Hiring of FCU Director as Part-Time Employee

Stanley J. Barron, President/CEO
Chetco Federal Credit Union
16417 Hwy. 101 South
Harbor, OR 97415-0545
Re: Hiring of FCU Director as Part-Time Employee.

Dear Mr. Barron:

You have asked if your federal credit union (FCU) may employ an attorney as a part-time Vice President of Compliance and General Counsel if the attorney is also serving as a board director. As discussed in the attached OGC legal opinion 91-0610, dated June 27, 1991, there is no general prohibition on a paid FCU employee serving as a board director if his employee responsibilities are distinct from his board responsibilities. You are also concerned that the attorney, who will likely do loan collection work in the future as part of his employment, might be in violation of the National Credit Union Administration’s (NCUA’s) regulatory prohibition on FCU officials or employees receiving compensation in connection with any loan made by the FCU. 12 C.F.R. §701.21(c)(8). Under the facts discussed below, we do not believe this employment would violate the regulatory prohibition.

NCUA’s regulations state that:

Except as otherwise provided herein, no official or employee of a Federal credit union . . . may receive, directly or indirectly, any commission, fee, or other compensation in connection with any loan made by the credit union.

12 C.F.R. §701.21(c)(8)(i), (ii). This prohibition on lending-connected compensation ensures that an individual who is in a position of authority in an FCU does not put self-interest ahead of the FCU’s interest in making good loans. 60 Fed. Reg. 19690 (April 20, 1995)(Preamble to proposed rule). An FCU’s board of directors sets lending policies and reviews certain loan applications. 12 U.S.C. §1761b(17), (20). Section 701.21(c)(8) generally prohibits an attorney on the board from generating fees from loan collections since an inclination to increase the amount or volume of potential fees could have an undesirable influence on how the attorney treats lending matters before the board. See attached OGC legal opinions 99-0847, dated November 23, 1999 and 95-0915, dated November 9, 1995.

One exception to the prohibition is for compensation in the form of “[p]ayment, by a Federal credit union, of salary to employees.” 12 C.F.R. §701.21(c)(8)(iii)(A). Usually, an attorney providing legal services to a credit union on a part-time basis, including a retainer basis, will be an independent contractor, not an employee of the credit union. See Farlow v. Wachovia Bank, 259 F.3d 309 (4th Cir. 2001). You state, however, that your attorney is an employee of your FCU, not an independent contractor. Specifically, you indicate that the working arrangement has the following indicia of an employer-employee relationship: 1) your attorney does credit union work in an office on credit union premises; 2) you provide your attorney with the tools needed for his credit union work, including a computer, Westlaw access, and a secretary; 3) you withhold social security and other taxes associated with a true employment relationship; and 4) your attorney receives the same benefits as other part-time employees of the credit union. You also indicate that loan collections will constitute only a small part of the attorney’s work for the credit union and that the attorney will not perform any legal services for the credit union outside of his capacity as an employee.

Finally, you represent that the attorney will not receive any contingency or hourly fees, but will only receive a fixed weekly or monthly payment consistent with the definition of “salary.” Salary is “a stated compensation paid periodically as by the year, month, or other fixed period, in contrast to wages which are normally based on an hourly rate.” Black’s Law Dictionary 1200 (5th ed. 1979)

If the arrangements between your FCU and attorney adhere to the facts above, the attorney may rely on the salaried-employee exception to the prohibition on receiving compensation in connection with any loan made by the FCU.