of confidentiality.

This HOA has been in existance since 1973 when the association was outside of Phoenix city limits.

JudithE1 (Arizona)
Posts: 21

Posted:

Thank you John.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By JudithE1 on 03/12/2013 5:02 PM
Our common grounds include (2)clubhouses,(2)pools,(1)spa and two employees in the office to handle our busness affairs. We have never hired an independent contractor, only (1) employee at a time for maintenance. We are a non-profit corporation. Grandson stated he had a business license when Board hired him and references. None were supplied. We pay him by the hour for a 40 hr week plus overtime and travel expense for picking up supplies. His Independent Contract is locked up in personnel file with President having key. He does not fall into category of confidentiality.

This HOA has been in existance since 1973 when the association was outside of Phoenix city limits.

Your "independent contractor" sounds more like an employee. Small businesses sometimes try to classify their employees as contractors to evade the requirements for tax withholding, unemployment insurance, and workman's comp. Sometimes it works and sometimes it does not.

A few things caught my attention. He seems to have no deliverable and is paid by the hour rather than by the job. He gets overtime. He is being reimbursed for travel.

There are a number of tests for determining whether one is an employee or a contractor. Usually, a contractor has some sort of deliverable that marks the completion of the contract, he advertises his services to others and works for multiple clients, he supplies his own equipment, has a home base that he works from, has a business telephone number, and decides when he will work and how he will do the job. At year-end he receives a 1099 instead of a W-2. He pays his own taxes and insurance.

You might consider making complaints to the IRS, ADOR (AZ Dept of Revenue), Dept of Economic Security, and the Industrial Commission. Each has the authority to independently investigate, so Madame President may want to make multiple copies of her grandson's contract.

Please note that if one of those agencies finds any misconduct, any legal action will be taken against the HOA and probably not against the president personally, although there will be plenty for her to explain.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By JudithE1 on 03/11/2013 9:33 PM
Our by-laws state specifically that Board members cannot hire relatives.

Quote:

Posted By CarolR11 on 03/12/2013 11:30 AM
Judith, please show us the exact quote from your bylaws that prohibits the board from hiring relatives.

Quote:

Posted By JudithE1 on 03/12/2013 3:30 PM

"No paid employee of the Association or their relatives may be a member of the Board."

Judith, I pulled these sections together to show that what you think that section is saying is not what it says.

As Larry pointed out, that section prohibits a paid employee or a paid employee's relative from serving on the Board. The key word being "employee".

If a Board did hire an employee who was related to a member of the Board, then a challenge could be made that the relative may no longer serve on the Board (however, it doesn't prevent the hiring of the individual). At the very least, the relative should not be considered qualified to run for re-election.

However, and this is the key point, if the individual is hired as an independent contractor and not an employee, then that section of your governing documents would not apply.

Here is information from the IRS website about determining if an individual is an Independent Contractor (Self-Employed) or Employee?

Per the IRS, Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done.

As Larry says, you could always contact the IRS or AZ Dept of Revenue. The unintended consequence would be if the IRS and or AZ determine that the individual is an employee, the Association may face financial penalties. It is also possible that those Agencies will not only look at that one individual but all current and perhaps past individuals who performed work for the Association. Hopefully the Association has been providing 1099-misc to their independent contractors and W-2s to their employees.

Hope this helps,

Tim

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By TimB4 on 03/13/2013 2:29 AM

If a Board did hire an employee who was related to a member of the Board, then a challenge could be made that the relative may no longer serve on the Board (however, it doesn't prevent the hiring of the individual). At the very least, the relative should not be considered qualified to run for re-election.

Let me clarify this a little more.

If the Board hired an employee who was a relative of a current board member, I would agree that that Director is no longer qualified to serve. However, qualified or not, the existing Board has no authority to remove the individual (unless they had appointed him) as that power and authority rests with the membership through a recall election. The only thing the existing Board can do is the following:
1) remove the individual from any Office, i.e. President, VP, etc., they hold (not from the Board).
2) Ask them to resign
3) Call for a general membership meeting to recall the individual.

Therefore, if the son is an employee (and I agree with Larry that the IRS would likely rule as such), and the Board is unwilling to hold a recall election on their own, then it would be up to you and/or other like minded members to collect signatures from other members and petition the board to hold a general membership meeting for the purpose of recalling the individual or the entire board and, if successful, to elect replacements.

Note: you should also have a slate of individuals willing to serve in their place if the recall is successful.

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