Ask A Lawyer: the Legality of Scholarship Programs

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Ask A Lawyer is a recurring column where attorney Jason Pill answers questions submitted by people who work in the climbing industry. For this edition, Pill analyzes scholarships and discounted membership programs and identifies ways for gym owners to approach the concepts, from a legal standpoint. Got a question that you’d like Jason to tackle about your gym, your employees, or anything else in the wide world of climbing? Submit your legal question here.

Legality of scholarship programs

QUESTION: “I am a gym operator and I would like to start a scholarship program and/or discounted membership system to make climbing at our gym more accessible. What legal barriers should I consider first?”

PILL: Generally speaking, implementing a scholarship program has few legal risks, and of course, is a great way to increase access to climbing in your community. That said, there are some initial considerations a gym should evaluate to avoid unintended legal consequences.

When implementing a scholarship program, two primary considerations are (1) financial structure and (2) selection criteria for the program. How a gym tackles these issues will have a significant bearing on the attendant legal obligations and barriers.

Financial Structure

As a starting point, any gym will want to discuss the program with its accountant or in-house finance team to figure out how the scholarship program will be structured for tax purposes and, if necessary, how it will be funded. For example, will the gym set up a separate 501(c)(3) non-profit to fund the scholarship program? While this approach has significantly more administrative requirements with the formation and maintenance of the charitable entity, it allows the gym to seek outside donations or partnerships from members or other organizations, if the gym plans on expanding the program. Plus, the 501(c)(3) could be leveraged to support other aspects of your community beyond scholarships and could open the door to much community support on a wide spectrum of issues.

Creating a 501(c)(3) to fund the scholarship program also incentivizes external giving through certain tax breaks and can lend some legitimacy to the program because of the organizational formalities associated with running a charity. This format is well suited if the gym is looking to use external funds to offset the cost of the scholarships awarded (e.g., raising external amounts to fund a full membership for a climber with financial need).

Alternatively, a gym can internalize the program by simply reducing its membership price for scholarship-eligible individuals, which does not necessarily require an influx of cash and, instead, is similar to a discount program. This option does not easily allow for external donations (because it could look like self-dealing), but removes many of the formalities required of a 501(c)(3) and, as a result, reduces many legal barriers and administrative costs.

The structure of the program will impact how much funding is needed, if any, and a gym should consider these machinations in advance. It is much more difficult to switch accounting methods or donation treatments down the road, so initial planning can be quite valuable. And, of course, the foregoing options are not mutually exclusive, and the gym can explore combinations that involve discount programs and a 501(c)(3) charitable entity. Neither option is right or wrong, merely two approaches to consider…or combine.

 

Determining the Recipients

Looking past these initial organizational and formation issues, a gym will need to decide the mechanics of its scholarship program—and what it intends to offer, as this will directly impact the selection criteria and corresponding legal risks (e.g., discount program vs. full scholarship).

One option is for the gym to set a baseline for financial aid available to all climbers or families below that threshold (e.g., families who have an annual household income below a certain amount are eligible for a certain percentage reduction on all gym membership fees). The relevant financial threshold to qualify for the discount can be tied to local poverty or income statistics that better match the gym’s demographics and region. Moreover, this approach reduces administrative work and selection issues because the selection only involves validating application data to determine if the financial threshold is met. The ease of this approach and its ability to help several climbers or families makes it very attractive for many gyms.

As an alternative to financial aid for all who qualify, a gym can consider awarding larger scholarships or more limited scholarships for individuals selected from a pool of candidates, with the candidate receiving a free or heavily discounted membership. This may be a more generous option for the selected climber or family, but can create complications for other deserving families who do not receive aid. If the gym wants to consider such a selection process, it puts the gym in an unenviable position of determining who is “more worthy” of financial aid. Given all of the socioeconomic factors that can influence this decision, many gyms may decide to skip this option entirely.

 

Avoiding Traps

Perhaps most notably, though, if a gym implements a selection process whereby only certain candidates receive financial aid (to the exclusion of others seeking it), the gym will invite more scrutiny and legal oversight.

There are no specific rules for how a gym must compose its selection panel (e.g., one decision-maker or a committee), but there can be legal issues based on the results of the selection process. Of paramount concern, any gym selecting scholarship recipients must ensure that the selection process is free of any discrimination—actual or perceived. Virtually all climbing gyms are considered “public accommodations” under federal and state laws because they offer goods and services to the general public. As such, federal and state laws prohibit discrimination against designated groups, based on the premise that everyone is entitled to enjoy goods and services of public accommodations equally.

Through the Civil Rights Act of 1964 and the Americans with Disabilities Act, the federal government statutorily prohibits discrimination in public accommodations on the basis of race, religion, color, national origin, and disability. State laws often provide additional protections on other bases, including age, sex, and sexual orientation. This means that if a gym’s scholarship selection is carried out in a discriminatory manner, the gym could violate the laws generally applicable to public accommodations (or at least risk a lawsuit alleging such from a disgruntled candidate who did not get a scholarship).

On an individual basis, it would be very difficult for a rejected candidate to prove that the scholarship selection was carried out in a discriminatory manner. However, it could become more provable if the gym demonstrated a pattern over time of selecting certain applicants to the exclusion of others. For example, if numerous applicants with disabilities were passed over in favor of applicants without disabilities, that could present a situation of actual (or at least perceived) discrimination against climbers with disabilities. While still a difficult claim to prove—and one with modest damages—it is not the type of lawsuit a gym would want to face for cost reasons and the negative publicity that would ensue.

Finding solutions for scholarship programs

Finding Solutions

To avoid those risks, if a gym uses selection criteria that excludes otherwise qualified candidates, the gym should ensure that the criteria emphasizes objective components wherever possible. There will be no way to remove all subjective elements, but eliminating those considerations and focusing on objective criteria will better position the gym to evaluate applications and explain its rationale if ever challenged by a rejected candidate. Of course, these risks disappear if the gym sets baseline criteria for a discount available to all individuals or families who qualify, thus removing the selection element from its process.

As another alternative, a gym could consider instead partnering with and donating to an external organization which offers scholarships or grants to climbers. In this way, any selection process is determined by an entity that is not a place of public accommodation, which could provide more flexibility in offering climbing scholarships to certain underserved groups. This kind of partnership would resemble the offering of external diversity scholarships by universities or their departments as part of affirmative action practices.

Overall, the legal risks associated with implementing a scholarship or discount program are minimal and generally can be avoided with foresight and good planning. Increasing access to climbing is a great goal that should be encouraged, and the above commentary is not meant to discourage any gym from implementing such a program. Rather, the foregoing highlights some initial considerations that gyms should address at the beginning of the program to avoid future complications or unintended consequences.

 


Note: This column offers general advice and is not intended to be used as direct legal counsel. Gym owners should consult a lawyer for their facility’s specific legal matters. Pill can be contacted directly here.