PayPal's donation tools stiff some charities, new class action lawsuit alleges

Dan Schulman, CEO, Paypal
Scott Mlyn | CNBC

PayPal was hit with a proposed class action lawsuit on Tuesday over its treatment of charity donations.

When charitable accounts are not set up correctly, PayPal continues to accept donations on their behalf, the suit alleges. Instead of notifying donors and nonprofits of the error, PayPal takes the money after six months and redirects it to another charity "without regard to the intention, beliefs, or desires of the donor," the lawsuit claims. The class action status of the suit still needs to be certified by a judge.

A PayPal spokesman fired back at the suit, telling CNBC that when a donation is received for a charity that hasn't enrolled, the PayPal Giving Fund does notify them of the gift and help them enroll.

"PayPal and PayPal Giving Fund have a long history of fostering significant social impact by connecting donors and charities. We work to ensure as many charities as possible can benefit from our global donation campaigns, " the spokesman said. "We are disappointed by the lawsuit and we are fully prepared to defend ourselves vigorously in this matter. "

One plaintiff claims that of her $3,250 December donations to 13 different charities through PayPal, only a total of $100 was distributed between three charities of her choosing. The rest, the suit says, is being withheld by PayPal.

PayPal lists a group of charities as "trusted" recipients in a database, but just because they're listed doesn't necessarily mean they're capable of receiving donations through the platform, the suit says. Charities must have two accounts — a giving fund account, and a business account — in order to receive donations.

PayPal's giving fund generates more than $35 million in donations each year to benefit charities in the U.S. and UK, according to its website.

UPDATE: This story has been updated to reflect more details about the timeline of the suit, and a response from the company.