6 minute read

Oftentimes when people start a nonprofit organization, they become so focused on their cause they fall behind on managing the day-to-day business functions of their operation. Human resources is one of the most overlooked areas in the nonprofit space for a number of reasons. Failure to keep this aspect of the business running smoothly, however, could lead to audits, fines, penalties and even issuing back pay to misclassified workers.

Two individuals discussing the state of their organization's HR


If this sounds like a nightmare, it often is. No nonprofit wants to get dragged into a court battle. More than any other type of organization, your reputation precedes you. The most important asset of your organization is its good name. Without this, neither donors, volunteers nor the communities you serve would trust you and the services you provide.

The good news is that the nightmare is preventable. There are tangible steps every nonprofit can take to minimize the likelihood of an audit, or mitigate the effect of one should it be triggered.

That brings us to the big question. Are your nonprofit’s personnel records in good shape?

If the answer is a resounding “yes,” congratulations! Your due diligence will pay off should your organization encounter any rocky seas caused by unhappy employees or new regulations. But for many , it’s easy to fall behind on personnel records. Keeping up with personnel records for your nonprofit can feel like a full-time job within itself, but following proper protocols and procedures is the only way to avoid serious penalties.

This article will serve as a concise starting point for getting your personnel files and records on track.


What To Include in a Personnel File

If you have been keeping track of your personnel records and have all the documents neatly filed under their respective names, congratulations. Just to be sure, here are the bare minimum requirements to be included in an employee’s files:

  • Job description
  • Resume
  • Letters of recommendation
  • Performance evaluations
  • Absentee records
  • Documentation of training
  • Position or rate change forms


The Biggest Personnel Mistakes Made by Nonprofits

If you have everything on the list above and more, you may feel you covered all your bases and can move on to the next task. However, we have a few followup things you should watch out for.

Proper Separation of Files

Have you successfully separated the files to ensure people who do not have the proper authority do not have access to a person’s files? For example, let’s say a worker’s immediate supervisor comes to your office. She tells you a worker has applied for a new position that just opened up. The supervisor is fairly new to the organization, so she would like to review the employee’s performance records for the past two years.

What do you give to the supervisor? Do you hand them the entire file you created for the employee or do you remove the performance reviews and hand them over? The correct and legal answer would be the latter. Some documents, such as a person’s health records, are confidential. The best way to remain compliant here is to separate inclusions in a person’s file from the very beginning. Keep confidential files under lock and key if there are paper copies. If you have an HR department, they may need their own office because of this. Mission Edge strongly recommends digitizing file management. If you choose this route, use strong passwords on all devices with access to the files and consider encryption.


Ready to evaluate your organization's operational performance? Download our HR  Health Scorecard to get started.


Time Keeping and Payroll Records

While most nonprofits get the first set of documentation right, they may then fall short when it comes to timekeeping and payroll records. If you do not have W-2 employees, you may think this is unnecessary. However, if a worker classified as an independent contractor disagrees with this classification, not having records to show otherwise could work against you.

Here are the payroll considerations you should be keeping track of:

  • Wage records with rates
  • Offer letters
  • Promotion letters
  • Compensation determinations
  • Pay stubs
  • Meal waivers

Note that timekeeping is a part of payroll duties and requires day-to-day tracking. You also need to look up your state and local laws to see what special requirements they may have in place. For example, in California, you should hold on to wage records for three years and timekeeping records for four years.


Meal Breaks, Rest Periods and Waivers

Not every U.S. state requires companies to provide meal breaks. The laws governing when employees become eligible and for how long also varies. Sometimes federal law may also intervene in specific industries, though there is some debate about the legalities of this in courts at present.

For instance, the federal government recently overruled California’s paid lunch break provisions for truck drivers. Representatives behind the change allegedly called it “a drag on the economy.” The State of California and the Teamsters Union representing truckers have filed lawsuits with the U.S. Court of Appeals to challenge this.

Here are the current laws in place in California regarding lunch breaks and rest periods for nonexempt employees in all other industries:

  • When working for three and a half hours or more in a day, they become entitled to a 10-minute rest period for every four hours worked.
  • When working more than five hours in a day, they become entitled to a meal or lunch break.
  • Those who work shifts longer than 10 hours get a second lunch break.


Employees enjoying their meal break


Employees can elect to give up these breaks with a meal waiver under specific circumstances. You can create one of these waivers yourself or download one from the state website to ensure it’s 100 percent up to date. Be sure to verify your local laws about this matter.


Employee Misclassifications

When your non-profit is just getting off the ground, maximizing donations and reducing expenses helps you move forward. This is especially important if you’re tackling a capital-heavy cause, such as rebuilding homes destroyed by natural disasters or providing medical care to people overseas.

One way organizations seek to keep expenses low is by hiring 1099 workers. Because these workers are not employees, your organization saves on payroll taxes and the need to provide benefits. However, if your workers perform their tasks under agreements that resemble employment you may be misclassifying them.

If the state or the employee should raise this concern, you could find yourself attending hearings, paying fines and catching up with back pay. This is a very expensive process. Note that in California, the employee no longer has to initiate the process to challenge this themselves. The new Assembly Bill 5 gives California and even its cities the right to sue companies for misclassifying workers.


I-9 Verification Issues

Of all states in the U.S., California has the highest immigrant population. About a quarter of foreign-born residents live in California. This can sometimes put additional pressure on California organizations to double-check the information provided for work eligibility. While many nonprofits serve people in immigrant communities with varying residency statuses, it’s important to note that having a high volume of illegal labor can get your organization shut down.

In addition to this, cybercrime and the resulting identity theft is on the rise. Some people may impersonate others to work in fields they are not qualified for. I-9 verification helps you to sift through anyone who could be using someone else’s identity. Otherwise, they may give you a severe headache if they become involved in illegal activities on the job or while holding a high-profile position.

We recommend signing up for E-Verify and using it within three business days of hiring a worker. It’s free, it simplifies the process and it checks the data via the government’s database. Remember that you can’t ask people to bring in specific documentation to verify their identity. They do have lists to choose from (birth certificate, driver’s license, etc). You’ll also need to keep track of when documentation expires, such as driver’s licenses or passports.


Inadequate Human Resources Expertise

Human resources work is much more technical than keeping up company morale or being a good listener regarding employee complaints. The best HR professionals have a specific type of expertise that most managers cannot make up for even with winning determination and academic brilliance.


HR professional working at her desk


Qualified HR professionals should have received training and built experience related to payroll laws and accounting practices. A running joke among many HR professionals is that hiring and firing is the cover-up. Their real job is trying to ensure the organization steers clear of lawsuits by remaining compliant.

When seeking HR expertise, there are a few things you should look out for to ensure they know more than just how to calculate a paycheck:

  • Ability to determine between exempt and nonexempt employees
  • Keeps abreast of law changes and state or federal disputes that may affect your organization
  • Understands the industry jargon, such as the difference between a timekeeping record and a wage record

Are you running an unhealthy organization? Download our HR Health Scorecard to  find out


What To Expect If You Face an External Audit

No matter how amazing your HR person or department is, the day may come when you get audited. It’s important to remember that facing an audit is not an indication that you’ve done something wrong. All it means is a government agency has questions.

There are several instances that may trigger an audit. An employee may submit a disability claim. Maybe the employee put their time down correctly but a manager later changed it without telling them. There could have also been numerical errors made. Moving a decimal place by one point or adding an extra zero can create a big discrepancy. A worker’s compensation claim may also lead to a request for records to accurately calculate and disburse payments.

Note that according to California’s Department of Industrial Relations, employees have up to three years to file certain claims and just a year for others. When it comes to violations of labor laws, employees have up to three years to file. These may include not paying minimum wage, failing to pay for overtime or not allowing them to take their meal and rest breaks.


The Bottom Line

There is more to human resources than recruiting, managing and formulating strategies. There is a very technical aspect of this field that requires familiarity with local, state and federal laws. Lacking this expertise that keeps your personnel records in good shape could come back to haunt your organization in the worst ways possible.

If you’re not an industry expert in human resources, you may worry about finding the right HR professional. After all, how do you know what they know, if you may not know it yourself? The best approach is to hire a team of proven experts who have delivered results for many other nonprofit leaders like yourself.

At Mission Edge, we provide consulting services to social enterprises and nonprofits just like yours. We aim to fill the gaps that may be holding back your organization or workforce so you can thrive. Your community needs you. Our experts invest in you so that you can invest in the people that rely on your passion and cause.

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