More About Nonprofits and Labor Laws

In A Reminder to Nonprofit Employers, we discussed common fallacies that many nonprofit directors and staff believe; these mistaken ideas can and do cause their organizations (and them!) a boatload of trouble.

First, many people associated with 501(c)(3)s focus only on federal tax-exemption laws and compliance with those complex rules and regulations. They are either unaware of – or ignore – other federal and state laws that can and often do apply across-the-board to the nonprofit as well as the for-profit sector. For instance, most labor laws that apply to businesses apply to nonprofits, too.

Second, because charities enjoy favored status under the law and do important work in their communities, directors and staff are sometimes lulled into thinking that the rules – including labor laws – can be relaxed from time to time due to exigent circumstances. While there are some exceptions for the nonprofit community, the safe course of action is to assume that all general worker laws apply.

   Labor Laws Require Timely Wages Payment

In a recent question-and-answer column in the Washington Post, business adviser Karla L. Miller passes on a question posed by an employee of a nonprofit that serves limited-income families. This worker – who is leaving shortly to study for a master’s degree – wants to know if she should blow the whistle on the organization that seems to have ongoing cash-flow problems. Workers don’t always get paid on time.

Specifically, the nonprofit issues paper checks to all employees every two weeks, but the only way these workers can get their money is to cash the check at the bank used by the organization. Apparently, on a fairly frequent basis, there isn’t enough money in the group’s bank account to cover all of the employees’ checks. Those who delay may have to wait up to a week to get paid. This would-be whistleblower mentions that some of the workers are foreign-born and are unaware that workers in the U.S. expect to get paid on a regular basis.
Ms. Miller’s response is clear and unequivocal: This is both morally wrong and illegal, notwithstanding that nonprofits – understandably – have fluctuations in cash flow, the cause of which is often outside their control.

Under the federal Fair Labor Standards Act, wages must be paid on a regular schedule. State labor agencies generally have rules and regulations about what the term “regular payday” means.  See, for example, California’s Department of Industrial Relations website:

In California, wages, with some exceptions … , must be paid at least twice during each calendar month on the days designated in advance as regular paydays. The employer must establish a regular payday and is required to post a notice that shows the day, time and location of payment.

This rule applies to all employers – for-profit and nonprofit.

Fudging this rule – for instance, in the way this nonprofit gives employees checks that may or may not be backed by sufficient funds – doesn’t meet this payment standard. A check that can’t be covered right away is a “worthless piece of paper.”  

The responsibility for regular payment of workers is not a staff issue. A nonprofit’s board of directors has certain fiduciary duties, one of which is to make sure that the organization is “managing funds properly and not committing labor violations.”

Another area of liability in the particular case addressed by Ms. Miller is a matter of banking law; it’s illegal to intentionally issue bad checks.

   Whistleblower Protections

An important matter raised in connection with this question-and-answer posed to Ms. Miller for her column is reporting violations and getting the problem fixed.

The employee, herself, raised the matter of blowing the whistle on this nonprofit’s illegal practice. She had a gut feeling that her situation – that is, about to leave for graduate study – made her a perfect candidate to alert authorities so that her vulnerable coworkers can be protected in the future.

Ms. Miller concurred; it’s certainly easier for a departing employee to raise the alarm than for current employees to complain.

In Whistleblower Policy for Nonprofits, we explained that the law grants substantial protections to any worker who asserts rights or reports wrongdoing. There are also laws against an employer retaliating against a complaining employee.

The federal law is the Sarbanes-Oxley Act. In California, workers have rights as well under the state’s whistleblower statute. Even before significant amendments effective January 1, 2014, California Labor Code section 1102.5 included protections broader than in the federal statute.

Nonprofits – like all employers – should have formal, whistleblower-protection policies in place that explain the legal protections afforded to workers as well as the procedures for reporting problems.


On a related issue, if nonprofits are having trouble paying their workers, they are likely also behind on making payroll tax deposits – or thinking about delaying those payments for a while. Managing cash-flow problems in this way is “excruciatingly common” but extremely dangerous, as we explained in Payroll Taxes: The One Payment a Nonprofit Should NEVER Skip. The IRS will impose huge penalties that often balloon out-of-control to the point that the organization can never recover.

Gender Equality (and Nonprofits): California's Bold New Law

We’ve already cautioned nonprofits to be on the alert for new laws coming on the books, from time to time, around the nation.
The special status of 501(c)(3)s “lulls many boards and staff into a false sense of believing the rules that apply to regular corporations and regular workplaces don’t apply to them.”

California’s “Avalanche” of New Laws

The California Legislature recently ended a marathon legislative session with a slew of important, high-profile bills, including the landmark right-to-die measure as well as comprehensive regulation of the medical marijuana industry.
Among the new laws is one of importance to all employers in the Golden State: the California Fair Pay Act,  SB 358. Passed unanimously (39-0) by the California Senate at the end of August, it was signed by Governor Jerry Brown on October 6, 2015, and  takes effect on January 1, 2016.  It is perhaps the strongest equal pay measure in the United States.
California already had a fair pay law. The new law amends existing California Labor Code section 1197.5 with key changes, including: (1) giving “employees more leeway to challenge pay discrepancies”; and (2) allowing employees to discover information, and talk about, the pay of their coworkers.

Gender Pay Inequity

Legislators made an official finding that the wage gap between men and women in California remains significant and harmful – about 84 cents for women for every dollar earned by men. Minority women earn far less than male counterparts. While this disparity is smaller than in other parts of the nation, the lawmakers decided to act.
According to national studies and surveys, wage inequality is even worse in the nonprofit sector.
SB 358’s legislative sponsor, State Sen. Hannah-Beth Jackson (D-Santa Barbara), indicated that it was recent national media attention (including Patricia Arquette’s acceptance speech at the Oscars earlier this year highlighting pay disparity in the entertainment industry) that spurred movement on this intractable problem.
“California has prohibited gender-based wage discrimination since 1949,” declares the preamble to this important legislation:

Section 1197.5 of the Labor Code was enacted to redress the segregation of women into historically undervalued occupations, but it has evolved over the last four decades so that it is now virtually identical to the federal Equal Pay Act of 1963 (29 U.S.C. Sec. 206(d)). However, the state provisions are rarely utilized because the current statutory language makes it difficult to establish a successful claim.

Legislators recognized, too, that “[p]ay secrecy also contributes to the gender wage gap, because women cannot challenge wage discrimination that they do not know exists.”

Although California law prohibits employers from banning wage disclosures and retaliating against employees for engaging in this activity, in practice many employees are unaware of these protections and others are afraid to exercise these rights due to potential retaliation.

Governor Brown hailed this legislation, “which will give employees more grounds for challenging perceived discrimination, ‘a very important milestone.’”  Gender pay advocates say “… the legislation [is] a model for other states and Congress, where similar efforts have stalled….”

What’s New In This Law?

Both of the key changes to the Labor Code will help achieve the stated goal of eliminating pay inequity.

Jobs Compared

“Courts have interpreted current law to mean that male and female workers must hold exactly the same jobs to require equal pay,” explains Sen. Jackson. “Now they’re going to have to value the work equally.” When the new measure takes effect, “[b]osses cannot pay employees less than those of the opposite sex for ‘substantially similar work,’ even if their titles are different or they work at different sites.”
In connection with available employer defenses, the new law

revise[s] and recast[s] the exceptions to require the employer to affirmatively demonstrate that a wage differential is based upon one or more specified factors, including a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or a bona fide factor other than sex, as specified. The bill would also require the employer to demonstrate that each factor relied upon is applied reasonably, and that the one or more factors relied upon account for the entire differential.


Wage Discussions and Retaliation

Under the new legislation, employees may not be prohibited from asking about, or discussing, wages of co-workers, and employees will have broader rights to assert improper retaliation. 


Employment law experts recommend that, ahead of next year’s effective date, California employers prepare for this tougher pay-equity law. These steps include:

  • learning about the new requirements;
  • reviewing records to identify instances of “potential unequal pay for similar work – even if at different physical locations;”
  • evaluating possible defenses based the new standard; and
  • revising existing policies and publications.