Most people associate HR with hiring and onboarding, timecards and vacation approvals, employee training and discipline, and other people-focused tasks. However, its most important role might be one that people rarely notice, which is the process of maintaining legal compliance across the organization.
The layers of local, state, and federal laws and enforcement strategies can make this task surprisingly complicated, although it is rarely top of mind for employees outside of the HR department. The widespread adoption of hybrid and remote work has only made this more challenging, as HR teams might have to ensure compliance with different state laws or even the labor laws in other countries.
The reason HR spends so much time ensuring compliance is that the costs and effects of being out of compliance can be significant, including financial penalties, shocks to organizational morale, and a loss of reputation and credibility. For nonprofits working in particular sectors, this can directly impact their ability to carry out their mission-driven work, as violations can lead to a loss of funding or accreditation. Because nonprofits sometimes struggle to fully resource their programs, they sometimes fail to sufficiently vet every process, creating greater potential for damaging violations.
Costs of being out of compliance
The costs of compliance violations can range significantly depending on the violation type, the regulatory body, and the severity. While many regulatory frameworks will build in processes which warn organizations when they are out of compliance, other regulations are strict and their penalties are incurred immediately. Here are some of the most common types:
Fines and penalties: These are financial payments to the governing body, or, in the case of employee-related violation, any wronged employees. The amount is often laid out in legislation, but in some cases, may be determined by a judge or arbitrator. - Lawsuits: In extreme cases of negligence or noncompliance, employees or organizations can sue the offender. These lawsuits can be complex and costly, particularly if they involve multiple employees or third-party organizations.
- Reputational damage: This can be more complicated as it might involve public awareness campaigns like a boycott or social media pressure, or a lowered reputation within an industry or among potential employees. This can be especially damaging for nonprofits which depend on public funding.
- Legal repercussions: In some extreme cases, noncompliance can result in criminal proceedings and even incarceration, especially in cases of repeated negligence in the face of warnings. These are generally preempted by warnings and fines.
Common compliance violations at nonprofits
Here are some of the most common compliance issues that nonprofits face:
Lack of clarity about responsibilities
One of the advantages that nonprofits have is the personal investment of their team members, from the board down to the volunteers. For many, this means that team members are willing to “go the extra mile” to assist with tasks outside of their usual responsibilities or their typical work schedule. However, an organization which depends on this kind of informal overwork could be in violation of labor laws, unpaid wages, missed breaks, and other labor regulations.
Lack of financial tracking and accountability
Nonprofits depend on fundraising, grants, and other inconsistent or irregular forms of funding, which can make close financial tracking and accountability difficult. Some organizations fail to adequately plan or track the inflow and outflow of cash and other resources, which can put them in line for potential compliance violations around the accuracy of their financial statements.
Failure to keep up with regulatory shifts
During periods of high financial or organizational stress, like the one many nonprofits are facing now, the potential for burnout can increase, along with the chance that HR professionals will miss a crucial change to the regulatory landscape. What’s more, changes in the status quo might be difficult for team members to understand, especially if they are in conflict with the way the organization functioned before. This can increase the risk of unintentional compliance violations.
New compliance violations for nonprofits
The breakneck pace of technological change and the radical redefinition of the modern workplace have created new risk factors for nonprofits:
Changes in the definition of “employment”
Modern organizations rely more on freelance and contract employees, and this includes nonprofits. Although this can be a boon to organizational flexibility and financial stability, it can also create issues if a contractor is found to be working in a way that falls outside of the work typically done by contractors. Many states have specific guidelines about what sort of work can be “contracted out”, which can be difficult to fit with the expectations of freelancers and the needs of your organization.
Rushed adoption
Some organizations move into a new process too quickly or adopt a technology carelessly without considering the regulatory risks. Tools like LLMs or other automation workflows can help speed up certain tasks, but they can also be difficult to keep in compliance, particularly if they transact or learn from sensitive data. An automated tool that puts your organization out of compliance can’t be held responsible itself, so the responsibility falls on you to implement it carefully.
Remote work challenges
The popularity of remote work continues to grow, and it can offer nonprofits some considerable advantages, including hiring from a much broader pool of potential employees. However, hiring out of state or out of country can also create major compliance risks, as you will be subject to the labor laws in that country, down to seemingly small details like mealtimes, breaks, and vacation. Although many HR tools and platforms offer tools to help manage this, it can still be a major challenge for even a well-resourced HR department to stay up-to-date on these kinds of regulations.
About Us
For more than 40 years, 501(c) Services has been a leader in offering solutions for unemployment costs, claims management, and HR support to nonprofit organizations. Two of our most popular programs are the 501(c) Agencies Trust and 501(c) HR Services. We understand the importance of compliance and accuracy and are committed to providing our clients with customized plans that fit their needs.
Contact us today to see if your organization could benefit from our services.
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The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.
(Images by Pressfoto and Fabrikasimf)
