Hantz Woodlands’ President Mike Score was on WDET last week to talk about its second community tree planting, which it held this past Saturday. On a previous post, I detailed why Hantz Woodlands’ use of volunteers was likely illegal. In short, there is a strong legal presumption that individuals who work for a for-profit business, such as Hantz Woodlands, are regarded as employees for the purpose of many state and federal employment laws. Those employment laws provide employees with specific statutory benefits, such as minimum wage and workers compensation. This is true regardless of any agreement between Hantz Woodlands and its volunteers as a worker and its employer cannot contract around the statutory benefits and protections provided by employment law. If they could, then employment laws wouldn’t have much teeth.
During Mike Score’s WDET appearance, Jerome Vaughn asked him directly about Hantz Woodlands’ practice of utilizing volunteers to operate its for-profit business. Mr. Score acknowledged that some people had complained about Hantz Woodlands’ use of volunteers. He justified the practice by reasoning that since Hantz Woodlands’ business if focused on creating a positive change in an area of the City that has been long-neglected, it provides some form of social benefit. This begs the question: why not incorporate a nonprofit corporation, which is the typical entity choice for enterprises focused on providing a social rather than private benefit, to do this work? According to Mr. Score, the benefit of having Hantz Woodlands’ be a for-profit business is that it will have the operating budget to sustain the impact that the volunteers make going forward.
First, it is important to point out the falsehood that exists in Mr. Score’s reasoning. Operating budgets are not something unique to for-profit businesses. All enterprises need some start-up capital to being its work. All enterprises, once they have received their start-up capital, need to develop some operating budget to determine how that money will be best spent. This is no different for nonprofit corporations as opposed to a limited liability company. How that start-up capital is obtained is also not all that different for nonprofit corporations; in fact, nonprofit corporations have a greater array of methods for obtaining start-up capital than for-profit businesses. A nonprofit corporation can not only receive capital investments from shareholders and take out loans, but it can also accept grants from private foundations and can receive tax-deductible donations assuming the nonprofit is a 501(c)(3) organization. Further, a 501(c)(3) organization is exempt from paying corporate income taxes which means that a nonprofit tax-exempt corporation gets to keep more of the money it has and dedicate it to its tax-exempt purpose.
However, nonprofit corporations come with a key restriction. As a general rule, a tax-exempt nonprofit corporation cannot be operated to provide private benefits to a specific individual. Instead, a tax-exempt nonprofit corporation must be operated for a public benefit. This is often referred to as the private inurement doctrine and it is one of the defining characteristics of tax-exempt nonprofit corporations; in exchange for the IRS granting 501(c)(3) organizations an exemption from corporate income taxes and the fundraising advantages described above, the nonprofit corporation must not be operated for the purpose of benefiting private individuals. In contrast, a limited liability company such as Hantz Woodlands’ is not restricted from distributing its assets for private benefit.
The distinction between nonprofit corporations and limited liability companies doesn’t just matter for those involved with starting and operating those entities. It also matters for those that work for the entity. While the employment laws that have been enacted at the state and federal level are several, each generally defines an “employee” as an individual employed by an employer or a person permitted to work by an employer. At least part of the reason why volunteers have been regarded as outside of the employee classification as defined by several employment laws is because they are typically utilized by nonprofit corporations which are organized to provide a public benefit. In theory, there is a reduced need to provide the statutory protections and benefits that employment laws provide to the volunteers of a nonprofit corporation because the benefit their work provides is legally required to be for some public benefit. Therefore, there is less of a concern that the nonprofit corporation will exploit volunteer workers for private gain. Since a limited liability company such as Hantz Woodlands’ is not legally required to operate for a public benefit, there is a real concern that volunteers are being utilized for private benefit.
While Mike Score can argue that the work of Hantz Woodlands’ benefits the community, this argument can be made by almost any enterprise. Should a Detroit housing developer be able to utilize volunteers to construct homes in a heavily vacated neighborhood? Surely the housing developer is providing a community benefit by creating new housing. Should Whole Foods have been able to utilize volunteers to construct its new store? After all, Detroiters have long complained about not having easy access to quality grocery stores and by providing that point of access Whole Foods is providing a benefit to the community. Almost all for-profit enterprises provide some public benefit; the key is that for-profit enterprises are not legally required to provide a public benefit.
It may be that the Hantz Woodlands project is good for the surrounding community in that it reduces blight and raises neighborhood property values. However, it is cruelly ironic for a for-profit business to justify its use of volunteers as opposed to paid employees by stating that its business is providing a public benefit. If Hantz Woodlands was truly dedicated to providing a public benefit it would either be a nonprofit corporation or would be hiring employees and giving them all of the benefits required by law to do its work. While Hantz Woodlands might believe what its doing if valuable and ethical, but the law is the law and it is violating it.