Nonprofit HR: The Rules and Practices a Small Nonprofit Needs

Most nonprofit HR advice is about culture. The decisions that cause real trouble for a small nonprofit are legal and specific: whether the wage-and-hour law covers your staff, who is allowed to volunteer, what changes at 15, 20 and 50 employees, how the Form 990 asks about your policies, and how a 501(c)(3) handles unemployment insurance differently from a business. This guide covers those, from the federal agencies’ own pages, for an organization hiring its first one to twenty people. Pay levels are covered separately in nonprofit salaries.

The nonprofit workforce, briefly

The Bureau of Labor Statistics found that in 2022 “over 300,000 nonprofit establishments accounted for 12.8 million jobs, or 9.9 percent of all private-sector jobs”, counting 501(c)(3) organizations only. 66.3% of those jobs were in health care and social assistance, 16.4% in educational services and 2.6% in arts, entertainment and recreation. Nonprofit employment fell 4.5% when the pandemic began and in 2022 was still 1.4% below its 2019 level. The share varies widely by place: nonprofits provided 25% of all jobs in Washington, D.C., 20% in Vermont and 18% in Massachusetts. BLS plans its next update of these figures for 2029.

Those totals are dominated by health care. Many nonprofits employ only a handful of people, which is why the employee-count thresholds below matter so much: a small organization can go years without crossing 15 employees, and then take on a new set of federal duties with one hire.

Does wage-and-hour law apply to a nonprofit?

Usually, yes, but in a narrower way than for a business. The Fair Labor Standards Act covers employers in two ways. Enterprise coverage, which applies to businesses with at least $500,000 in annual sales, works differently for nonprofits: the Department of Labor says “enterprise coverage applies only to the activities performed for a business purpose”, so donations, grants and dues used for charitable work do not count toward the threshold. A charity’s shop or fee-paid service can be covered while the rest of its work is not.

Individual coverage still applies to the employees themselves, whatever the organization’s income. Fact Sheet 14A gives examples such as making or receiving interstate phone calls and shipping materials to another state, and says the Department will not assert coverage only for isolated occasions taking an insubstantial amount of time. So an office employee who emails, phones or orders across state lines is likely covered: plan on paying minimum wage and overtime unless a staff member is exempt.

Which staff can be exempt from overtime

Executive, administrative and professional employees can be exempt if they meet the duties tests and are paid a salary of at least $684 per week, equivalent to $35,568 a year. A 2024 rule that would have raised the threshold was vacated by a court, and in May 2026 the Department of Labor removed that language from the regulations and restored the earlier text. Nondiscretionary bonuses can count for up to 10 percent of the salary level, according to Fact Sheet 17A. A coordinator or assistant paid below the threshold is non-exempt and entitled to overtime, whatever the job title says. State rules can be stricter; check your state’s salary threshold too.

Volunteers, staff who volunteer, and interns

Nonprofits are allowed to use volunteers; for-profit businesses are not. But Fact Sheet 14A sets three limits that catch small organizations:

• Staff cannot volunteer for their own job. “Paid employees of a non-profit organization cannot volunteer to provide the same type of services” they are paid for. A program assistant who stays late to run the same program is working, not volunteering, and must be paid.
• Volunteers cannot work in commercial activities. They may not volunteer in commercial activities run by a nonprofit, such as a gift shop.
• Volunteers cannot displace employees. Replacing a paid role with volunteers is a warning sign.

Unpaid internships at nonprofits are treated more generously than at businesses. The Department of Labor’s internship fact sheet applies a “primary beneficiary” test for businesses, and notes that unpaid internships for public sector and nonprofit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible. Recruiting and keeping volunteers is covered in how to recruit volunteers, and when to use contractors instead in can a nonprofit hire independent contractors.

What changes as you grow

Federal employment laws switch on at different headcounts. Counting rules differ by law, so treat these as the points at which to check, not exact triggers:

The Equal Employment Opportunity Commission says a private employer is covered by the laws it enforces if it has 15 or more employees, or 20 for age discrimination. FMLA applies to employers with 50 or more employees in 20 or more workweeks, and an employee also needs 12 months and 1,250 hours of service. Religious organizations have a specific exemption under section 702 of Title VII that lets them prefer individuals of a particular religion, but they remain covered by the rules on race, sex, national origin, age, disability and genetic information. The EEOC notes that courts have applied the exemption not only to churches but also to religious schools, hospitals, and charities, and that a separate ministerial exception bars discrimination claims by employees who perform vital religious duties. State laws often apply at lower headcounts; state minimum wages are listed on the Department of Labor’s state table, and some states require paid sick leave, such as California’s 40 hours or five days a year.

The HR questions on your Form 990

The Form 990 asks about HR governance in public. Part VI asks whether the organization has a written conflict of interest policy (line 12), a whistleblower policy (line 13) and a document retention policy (line 14), and how it sets the pay of its top executive (line 15). The IRS instructions explain that a whistleblower policy encourages staff and volunteers to come forward, and that federal law imposes criminal liability on tax-exempt organizations for retaliating against whistleblowers and for destroying records. None of these policies is legally required by the 990, but a “no” is visible to every funder who reads it. Our nonprofit policies template and conflict of interest policy cover the wording.

Executive pay gets extra scrutiny: anyone listed with more than $150,000 in reportable compensation triggers Schedule J. The board can protect itself by following the IRS rebuttable presumption process, under which pay approved properly is presumed to be reasonable; how to do that is in nonprofit executive compensation, and where to find comparable data in nonprofit salary surveys.

Unemployment insurance: the 501(c)(3) choice

A 501(c)(3) does not pay federal unemployment tax. The Federal Unemployment Tax Act excludes service in the employ of a religious, charitable, educational, or other organization described in section 501(c)(3). State unemployment insurance still applies, but federal law lets a 501(c)(3) choose to reimburse the state “in lieu of contributions”: instead of paying a tax rate on wages, it pays back the actual benefits its former employees claim.

California’s Employment Development Department describes reimbursable employers as charged for the exact amount of UI benefits paid to their former employees, and requires nonprofits choosing it to stay with it for five full calendar years. Washington’s agency says plainly that reimbursable employers do not pay unemployment taxes, and may require a bond. For a stable organization that rarely lays anyone off, reimbursing can cost far less; for one that depends on short grants, a single layoff can cost more than years of contributions. Decide deliberately, and set money aside if you reimburse.

A recruiting advantage: Public Service Loan Forgiveness

Employees of 501(c)(3) organizations can qualify for Public Service Loan Forgiveness on federal student loans. Federal Student Aid lists “not-for-profit organizations that are tax-exempt under Section 501(c)(3)” as qualifying employers, defines full-time as at least 30 hours a week on average, and stresses that eligibility is about who you work for, not the specific job. Mention it in job postings and certify employees’ forms promptly; it is a real benefit that costs the organization nothing. More on nonprofit recruiting is in nonprofit jobs.

Where HR goes wrong

The EEOC received 88,201 charges of discrimination in fiscal 2025, and retaliation was alleged in 54,350 of them, the most common basis by far. Charges can cite several bases, so these overlap. The lesson for a small nonprofit: how you respond after an employee complains matters as much as the original problem. Document decisions, apply policies consistently, and never act against someone because they raised a concern. Ask your insurer whether your directors and officers insurance covers employment claims.

The basics to have in place

1. Classify every role. Employee or contractor; exempt or non-exempt, using the duties tests and the $684 weekly salary.
2. Written job descriptions that match the work, and an org chart showing who reports to whom.
3. An employee handbook covering pay, hours, leave, conduct, complaints and the whistleblower policy, reviewed against your state’s law.
4. Payroll that handles it all: withholding, state unemployment, and the reimbursing method if you choose it. Options are compared in nonprofit payroll software.
5. Retirement and benefits. Nonprofits can offer a 403(b); see 403(b) vs 401(k).
6. Volunteer rules that keep staff from volunteering for their own work.
7. Board oversight of executive pay and HR policies; the board guide covers its role, and succession planning covers the executive transition.

This is reference information, not legal or tax advice. Rules vary by state and change over time. For a decision that carries real consequences, check the current text at irs.gov or your state registry, and talk to a nonprofit attorney or CPA.