In December of each year homeowners associations typically address the issue of payment of holiday bonuses for employees and vendors. Discussion amongst board members and homeowners over the issue of bonuses involves many considerations such as: (i) is it proper to utilize HOA funds for the payment bonuses; (ii) who should receive a bonus; (iii) how much is it appropriate to give; and (iv) does the association have to report the bonus to taxing authorities?

The authority for HOA directors to give holiday bonuses is typically found in state statutes and/or the association’s bylaws. Most states have statutes that grant association boards those powers that are granted to nonprofit corporations, which include the power to hire employees and enter into contracts with vendors, unless the association’s governing documents provide otherwise. A standard provision that is found in most bylaws for homeowners associations is the authority to hire employees and to contract with vendors who provide services needed by the association. Having the authority to hire employees and to contract with vendors includes the authority to make decisions regarding payment or compensation to be paid to the employees and vendors. Such compensation can include decisions concerning holiday or year-end bonuses. Because directors have the authority to make such decisions concerning compensation, absent specific provisions that mandate homeowner approval, HOA boards do not need to seek approval from the members for the giving of bonuses to employees and/or vendors.

The decisions concerning bonuses should be made by HOA directors the same way all other business decisions are made. Thus, the topic of year-end or holiday bonuses for employees and vendors should be included as an agenda item for a regular or special meeting of the association’s directors. The subject can also be addressed in a meeting that is not open to all association members in states where directors meet in executive session meetings to discuss personnel and contract issues. In order to provide a source for the funds that are to be used for bonuses, the association’s annual budget should include an appropriate line item amount for bonuses or a specific amount that is allocated for bonuses in the amount that is budgeted for compensation and/or payments to service providers.

Assuming the decisions concerning bonuses are made in good faith and in what is believed to be the best interests of the association by a majority of the directors acting at a meeting where there was a quorum of the directors present, the directors’ decisions should be considered a valid exercise of the directors’ business judgment. Nevertheless, because association directors have a fiduciary duty to use association funds prudently, if the funds necessary for the payment of bonuses have not been properly provided for in a budget, or are not available from other line items without creating a shortage of funds that may be necessary for HOA operations, proper board discretion may be to not approve the payment of bonuses.

The payment of a bonus to an employee or a vendor of a homeowners association is treated as “compensation” paid to the employee or vendor and thus, is subject to appropriate withholding and reporting to taxing authorities along with other compensation that has been paid to the employee or the vendor during the year.

Associations that do not authorize the use of HOA funds for the payment of bonuses, or that do not have sufficient funds included in their budget for the payment of bonuses, frequently handle the issue concerning the payment of year-end or holiday bonuses by soliciting voluntary contributions from association members for inclusion in an employee bonus fund that is then distributed to the employees. Anonymous donations are then received from homeowners that are placed into a collective employee bonus fund which is then distributed evenly among all of the association’s employees.

While some may argue that holiday bonuses are unnecessary and inappropriate when paid by a homeowners association that is expending homeowner funds that are received from the payment of dues and assessments, it is generally recognized that hard working employees and vendors who provide valuable services for the association throughout the year rely on, appreciate, and frequently expect something extra at holiday time. Thus, to promote loyalty and continued dedication by such valuable employees and service providers, the payment of reasonable bonuses has become customary for many homeowners associations.