5 HR Challenges Faced by Nonprofit Organizations

Last Updated on July 19, 2023 by VantagePoint

Nonprofit organizations have employees, so they face HR challenges just like for-profit organizations do. These challenges can be related to recruitment and retention, performance management, employee relations, compensation and benefits, and anything else that impacts the employee in the workplace. According to Statista, there were 1.5 million nonprofits in the US in 2020.

Changes to the Non-Profit Laws in 2020

The IRS announced the annual inflation adjustments applicable to tax years beginning in 2021 (typically, returns filed in 2022) for more than 60 tax provisions, including those affecting exempt organizations, in Rev. Proc. 2020-45 and IR-2020-245.

At the end of 2019, the US Congress passed a legislation that has a significant impact on nonprofits. On December 20, 2019, the “Further Consolidated Appropriations Act, 2020,” also known as H.R. 1865, became law. This act includes two provisions that significantly impact nonprofits:

• The simplification of the excise tax on net investment income — as of the fiscal year 2020, the new law fixes the excise tax rate at a flat 1.39% regardless of a nonprofit’s level of distributions. In the past, many foundations carefully monitored their distributions to ensure qualification for the 1% excise tax. In light of the new flat tax, this will no longer be necessary.
• The retroactive repeal of the unrelated business income tax on qualified transportation fringe benefits — this act repealed the unrelated business income tax on qualified transportation fringe benefits. The repeal is retroactive to the original date of enactment (December 2017). So, if this tax affected your nonprofit organization, consider filing an amended 990T to claim a refund for taxes paid or incurred after December 31, 2017.

Difference Between Nonprofit and For-Profit Organizations – From an HR Standpoint

While people often think of charities or community organizations when they think of nonprofits, there are actually 29 types of tax-exempt organizations that can be classified as nonprofit according to the National Council of Nonprofits.

Nonprofits sell goods and/or services for a profit, but instead of the profit benefiting shareholders, it is re-invested in the organization to further their mission and better the community at large.

Examples of nonprofits include charities, churches and religious organizations, animal shelters, chambers of commerce, credit unions, and more.

What they have in common is that they are exempt from certain taxes and they have a mission to make a difference within their community, although how they make a difference varies greatly.

Nonprofits may sustain themselves on money earned through their normal course of business, but most are dependent on grants and donations. As such, they face constraints when it comes to strategic HR management.

They simply have limited dollars to fund employee programs, including compensation, benefits, and training. Nonprofits must weigh the opportunity cost of spending money on their employees with what they could use that money as part of their mission.

The use of strategic HR solutions is one way nonprofits can maximize their impact on employee engagement and satisfaction, thereby furthering their mission.

1. Volunteers

There are two big HR challenges when it comes to volunteers and nonprofits. The first is whether or not a person is a volunteer or an employee and the second is how to manage and engage your volunteer resources. We’ll cover the issue of volunteer vs. employee in the section on federal laws below.

Volunteers pose their own unique challenges when it comes to schedule management and engagement. Often nonprofit organizations struggle with scheduling volunteers.

It can be difficult to find people with the level of commitment needed within an organization or to schedule many people to fill several short time periods based on individual schedules. Technology is helping nonprofits manage schedules more effectively among volunteers.

As for engagement, volunteers tend to pick causes that they are passionate about.  Having a strong volunteer recruitment program can help maintain engagement among volunteers. Once volunteers start with the organization, the nonprofit should ensure that they are performing at the level expected.

Volunteers whose performance is lacking can hurt the organization’s brand. Nonprofits should have a “plan B” for when volunteers cannot complete the tasks assigned to them.

2. Recruiting and Retention

Hiring employees is very competitive in the current economic climate. The unemployment rate has been under 5% since September 2016 and has hovered closer to 4% so far in 2018.

Recruitment and retention have been a pain point for executives in many organizations, including nonprofits. Nonprofits must utilize creative HR solutions to attract and retain top talent in order to serve their clients.

A strong recruitment process that encourages the right candidates to apply for positions and filters out the strongest candidates quickly is essential to remaining competitive. Increasing employee engagement and satisfaction is crucial to retaining employees and reducing turnover.

3. Engagement and Satisfaction

People are attracted to working for nonprofits for many reasons, but often their desire to be part of a cause that they believe in is a strong motivator for employees of nonprofits.

Employee engagement and satisfaction are multi-faceted; employees have different preferences. Compensation and benefits, recognition, career advancement, and opportunities for training and development are among some of the drivers of engagement and satisfaction.

Nonprofits have the unique challenge of providing these programs to employees at a cost that is sustainable over the long run.

A strategic HR management program can help nonprofits determine which areas they should focus their limited budget on as well as maximizing areas that have little or no cost to the organization.    

4. Federal Laws

There are several federal laws that apply to nonprofits. The Affordable Care Act and the Fair Labor Standards Act are two laws that impact employers specifically, as well as tax laws that impact the accounting departments of nonprofits.

The Fair Labor Standards Act (FLSA) defines employment very broadly – “to suffer or permit to work”. This does not mean that nonprofit organizations must pay their volunteers, but they must ensure that they are following guidelines when it comes to volunteers within the organization.

For example, volunteers should not be involved in for-profit activities.

The FLSA can get complicated when it comes to who is protected by the FLSA and who is not as there is an annual revenue minimum that determines whether an organization is covered, but some individual employees may be covered even when the organization does not generate enough revenue.

In addition, there are state laws that impact whether someone is considered a volunteer or an employee. Using a strategic partner that provides HR solutions can help nonprofits navigate this complex web of laws.

5. Payroll Taxes

As a tax-exempt entity, there are certain requirements that the payroll department must be aware of when processing pay for employees. For example, withholdings for FICA (the tax that funds Social Security and Medicare) are required, but some nonprofits are exempt from FUTA (the federal unemployment tax).

Often, these rules are complex and based on the specific classification of the nonprofit, so using a payroll provider that has experience with nonprofits can help your organization comply with all relevant laws.

In conclusion, nonprofit organizations face the same HR challenges that for-profit organizations face, but often with more limited resources.

Strategic HR management with VantagePoint can help nonprofits uphold compliance requirements, save administrative time and protect their money by integrating their HR platform, allowing them to invest in other areas that directly benefit employees and increase engagement and satisfaction.

Call us. We are here to help.

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