How Nonprofits Can Field Their Biggest HR Challenges

The U.S. is home to about 1.5 million nonprofits, whose estimated 12 million employees make up roughly 10% of the nation’s workforce. Nonprofits generate about 5.6% of the American economy, putting them on par with the manufacturing industry.

The perks of working for nonprofits continue to fuel the sector’s growth. However, nonprofits also navigate a number of HR challenges—often with small teams and scant resources.

Here to offer expert advice on how to handle these challenges is Katie (Howard) Tanner. A senior human resources consultant with James Moore’s HR Solutions team, Katie brings nearly 20 years of professional HR experience to the fore.

The nonprofit advantage: Motivated employees

Before diving in, it’s worth reflecting on the benefits of working in the nonprofit sector. Careers in these organizations often come with less-than-plum salaries. So they often have to drive recruitment and engagement by offering several advantages to employees

• Positive impact: Being able to have an impact on a local community or cause is a driving reason why workers join nonprofits. A recent study showed that 45% of Gen Z – now 13% of the employee market – wants to work for an organization that makes a positive difference in the world. “Younger generations are very in tune with how they can impact society and make positive changes in the world,” Katie said. “They want the organization they work for to align with their ethics.”
• Creativity in the workplace: Most nonprofits are small organizations, which enables employees to blur the lines between traditional job roles and develop a broad, varied skill set. A graphic designer might also serve as the office administrator or a librarian may also manage social media. These cross-functioning role opportunities are harder to come by in large organizations.
• Good benefits: The comparatively small salary of nonprofits is often offset by good benefits. Even before the COVID-19 pandemic, many nonprofits offered flexible working schedules, generous amounts of time off and the option to work from home. The ability to determine their own schedules is an increasingly high priority for employees seeking a better work-life balance.

The uniqueness of nonprofits, however, also comes with issues that can impact human resources in significant ways.

HR challenge: Limited funding

Staying in the black is no easy task for nonprofit organizations. Small teams may have limited financial experience, and the pressure of covering short-term costs can divert time and energy away from long-term planning. A disengaged board may not warn you of oncoming financial peril and can hinder you from being able to respond quickly to changes in the market.

That’s why it’s vital that nonprofits have a diversity of funding sources to mitigate this HR challenge. Katie offers the following analogy: An elevator suspended from a single cable will plummet if that cable snaps. If the elevator is connected to six cables, however, one can fail and the elevator will still hold.

“You need to have multiple funding sources,” Katie said. “A lot of nonprofits learned that during COVID when members couldn’t participate, volunteers couldn’t participate, and they saw revenue sources drop very quickly.”

Nonprofit funding typically comes from one or more of the following sources, each with its own challenges:

• Donations: Major donors take more effort to court but result in bigger payouts.
• Grants: Obtaining a grant requires an application, which is a significant investment of time and effort. If you succeed in getting grant funding, you must then ensure money is spent in accordance with the terms of the grant.
• Government funding: The application and compliance requirements are often time consuming to follow and understand.
• Corporate sponsorships: In exchange for much-needed funding, you must make sure the sponsor is getting the publicity it expects.
• Membership fees: Time, effort and swag are required to keep members feeling connected and engaged.
• Retail offerings/service fees: This requires an accounting system that accommodates commercial business operations as well as the needs of a nonprofit.

Staff members are nonprofits’ most expensive asset, accounting for roughly 70% of overhead. Tight budgets translate to less money for salaries, which lends itself to fewer people fulfilling multiple job roles. While this sometimes spurs increased creativity and innovation, employees could burn out and resign when the pressure becomes overwhelming.

Resignations equals turnover, which can be extremely expensive. Replacing a manager with a $60,000 salary can cost between $30,000 and $45,000—an expensive HR challenge. So it’s worth taking proactive steps to improve engagement and retain employees, especially since some methods cost little to nothing.

This is why it’s so important to spotlight the reasons your staff works for you—for example, the impact your nonprofit has on your local community or society as a whole.

“People want to know their purpose. They want to know how their part contributes to the whole,” Katie said. “They want to know how important they are.”

Maintain good benefits, such as flexible or remote work. Consider offering tuition reimbursement or student loan payback. Invest in training and professional development for your staff. Learning new skills keeps workers engaged and excited.

HR challenge: Classifying workers

Budgetary constraints can lead nonprofits to rely on volunteers and independent contractors as much as traditional employees. Make sure you classify your organization’s workers properly to avoid costly penalties.

Salaried employees vs. hourly employees

Employees are either classified as exempt (salaried) or non-exempt (hourly). Hourly employees must be paid overtime. In most states, this translates to time-and-a-half pay for more than 40 hours worked in a week.

Salaried employees, in contrast, are not paid for overtime. Even though salaried positions are often seen as more desirable than hourly, salaried employees can take a monetary hit if they regularly work more than 40 hours.

“Depending on your working hours, being salaried can result in missing out on a lot of overtime,” Katie said.

The consequences can be more than worker dissatisfaction. If you’re not classifying employees correctly, you could face penalties from the IRS. So it’s important to make this determination accurately and avoid this HR challenge.

If a position earns at least $684/week or $35,568 annually and meets the following requirements, it is exempt:

• Administrative: The employee manages some part of the organization, but not necessarily other employees. Administrative roles can include project managers.
• Computer: Computer programmers and software engineers are typically salaried because their work involves building, designing and running computer programs. Help-desk managers and network engineers can be hourly positions.
• Executive: The employee supervises at least two full-time employees and manages their hiring, firing, performance evaluations and rates.
• Outside sales: Employees who market an organization and sell its services or goods tend to be salaried and may earn a commission on top of a baseline salary.
• Professional: This is similar to an administrative role, but can be more creative or scientific.

Employees vs. contractors

Sometimes organizations misclassify workers as independent contractors when they are actually performing the role of employees.

“Whether someone is a contractor or an employee depends on who controls their behavior, finances and relationship with the organization,” Katie said.

To avoid this HR challenge, you must carefully consider the terms of your organization’s relationship with workers. If your nonprofit determines what an individual does, how and when the work is conducted, the tools and supplies they use and how they are reimbursed, then this person is an employee.

However, let’s say the individual has the autonomy to determine what they do, pays their own expenses, plans out their own schedule, and can provide their services to other organizations. In this case, they are a contractor.

Employees vs volunteers

While volunteers are a boon to nonprofits, it’s important not to use volunteers as a replacement for paid employees. These are the classification requirements for volunteers:

• They must advance a charitable cause. Their work cannot serve a commercial or retail effort.
• They cannot work full time or be expected to work certain hours.
• They cannot fill an employee’s position. Only employees can fill open employee positions. “If your executive assistant is out on vacation, you cannot ask a volunteer to step into that role in the meantime,” Katie said.
• They are not eligible for benefits.

HR challenge: Building a healthy internal culture

Nonprofits often excel at creating a strong culture externally. Yet it’s just as important to pay attention to fostering a healthy culture inside your organization as well.

Katie defines internal culture as a combination of formal and informal processes, behaviors and values that make up an employee’s experience.

“Company culture is how the employee experiences their day-to-day life with your organization,” she said. “A positive internal culture can actually increase your bottom line by boosting your nonprofit’s productivity and efficiency. Meanwhile, a poor or toxic culture can sink an entire organization.”

To best avoid this HR challenge, watch for the signs of a failing culture. These include a lack of shared work ownership and accountability; you’ll notice employees are unsure of their responsibilities and don’t genuinely care about the quality of their work. Vague communication obscures transparency and opens the door to gossip. Additionally, a culture in which creativity is stifled slows the organization down and hinders the innovation on which nonprofits especially rely. Finally, a lack of diverse staffing leads to limited perspective.

“If you only have one type of person, it’s not great for the organization overall,” said Katie. “You don’t want to clone one type of employee. That will stifle creativity, innovation and insight. Look for individuals who will be a ‘culture add’ to your organization.”

On the flip side, you can build a flourishing internal culture by clearly defining your organization’s purpose and core values, encouraging innovation, collaborating and communicating openly.

Finally, don’t forget to have fun!

“A strong internal culture increases your recruitment and retention,” Katie said. “It creates an environment in which everybody feels like they’re a part. Everyone wants to belong.”

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