The sister of a director of a charitable corporation is by definition a “disqualified person” and for federal tax purposes the transaction is likely to be subject to the excess benefit tax rules.  But assuming that the compensation is at standard rates (or better for the charity), it should not be a problem.

Some nonprofits have conflict of interest policies that prohibit the organization from participating in any conflict transactions, but most organizations don’t have an absolute prohibition.  There may be special rules to follow before approving the transaction, but they probably won’t prevent the arrangement.

State laws don’t normally prevent conflict transactions so long as they are fair to the organization.  In all likelihood, the arrangement is permissible.  The organization should be sure to justify it, however, because conflict transactions always raise an issue about whether the organization is being used for the private benefit of insiders.  For charities seeking contributions, the element of trust with their donors is extremely important.