Making Decisions in Times of Change
By Russell A. Cargo, Ph.D. (racargo@vcu.edu) and Deborah Barfield Williamson, M.P.A., J.D. (dfbarfield@vcu.edu)

Recently, the Richmond, Va., office of the International Mission Board announced it would be cutting staff as a cost-saving measure. In late 2002, the Church of Jesus Christ of Latter-day Saints, Utah’s largest employer and a nonprofit religious organization, announced staff cuts in the way of early retirement offers to better manage operational costs. Earlier this year, the Boston Ballet, Pittsburgh Symphony Orchestra and San Francisco Opera announced reductions in staff to offset decreases in revenues and investment performances. Across the country, nonprofits of all sizes and types are responding to a period of economic contraction—a period of reduced revenues from fees, contributions, grants and investments. Stretching out ahead is a year of continued uncertainty about the national economy and of further reductions in foundation funding, according to the Council on Foundations.

A well-run nonprofit organization will position itself to face uncertain times by having in place a strategy to address downturns. The strategy should address organizational structure, including the possibility of staff reduction and reassignment of responsibilities; communications to the organization’s employees, volunteers, supporters and the public; and personnel policies and assistance to affected employees, which include those let go as well as those retained to keep the organization going. Finally, a plan for continued program and service delivery is necessary to keep the organization functioning.

If staff reductions are part of the plan, a number of legal issues exist that must be considered so as to protect the organization’s fiscal security as well as its reputation. An organization considering downsizing or restructuring its workforce is wise to consult legal expertise at the outset so as to avoid potential litigation and sanctions. For a financially strapped organization, an appeal to the local or state bar association may yield a connection with an attorney willing to provide, at a minimum, counseling on the issues at low or no cost. In addition to any state laws relating to labor and employment, nonprofits can be held accountable under federal laws dealing with workforce reduction, labor standards and discrimination.

One notable federal law is the Worker Adjustment and Retraining Notification Act (WARN), 29 U.S.C. §§ 2101 et. seq., which may apply to a nonprofit which employs 100 or more employees and is seeking to terminate 50 or more full-time employees or as much as 33 percent of its workforce. WARN requires a 60-day notice of termination. Also, the Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 201-09, governs wages and overtime. In making decisions about staff lay-offs, a nonprofit must remain cognizant of who, of the remaining employees, will assume the essential duties of the released employees—being mindful of the distinctions between exempt and non-exempt employees and being careful not to mesh the two as a result of a reduced staff. Moreover, if a nonprofit fails to document the steps by which it makes its termination decisions and if those decisions are not based on an objective standard, the nonprofit may expose itself to a potential discrimination claim from a member of a protected class. In civil rights law, protected classes include minorities, women, workers over the age of 40, and workers with disabilities. Even if an objective standard is used, such as seniority, a nonprofit should take note if the result of the layoff has a disparate impact on a protected class. Finally, a nonprofit must acknowledge and abide by any legal or contractual obligations with respect to paying out unused vacation and sick leave and in honoring any severance policies.

At the same time, many nonprofit managers are not well-versed in fundamental organization theory when it comes to organizational contractions. For most of the past 15 years, nonprofits have generally been in growth mode and many of today’s managers have not experienced the challenge of cutting staff while struggling to sustain the organization’s external image as well as its internal stability. Dealing with structural issues, staff motivation, communications and disciplinary matters all fall into the category of organization theory and behavior. Leadership in those areas begins with a core knowledge of organization theory. In matters of downsizing, legal and organizational issues are in some ways more challenging than dealing with the numbers. It is easier to make adjustments to the budget numbers on a spreadsheet than it is to implement layoffs. Keeping an organization in tact during downsizing requires organizational wisdom, a strong will and legal guidance.

In addition to the laws cited above, several resources are available to nonprofits to help them respond to and plan for downsizing. Some we recommend are James Austin’s The Collaboration Challenge: How Nonprofits and Businesses Succeed through Strategic Alliances (Jossey-Bass Publishers); Charles E. Bartling’s Managing Association Turnarounds (American Society of Association Executives); Mission Accomplished: A Practical Guide to Risk Management for Nonprofits (Nonprofit Risk Management Center) by Peggy M. Jackson et. al.; Jerald A. Jacobs’ and David W. Ogden’s Legal Risk Management for Associations (American Society of Association Executives); and, Michael Winer’s and Karen Ray’s Collaboration Handbook: Creating, Sustaining, and Enjoying the Journey (Amherst H. Wilder Foundation). A good on-line resource is Business and Legal Reports, at http://www2.blr.com.

Dr. Cargo serves as a member of the ARNOVA Board of Directors. He is the Executive Director and Ms. Barfield Williamson is the Associate Director of the Nonprofit Enterprise Institute (NEI) at Virginia Commonwealth University (VCU) in Richmond, Va. NEI serves as the coordinating entity for all of VCU’s education, research and services in the nonprofit sector. Specifically, faculty and staff who work with NEI coordinate training and education programs to help nonprofit organizations operate more effectively; assist nonprofits in understanding their value to society and strength as a sector; and, work to create a more supportive policy environment in which nonprofits operate. For more information, contact Russ Cargo at racargo@vcu.edu.