Conflicts of Interest and Incompatible Activities
The purpose of this memorandum is to acquaint trustees and officers with the prohibitions and restrictions contained in the Government Code. Included with this memorandum are:
1. Government Code Sections 1090-1097 regarding Conflicts of Interest.
2. Government Code Sections 1125-1128 regarding Incompatible Activities.
3. Government Code Sections 87100-87103.5 regarding Conflicts of Interest Under the Fair Political Practices Act.
4. A sample policy or regulation appropriate for adoption by your board concerning Conflicts of Interest/Incompatible Activities. Adoption and dissemination of a policy of this kind may be an essential prerequisite to dismissal of an employee for conflicts of interest. (The attached policy differs significantly from earlier versions recommended by this office.)
Schools Legal Service recommends that the superintendent and each trustee review this memorandum and the code sections and that all employees review the policy.
A basic rule governing the conduct of public officials is that they may not place themselves in positions where they might be tempted by their own private interests to disregard the best interests of the public. This so-called common law doctrine against conflicts of interest is the foundation of the many statutes enacted not only by the Legislature, but also by the people of California in the initiative process.
The purpose of these statutes is to insure that public servants perform their duties in an impartial manner, free from bias caused by their own financial interests. To achieve this purpose, California’s conflict of interest laws establish an objective standard intended to strike not only at actual impropriety, but also at the mere appearance of impropriety.
Generally, these laws prohibit four types of prohibitions on the part of district officers and employees:
1. Being financially interested in any contracts made by them in their official capacity;
2. Participating in or attempting to influence government decisions in which they have a financial interest;
3. Engaging in any employment or activity for compensation which is inconsistent or incompatible with their duties with the district or which would subject them to the supervision or control of another district employee; or
4. Failing to disclose interests reportable under state law and district regulation.
Each of these prohibitions will now be discussed individually.
B. Financial Interests
Government Code section 1090 prohibits district officers and employees from having financial interest in any contracts made by them in their official capacity or from being purchasers at any sale or vendors at any purchase made by them in their official capacity. The fact that a contract made by an interested trustee or employee is fair to the district and untainted by fraud is irrelevant to determining whether a violation of this section has occurred.
Even trustees and employees without formal authority to execute contracts can be prosecuted under this code section if it is established that they had the opportunity to, and
did promote their own personal interest. Violation of section 1090 is a felony, and any contract made in violation of it can be voided by any person except the financially interested trustee or employee.
Section 1090 is strictly enforced. However, section 1091.5 does set forth various interests deemed not to constitute a financial interest for purposes of section 1090.
A trustee is permitted by Government Code sections 1091 and 1091.5 to declare that he/she is only remotely interested in a contract and to abstain from voting on it without invalidating the contract or being subject to prosecution if:
1. He/she does not influence or attempt to influence other trustees to enter the contract; and
2. He/she has only a "remote interest" in the contract.
Briefly summarized (and we caution you to review the statutory language), the following are included among such remote interests:
1. Officer or employee of nonprofit corporation.
2. Employee or agent (not owner) for at least three years before taking office of a contracting party with 11 or more employees.
3. An employee or agent of the contracting party if certain strictly specified conditions are met. (See Government Code section 1091(b)(3) attached.)
4. Landlord or tenant of contracting party.
5. Attorney or broker of insurance, real estate or stocks for contracting party.
6. Supplier of goods and services to a party contracting with the district for five years before taking office.
7. Officer or employee of a bank where a contracting party has an account or loan.
8. Nonmanagement employee of an engineering, geological or architectural firm.
A trustee is permitted to vote on and influence decisions in which he is deemed to have no interest. These include:
1. Ownership of less than three percent of the stock of a corporation which supplies only five percent of his income.
2. Reimbursement by the district for actual and necessary official duty expenses.
3. Recipient of the same public service as other members of the public.
4. Landlord or tenant of the district (except that he must abstain – under "remote interest" procedure described above – on decision involving the property of the tenancy).
5. Spouse of a district officer or employee if the spouse was employed or held office for at least one year before the trustee was appointed or elected.
6. A disclosed nonsalaried member of a nonprofit corporation.
7. A noncompensated officer of a nonprofit foundation formed to support the district.
8. An officer or employee of a bank serving a contractor who bids competitively on a contract with the district.
C. Noncontractual Financial Issues
While sections 1090 et seq. apply specifically to financial interests in contracts made by district employees, the Political Reform Act of 1974 enacted statutes which regulate the conduct of district employees with regard to noncontractual financial interests as well. Section 87100 provides that:
"No public official at any level of state or local government shall make, participate in making, or in any way attempt to use his official position to influence a governmental decision in which he knows or has reason to know he has a financial interest."
Generally, a district officer or employee has a financial interest in a decision if it is reasonably foreseeable that the decision will have a material financial effect on any of the following:
1. Any business entity or real property in which the officer or employee has an interest worth more than $1,000.00;
2. Any source of income aggregating $250.00 more in value received by or promised to the officer or employee within 12 months prior to the decision; or
3. Any business entity in which the officer or employee is a director, officer, partner, trustee, or employee. (See section 87103.)
The California Fair Political Practices Commission has adopted extensive regulations amplifying upon and limiting the scope of the general prohibition. (Cal. Admin. Code, Title 2, §18700, et seq.) These regulations also provide expanded definitions of the terms used in the Political Reform Act. Violation of section 87100, as interpreted and applied by these state regulations, is punishable as a misdemeanor and by a fine of up to at least $10,000.00 (section 91000).
D. Incompatible Activities
Section 1126 states that district officers and employees cannot engage in any employment or activity for compensation which is inconsistent or incompatible with their duties with the district or which would subject them to the supervision or control of another district employee. Pursuant to this code section, the district may, itself, determine which of those outside activities of its employees fall within this prohibition. The district may prohibit an employee’s outside employment, activity, or enterprise if it involves any of the following:
1. The use of district time, facilities, equipment, or supplies or of the prestige or influence of the district employee’s office or employment for private gain or advantage;
2. Receipt of any compensation from nondistrict sources for performing an act which is required of the employee in the regular course or hours of district employee;
3. The performance of any act which may later be subject directly or indirectly to the control, inspection, review, audit, or enforcement of any other district officer or employee; or
4. Such time demands as would render performance of district duties less than efficient. Violation of Section 1126 may subject an employee to disciplinary action and criminal sanctions.
E. Nondisclosure of Reportable Interests
Pursuant to the Political Reform Act of 1974 (see section 87300, et seq.), the district’s governing board has adopted a Conflict of Interest Code which requires certain designated district officers and employees to periodically report specified types of financial interests. The Code also specifies circumstances when employees must disqualify themselves from participation in a district decision. Violation of these disclosure requirements is punishable as a misdemeanor and by a fine of up to at least $10,000.00. (Section 91000.)
California’s conflicts of interest laws are designed to promote impartial and ethical conduct on the part of government officers and employees. These laws are strictly construed and applied to prohibit not only actual corruption, but also the mere appearance or possibility of impropriety. Because of their important purpose of and because their violation can lead to both disciplinary action and criminal prosecution, it is essential that all district trustees and employees be aware of and comply with these laws. This summary of California’s conflicts of interest laws is intended only as a brief introduction. Because of their complexity, it is not possible in this memorandum to discuss all of their ramifications when applied to individual situations. Therefore, if there is any possibility that your outside activities might violate California’s conflicts of interest laws, you should assess them in light of all applicable state laws and regulations and seek the advice of legal counsel if necessary.
CONFLICTS OF INTEREST/INCOMPATIBLE ACTIVITIES
This [policy/regulation] is applicable to all officers and employees. It specifies activities which are inconsistent, incompatible, or conflicting with their duties or offices as well as action to be taken by supervisory/management personnel.
A district employee or officer shall not engage in any activity or enterprise for compensation which is inconsistent with or inimical to either his/her own duties with the district or to the functions or responsibilities of the district.
This prohibition includes, but is not limited to, the following:
1.1 Use of district time, facilities, equipment, supplies, or name for private gain or advantage.
1.2 Receipt or acceptance of money or other consideration from other than the district for activity which the employee or officer is expected to render in the regular course or hours of his/her employment with the district.
1.3 Employment involving time demands which would render performance of his/her duties as a local agency officer or employee less efficient.
1.4 Sale or promotion, on district property during employee’s- or officer’s duty hours, of products or services, rental of property or products, or promotion of any academic or nonacademic enterprise in which the employee or officer may have a pecuniary interest.
1.5 Acceptance of remuneration, direct or indirect, for tutoring a student who is, or was during the past two semesters, enrolled in a faculty member’s classes. No faculty member shall engage in tutoring for which he/she receives a fee on any of the campuses of the district nor may any equipment belonging to the district be used for this purpose.
1.6 Outside employment and attendance at classes/ courses at colleges and universities which conflict with the assigned hours of district employment.
1.7 Receiving or giving of gifts, presents, or articles of value between students and staff.
1.8 Submission of bids to purchase surplus district personal property when such is offered for public sale by the district.
1.9 Outside activity which involves the use for private gain or advantage of the prestige or influence of the individual’s position as a faculty or staff member, or employee of a particular department or office. This includes the use of information not readily available to the general public, gained in the course of district employment, for private gain or advantage, or the gain or advantage of another.
1.10 Performance, outside of the district, of any work service for compensation where any part of his/her efforts will be subject to approval or control by any other district employee, unless reported and approved in accordance with Section 2.1 and 2.2 below.
2.1 All officers and employees shall apprise their immediate supervisor, in writing, when they are engaged or intend to engage in any activity, employment, or enterprise which could be in violation of the regulations enumerated above.
This requirement is in addition to the reporting requirements for designated employees covered by the district’s Conflict of Interest Code.
2.2 When a possible conflict of interest exists, the issue shall be resolved in the following sequence:
2.2.1 The immediate supervisor/manager will confront the employee with his/her belief that activities engaged in by the employee violate a specific prohibition of this [policy/regulation!. (If this step is verbal, a follow-up written memo shall be sent both to the employee and Superintendent confirming and detailing this belief).
2.2.2 The employee shall be informed of his/ her right to appeal any determination of conflict of interest or incompatible activity and from its application in his/her specific case.
2.2.3 If the employee desires to appeal, such appeal will be made to the Superintendent.
2.2.4 If, on appeal, the Superintendent determines that the employee’s activities do violate this [policy/regulation] the employee will cease those activities or alternatively terminate his/her employment status with the district. Failure to take one of these actions shall be cause for disciplinary action which could result in dismissal.
2.3 The existence of procedures in 2.2 above shall not be construed to preclude disciplinary action against employees who willfully violate this [policy/regulation] by engaging in activities which are clearly inconsistent with or inimical to his/her district duties or office.
3.0 Forms and References
California Government Code, Section 1125, et seq.
Article 4 Prohibitions Applicable to Specified Officers
Members of the Legislature, state, county, district, judicial district, and city officers or employees shall not be financially interested in any contract made by them in their official capacity, or by any body or board of which they are members. Nor shall state, county, district, judicial district, and city officers or employees be purchasers at any sale or vendors at any purchase made by them in their official capacity.
As used in this article, "district" means any agency of the state formed pursuant to general law or special act, for the local performance of governmental or proprietary functions within limited boundaries.
No officer or employee of the State nor any Member of the Legislature shall accept any commission for the placement of insurance on behalf of the State.
(a) An officer shall not be deemed to be interested in a contract entered into by a body or board of which the officer is a member within the meaning of this article if the officer has only a remote interest in the contract and if the fact of that interest is disclosed to the body or board of which the officer is a member and noted in its official records, and thereafter the body or board authorizes, approves, or ratifies the contract in good faith by a vote of its membership sufficient for the purpose without counting the vote or votes of the officer or member with the remote interest.
(b) As used in this article, "remote interest" means any of the following:
(1) That of an officer or employee of a nonprofit corporation, except as provided in paragraph (8) of subdivision (a) of Section 1091.5.
(2) That of an employee or agent of the contracting party, if the contracting party has 10 or more other employees and if the officer was an employee or agent of that contracting party for at least three years prior to the officer initially accepting his or her office and the officer owns less than 3 percent of the shares of stock of the contracting party; and the employee or agent is not an officer or director of the contracting party and did not directly participate in formulating the bid of the contracting party.
For purposes of this paragraph, time of employment with the contracting party by the officer shall be counted in computing the three-year period specified in this paragraph even though the contracting party has been converted from one form of business organization to a different form of business organization within three years of the initial taking of office by the officer. Time of employment in that case shall be counted only if, after the transfer or change in organization, the real or ultimate ownership of the contracting party is the same or substantially similar to that which existed before the transfer or change in organization. For purposes of this paragraph, stockholders, bondholders, partners, or other persons holding an interest in the contracting party are regarded as having the "real or ultimate ownership" of the contracting party.
(3) That of an employee or agent of the contracting party, if all of the following conditions are met:
(A) The agency of which the person is an officer is a local public agency located in a county with a population of less than 4,000,000.
(B) The contract is competitively bid and is not for personal services.
(C) The employee or agent is not in a primary management capacity with the contracting party, is not an officer or director of the contracting party, and holds no ownership interest in the contracting party.
(D) The contracting party has 10 or more other employees.
(E) The employee or agent did not directly participate in formulating the bid of the contracting party.
(F) The contracting party is the lowest responsible bidder.
(4) That of a parent in the earnings of his or her minor child for personal services.
(5) That of a landlord or tenant of the contracting party.
(6) That of an attorney of the contracting party or that of an owner, officer, employee, or agent of a firm which renders, or has rendered, service to the contracting party in the capacity of stockbroker, insurance agent, insurance broker, real estate agent, or real estate broker, if these individuals have not received and will not receive remuneration, consideration, or a commission as a result of the contract and if these individuals have an ownership interest of 10 percent or more in the law practice or firm, stock brokerage firm, insurance firm, or real estate firm.
(7) That of a member of a nonprofit corporation formed under the Food and Agricultural Code or a nonprofit corporation formed under the Corporations Code for the sole purpose of engaging in the merchandising of agricultural products or the supplying of water.
(8) That of a supplier of goods or services when those goods or services have been supplied to the contracting party by the officer for at least five years prior to his or her election or appointment to office.
(9) That of a person subject to the provisions of Section 1090 in any contract or agreement entered into pursuant to the provisions of the California Land Conservation Act of 1965.
(10) Except as provided in subdivision (b) of Section 1091.5, that of a director of or a person having an ownership interest of 10 percent or more in a bank, bank holding company, or savings and loan association with which a party to the contract has a relationship of borrower or depositor, debtor or creditor.