New York State Governor Andrew Cuomo issued an administrative regulation in May 2012 that set a salary cap on nonprofit contractors that get more than $500,000 and 30 percent of their revenue from the state – they are not allowed to pay more than $199,000 a year in state money toward an executive’s salary.  Some nonprofits that have contracts to provide social services for the state have challenged this rule, and now two judges have come to different conclusions about these executive compensation restrictions.

In April 2014, State Supreme Court Justice Thomas Feinman ruled that that the NYS Health Department “overstepped its authority” in imposing pay caps for top officials at state-supported nonprofits. This was a case pursued by Agencies for Children’s Therapy, an association of 33 groups in New York City and on Long Island that provide early intervention and special education programs.  NYS representatives stated that the verdict would be appealed.

But, on August 11, 2014, in a lawsuit brought by a charity providing home care services under a state-funded contract, Suffolk County Supreme Court Justice Emily Pines came to the opposite conclusion – that the cap falls within officials’ authority “to regulate the financial assistance provided by the state in connection with public health care activities.” She made the additional point that the compensation was not truly capped, because organizations can use other funding sources to pay more than $199,000, if they wish to do so.

A ruling in another lawsuit filed in Albany County by the New York State Health Facilities Association is still pending.

The IRS regulations call for data for comparable nonprofits to be used in salary determinations and mention criteria such as size, location, and type of services provided to define which organizations are comparable.   Executive boards setting salaries must look at appropriate comparable data, but there are no defined salary caps.  The arbitrary salary cap approach does not take into account one of the main criteria for setting salaries – size of the organization.

A look at the salaries of top executives in human services nonprofits reveals that they are often paid more than $199,000, particularly the larger ones.  Included in this count are organizations providing rehabilitation services for criminal offenders, legal services, vocational rehabilitation, employment training,  food and nutrition programs, low income rental housing, homeless shelters, disaster preparedness and relief, recreational sports, youth centers and clubs, as well as the more typical family and children’s services.

Not all of these organizations will be directly affected by the salary cap, because the level of revenue received from state government grants is not available. However, the data do indicate the competitive compensation levels for similar organizations. In particular, the larger organizations may need to tap other revenue sources to enable them to pay market rates for executives. Many will be closely following the various court decisions on the legality of the NYS salary cap.