The excitement at the board meeting was palpable. The organization had previously retained a bookkeeper and various contractors but had otherwise proceeded with only board volunteer service and the devoted service of a few key program volunteers. But the organization’s work had grown too complex to continue without employees. And so, the organization had just hired its first executive director who would begin next month after meeting the full board at this meeting. Everyone knew the organization had just turned a corner. They all hoped that the turn would lead to even greater organization success.

Employees

The step from an all-volunteer 501(c)(3) organization to an organization with paid employees is a big one. Many charitable organizations operate without paid employees. They depend instead on devoted board members and key volunteers. Their advantage is that the organization expends no donated funds on employee compensation and benefits, when employee expenses can be considerable. Their disadvantage, though, is that volunteers generally have limited time and may also have limited devotion. Laboring at work one does not always enjoy is one thing when paid to do so. Paid workers tend to persevere for the paycheck, even if the job offers few other rewards. But volunteers don’t have that financial incentive and reward. If the charitable work becomes too challenging, arduous, or unpleasant, they may simply stop volunteering, leaving the organization without the human resources it needs. Employees are thus an inevitable need for many charitable organizations. They can also revolutionize the processes and progress of a charitable organization that had formerly depended on only volunteers.

Costs

Charitable organizations should look especially closely at the costs associated with employees. For-profit firms look closely at labor costs, too. Wasteful expenditures on labor cut into business profits. But for-profit business owners and leaders know that they depend on paid workers. People don’t generally volunteer for businesses, only charitable organizations. And businesses that pay workers expend their own revenue, not donations given by generous folks, devoted to public good. Charitable organizations thus have even greater reason to watch employee compensation and expenses closely. Your organization should budget for its employee costs, with a clear eye toward stewarding donations well. 

Flexibility

Another obligation that comes along with employees, that charitable organization leaders should consider before hiring employees, is that employees have reasonable expectations of relatively stable employment. Charitable organizations can recruit and release volunteers freely. Volunteer opportunities generally have little or no significant commitment either way. Volunteers are free to leave at any time, and the organization owes them no continuing commitment if the organization determines that their volunteer work is done. Not so with employees. Organizations of all types should respect the need of employees for relatively stable employment. Organizations shouldn’t use frequent layoffs and rehiring to manage programs and budgets, if they can avoid it, because of the disruption it causes paid workers who depend on the job’s income and benefits. Organizations that hire and fire workers willy nilly quickly earn that reputation and may find it hard to recruit reliable, valuable workers. Don’t hire employees until you’re sure you need them and can employ them with reasonable stability.

Terms

That said, charitable organizations, like other private employers, generally do well to avoid promises of job security. Employers nationwide employ nearly all workers, other than unionized labor, at will. Employment at will means that the worker has no job security. Job termination with or without cause, for any legal reason or no reason, leaves the terminated employee with no legal recourse, other than unemployment benefits or any severance or accrued vacation days the employer’s policies may have granted. Your organization should retain its employees at will, making sure that employees understand that term of their employment. See the example employee handbook and retention letter at the end of this guide, both clearly stating at-will employment.

Recruiting

Recruitment is a key function in retaining skilled, experienced, and committed employees. The wider the net your organization casts, the more qualified candidates among which it may get to choose. Your organization may already have identified and even groomed its next employee candidate. Internal hires or hires of individuals already closely connected with the organization can ensure a known candidate. But even in the case of internal hires, an organization does well to look around. An even better candidate may be out there, and the internal hire may draw confidence from the fact that the organization knew that it had other candidates available but hired internally nonetheless. Online recruiting services can be efficient and helpful. So can posting the job opportunity on the organization’s website and newsletter, sharing it through contact lists, and sharing it through a nonprofit hub or resource center. Word of mouth through board members, donors, suppliers, staff, and others connected with the organization can also help. Assign clear responsibility to a board Personnel Committee, the executive director, or another staff member or group to recruit widely and responsibly.

Description

Your organization should know the position for which it is recruiting candidates. Begin your search process by studying your organization’s labor needs, employee responsibilities, and organization chart. Draft a job description for the role the organization needs, not the role that a candidate or candidates generally want. Consider reassigning current employees into their better roles and preferred roles before designing the new position. Share thoughts about the new position with current employees, to see if they want to take on the new role or parts of the new role. When you’re confident in the job description you have designed for the new role, include it with your job postings. Candidates need to know the position for which they are applying. Include in your job description or posting not just the job title, essential functions, supervision, compensation range, and benefits package but also job qualifications, including education, skills, and experience, and whether the job is on site or includes remote flexibility.

Interviewing

Form a committee or small group to review candidate submissions and evaluate candidates. One reviewer may see things in a candidate that other reviewers miss. Winnow candidates for first interviews, even if by telephone or videoconference. Choosing up to five or more candidates for initial interviews can help broaden the candidate pool, if that number of interviews is not too burdensome. Have a small group of interviewers, and plan the areas each interviewer will cover or questions each interviewer will ask so that all interviewers participate and all candidates get similar questions. Then cull the candidates to one, two, or three for on-site, in-person interviews, again with an interview team. Let each candidate know the time within which you expect to get back to them, typically no more than a few days.

Retention

Deliberate afterward over the preferred candidate. Confirm the specific compensation to offer within the posted range. Contact the chosen candidate with the offer by telephone, followed by a confirming email with the attached retention letter for the candidate to review, approve, countersign, and return. See the example retention letter at the end of this guide. Reserving background and reference checks for after the candidate accepts the offer can save time, but if you do so, then make the offer contingent on acceptable reference and background checks, as the example retention letter at the end of this guide does. Follow through on criminal history background checks through state online public resources or a service to conduct a nationwide search, especially for positions dealing with children, other vulnerable individuals, or substantial funds. Also follow up on reference checks. You can learn helpful information about a new employee from prior employers or other references, even if candidates carefully choose references to be glowing.

Compensation

Charitable organizations owe a special duty with respect to employee compensation, having to do with avoiding excess benefit transactions. Your charitable organization could lose its 501(c)(3) status, and the employee could owe excise taxes, if the IRS determines that the employee received excessive compensation as a personal benefit beyond the value of the employee’s services. Before posting the job position, do a compensation study from reliable online nonprofit resources. Ensure that your organization compensates each employee within the normal range or has a clear justification, grounded in public not private benefit, for exceeding the range. 

Policies

Your organization may not need elaborate employment policies if it hires only a single executive director and no other employees. Your organization’s board and the executive director can work out the details of the employment terms, conditions, and benefits, including things like health insurance, disability insurance, vacation days, personal days, and retirement contributions. But when the organization begins retaining multiple employees, clear and consistent employment policies can help. Employment laws may also require certain published policies. Employers typically gather employment policies in an employee handbook, like the example handbook at the end of this guide. Employment is one of the most highly regulated activities. Violations of employment laws, rules, and regulations can lead to substantial penalties and liabilities. Retain an executive director, administrative assistant, bookkeeper, or other employee with human-resources knowledge and experience to help with compliance.

Exemption

The exemption or non-exemption of each employment position in your charitable organization is a key example of important employee laws and regulations. Federal and state labor laws classify positions as either exempt or nonexempt from minimum wage and overtime pay rules. Paying time and a half for more than forty hours of employment per week, and ensuring that the total hours and compensation meet the minimum wage, depends on whether the position is exempt or nonexempt from those requirements. Generally, exempt positions, where overtime is no concern, are salaried rather than hourly positions supervising two or more other positions. But the details are more complex. Ensure that your organization properly classifies each position and then follows the applicable overtime and minimum-wage rules.

Payroll

Payroll is another area fraught with regulatory complexity. Charitable organizations, like other employers, must withhold federal income and FICA taxes, state income taxes, and local income taxes where they apply, to pay those taxes over to the government taxing authorities on a quarterly basis. Charitable organizations, like other employers, must also pay the employer’s portion of federal FICA (Social Security and Medicaid) taxes. These obligations generally warrant retaining a skilled bookkeeper to use payroll and accounting software or a payroll service to handle that function. State laws also closely regulate the timing of payroll payments, withholding of employer charges against payroll, garnishments of pay, and child-support withholding orders against pay, among other things. Again, your organization should employ a skilled bookkeeper or retain a payroll service to ensure compliance with these obligations.

Supervision

Employees in any responsible workplace require supervision and direction. Just because an employee works for a charitable organization does not mean that the employee has a cushy job free from responsibility. The opposite may well be true, that some charitable organizations require especially dedicated, efficient, hardworking, resourceful, and effective employees, who accept and respond to close supervision. Sound supervision can increase employee responsibility, accountability, and effectiveness. It can also increase employee development and retention. Your organization’s executive director should have strong supervision skills if your organization has multiple employees on whom it depends. Help your organization’s executive director develop strong supervision skills and employ sound supervision practices, if you find that your organization’s employees are less accountable and effective than they should be.

Evaluation

Your organization’s board of directors evaluates the organization’s executive director, while the executive director evaluates subordinate employees. Annual board evaluation of the executive director is an important practice, not just to hold the executive director accountable to goals but also to recognize, reward, inspire, and guide the executive director. You may regard your organization’s executive director as profoundly dedicated, skilled, and effective. Evaluate the executive director anyway. They deserve it, and your organization’s board may wish to recognize and reward the executive director accordingly. Evaluation tools for all employees should use objective performance measures as much as possible. Measurables can help reduce vague or ambiguous evaluations that frustrate employees and can reduce morale and loyalty. Record evaluations in writing, share them with the evaluated employee, give the employee the opportunity to respond in writing, and save the evaluation and response in the employee’s personnel file.

Records

State employment laws may require that your organization maintain a personnel file on each employee, to which the employee has access for inspection and copies. Place the employee’s job description, job application, resume, retention letter, and evaluations in the employee’s personnel file. Maintain the file as confidential except for the employee and the executive director or human-resources manager. Sharing negative employment information with anyone not having a legitimate need, right, and permission to know may lead to defamation liability. Do not include gossip, rumor, speculation, or other informal and unreliable writings in a personnel file. Personnel files can be the center of disputes in employment termination and litigation.

Recognition

Your organization can benefit by recognizing employee effectiveness and service. Your organization’s executive director should regularly do so informally. But your organization’s board may wish, with the executive director’s support, to formally recognize all employees on birthdays or annually, with notes of appreciation and modest or token appreciation gifts, and certain employees, such as retiring employees or exemplary employees, on special occasions. Charitable organizations, more so than other organizations, can depend and rely heavily on high employee morale, loyalty, and engagement. Foster those employee attributes.

Termination

Terminating employees is a sensitive subject, for all employers but especially for charitable organizations. All employers face liability risks on employee terminations, alleging promises of job security, unpaid wages, bonuses, or benefits, and violation of anti-discrimination laws relating to age, sex, race, religion, disability, and other protected characteristics. But charitable organizations also face special reputational risks potentially affecting donor or volunteer support. A former employee angered by job termination can poison the well for donors and volunteers, damaging or even bringing down the organization. To reduce those risks, institute a corrective-action plan over the span of ninety days, before termination. Tell the employee in writing how to improve, train and coach the employee, and reevaluate the employee and repeat the process, before terminating, unless the employee committed gross misconduct warranting immediate termination. Expect to pay unemployment to terminated employees unless frank misconduct was the termination ground.

Key Points

• Your organization should require employees to pursue its purpose.

• Ensure your charity’s funds and purpose justify employee costs.

• Employ employees on an at-will basis expressed clearly in writing.

• Recruit employment candidates broadly for a stronger field.

• Post a job description with qualifications and compensation range.

• Evaluate and interview candidates fairly and thoroughly. 

• Retain employees with a letter naming compensation and terms.

• Develop employment policies in a handbook shared with employees. 

• Classify employees correctly as exempt or non-exempt. 

• Use skilled payroll services to ensure tax and regulatory compliance. 

• Supervise and evaluate employees to increase productivity and morale. 

• Keep a confidential personnel file for employment records.

• Recognize employees to sustain and improve morale. 

• Terminate employees after corrective action unless for misconduct.

Read Chapter 14.