4 HR Challenges Faced by Nonprofits

It takes a special kind of person to join a nonprofit—and an even rarer breed to handle HR for one. Whether you work at a charity, museum, church, or any of the other purpose-driven organizations that make up the sector, there are several nuances your people team needs to be aware of.

From managing employee overtime to how to legally work with volunteers and interns, we’ll dive into the top challenges HR teams face at nonprofits.

Recruiting and Retention

The decision to work at a nonprofit isn’t typically made with a big payday in mind. That said, compensation still matters to both current employees and prospective hires. And since many nonprofits depend on donations and grants to stay afloat, there often isn’t much left to go around after overhead.

With less flexibility to reward employees financially, HR teams have started investing in nontraditional benefits and perks. Offering workers the flexibility to work from home, take parental leave, or even just bring pets into the office are all low-cost ways to differentiate your company from the competition. Some of these perks offer tax benefits to employers and employees alike. Did you know that company holiday parties are tax deductible? Or that federal law permits employees to allocate pre-tax money for their parking or transit expenses, at little cost to your business?


Offering perks like these is just one way to boost engagement. Thankfully, there’s a secondary factor at play: purpose. A report co-authored by Namely and #HRWINS found that “having meaningful work” ranked as the top factor driving engagement. And given how mission-driven the nonprofit sector is, that should come as welcome news to recruiting and HR teams.

Payroll Taxes

Making sense of payroll taxes is difficult for any business, but it can be particularly challenging for nonprofits. While many nonprofits are entitled to tax breaks, the IRS only extends these benefits to certain companies—making it a challenge to figure out what’s actually owed at the end of the day.

Nonprofits whose work can be described as any of the below can apply for something called section 501(c)(3) status, a tax designation that signals that their mission is tied to the public good:

  • Charitable

  • Religious

  • Educational

  • Scientific

  • Literary

  • Tied to public safety

  • National or international amateur sports competition

  • Preventing cruelty to children or animals

While most payroll taxes remain in effect for these companies, there’s one key difference. 501(c3) organizations do not have to pay federal unemployment taxes. Commonly referred to as “FUTA” (an abbreviation for the Federal Unemployment Tax Act), these employer-paid taxes are calculated at 0.6 percent of the first $7,000 in wages each employee receives. Depending on your location, you may also be eligible for a similar exemption from state unemployment taxes.

While charitable nonprofits get a free pass for FUTA, their payroll administrators will still need to withhold several other taxes—including Social Security and Medicare (FICA), Federal Income Tax Withholding (FITW), and others. HR teams should work closely with a third-party provider well versed in the subtleties of nonprofit payroll rules.

Volunteers and Interns

Nonprofits often rely on help from volunteers and unpaid interns. While critical to the sector, these relationships can put HR teams at risk of violating wage and tax rules if not handled appropriately.

The Fair Labor Standards Act (FLSA) defines a volunteer as “an individual who performs hours of service for civic, charitable, or humanitarian reasons, without promise, expectation or receipt of compensation for services rendered.” While volunteers can be reimbursed for things like travel, giving them “a little something” for their time can pose compliance issues. Compensating a volunteer anything more than $500 per year puts them in paid employee or independent contractor territory, opening a pandora’s box of regulations including the Affordable Care Act, the Family Medical Leave Act, minimum wage rules, and others.

Keep in mind that nonprofits can’t necessarily use volunteers for all tasks. Commercial activities, like working in a museum gift shop, for example, must be handled by paid employees. The only exception here are interns, who are subject to a separate set of rules. To dive into the criteria needed to legally classify interns, visit our article on the topic here.

If your nonprofit makes use of volunteers and unpaid interns, protect your company from potential wage claims or disputes by having them acknowledge in writing that they don’t expect to be compensated. These agreements should also make it clear what duties are expected of the individuals and for how long. Work with employment counsel or an HR consultant if this is your first time drafting such an agreement.

Managing Overtime

Burning the midnight oil is something nonprofits workers are used to. And if you’re in HR, that translates to overtime headaches.

First, a compliance refresher. An employee’s eligibility for overtime is dependent on two factors: job responsibilities and wages. While the so-called duties test warrants its own discussion, the latter criteria can be described more succinctly: if an employee earns less than $23,660 per year, he or she must earn overtime regardless of job responsibilities.

That number, commonly referred to as the overtime threshold, has been in place since 2004. The Department of Labor (DOL) has eyed increasing it several times and appears likely to do so in the coming years. Why’s that matter? One study found that nearly a third of nonprofit workers made less than $28,000 annually, putting those individuals perilously close the threshold. That means nonprofit HR teams need to prepare to either raise wages above the new threshold (most experts believe it will increase to $33,000 by 2019) or reclassify workers and dole out time-and-half pay for overtime.

With overtime rules set to change, it’s critically important for nonprofits to have time tracking software in place. With the right tools, tracking employee hours and curbing runaway overtime has never been easier or faster—and we all know nonprofit HR teams could use a few extra minutes back in their day.

In spite of their compliance quirks, it’s never been a more exciting time to work for a nonprofit.  Over the last 10 years, the sector has expanded by 20 percent—well ahead of for-profits, which grew only 2-3 percent. That explosive growth should come as no surprise to the scrappy, purpose-driven professionals that call these organizations home.

Even as headcount grows elsewhere, people teams typically stay lean. To keep up with all of the unique challenges mentioned above, not to mention the other responsibilities HR teams juggle, these professionals need an edge. In our guide, 17 Hacks For Small HR Teams, we’ve compiled a list of the tactics small, successful teams use to get the job done. Download it by clicking below.

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