You Audit the Books Every Year. You’ve Never Audited the Thing Nonprofits Get Sued Over.
Every year, like clockwork, your board approves the financial audit. Nobody debates it. It’s in the budget, the finance committee expects it, and a $1M organization will spend $5,000 to $15,000 on it without anyone flinching. It’s simply what responsible organizations do.
Here’s the uncomfortable part: that audit examines a risk that rarely produces a lawsuit. The risk that most often produces serious management liability claims—the one insurers consistently identify as the leading source of nonprofit losses—has never been audited at all.
The numbers
I spent nearly a decade as a litigator before I started building people infrastructure instead of fighting over its absence or neglect. So let me show you what the data says, and then tell you what I saw from counsel’s chair.
Nonprofits experience management liability claims at higher rates than similarly sized for-profit organizations. One widely cited—albeit older—Towers Watson (now Willis Towers Watson) survey found about 63% of nonprofits reported at least one D&O claim over a ten-year period.
Those claims are overwhelmingly not just about money. They’re about people. Employment practices—wrongful termination, discrimination, harassment, retaliation, and wage-and-hour disputes—consistently rank as the leading source of nonprofit management liability claims. The Nonprofit Risk Management Center describes employment claims as both the most common and among the most costly claims nonprofits face, a finding echoed by major nonprofit insurers.
Even routine employment disputes can become expensive. Employers often spend tens of thousands of dollars defending discrimination claims before any judgment or settlement, and litigation costs can quickly exceed the value of the underlying dispute. For an organization running on grant cycles, that is not a line item. That’s a program.
Gallagher’s 2025 Nonprofit D&O Management Liability Report states that employment practices claims “continue to be a lead loss in the nonprofit sector,” and that carriers are seeing “a high frequency of wrongful termination claims for organizations that lack a strong HR infrastructure with dedicated resources.” The insurance industry has identified, by name, missing HR infrastructure as a significant driver of nonprofit claim frequency. The same report warns that federal funding disruptions are forcing layoffs across the sector, which it expects to push employment claims higher still, and notes that wage-and-hour claims are often not covered by insurance at all—its prescription is “adequate timekeeping and proper written documentation.”
The broader enforcement climate points in the same direction: the EEOC received 88,531 discrimination charges in fiscal year 2024 and recovered $700 million for workers, with retaliation cited in nearly half of all charges. And employment disputes are not a big-company problem—the EEOC has historically said that about 50% of charges are filed against small and midsized employers, with the most common target being organizations with 15 to 100 employees.
So why is your nonprofit a prime target? The answer is structural, not personal. I can tell you this one firsthand. The pattern isn’t “bad employers.” The pattern involves three structural forces, none of which is the nonprofit’s fault. One of them, in fact, is the funder’s.
1. The starvation cycle: You were rewarded for skipping this
In 2009, the Stanford Social Innovation Review named something every ED already knew in their bones: the nonprofit starvation cycle. Funders hold unrealistic expectations about the cost of running an organization. Nonprofits, competing for those funders, suppress and underreport overhead. The reported numbers then confirm the funders’ expectations, and the ratchet tightens. The researchers found organizations running on broken systems, untrained staff, and—in one case—office furniture so far gone the movers refused to touch it.
HR infrastructure is overhead. Handbooks, comp structures, classification reviews, personnel files, manager training—every dollar spent there is a dollar off the program-expense ratio that watchdogs score you on. The problem got bad enough that in 2013, the CEOs of GuideStar, Charity Navigator, and BBB Wise Giving Alliance—the watchdogs themselves—published an open letter to the donors of America declaring the overhead ratio a poor measure of nonprofit performance and naming the “Overhead Myth” as a problem they helped create. Overhead, they wrote, includes “important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems.”
The letter was right. It was also thirteen years ago, and the sector’s people infrastructure still looks like it was funded by the ratio police, not the letter writers. Employment claims are one of the predictable consequences of long-term underinvestment in people infrastructure.
2. Mission attachment makes disputes hotter, not cooler
People take nonprofit jobs—often at below-market pay—because they believe in the work. That’s the sector’s superpower, and it’s also an accelerant. When something goes wrong for a mission-driven employee—a termination, a denied accommodation, a promotion that went sideways—it isn’t processed as a business decision. It’s processed as betrayal. By the organization, by the mission, sometimes by a supervisor who was also a friend.
Betrayed people call lawyers. And the “we’re family here” culture that made the workplace warm is the same culture that skipped the documentation, applied discipline inconsistently, and never wrote down why the last three decisions were made. From counsel’s chair, I can tell you that is PRECISELY the fact pattern that loses cases. Trust is a noble instinct. It is also dangerous.
3. Volunteer boards, professional exposure
Nonprofit boards are staffed by generous volunteers who, with respect, are usually amateurs (or worse) at employment oversight. A for-profit of the same size has a professional management layer that absorbs personnel decisions. That governance structure can complicate employment decisions and create additional management liability exposure when board members become directly involved in personnel matters.
What this means for your next board meeting
None of this is an argument against the financial audit. Buy the financial audit. It’s the discipline working exactly as intended: an outside expert, on a schedule, examining a category of risk before it becomes a crisis. And it’s often required by funders.
It’s an argument for noticing that your organization already believes in audits—it just aims that belief at the risk that produces management letters instead of the one that produces the majority of your actual claim exposure. The infrastructure nobody funded is still the infrastructure on which everything grows. The only question is whether it gets examined on your schedule or a plaintiff lawyer’s.
So bring that same audit discipline to people infrastructure before someone else does.
I run a fixed-fee People Infrastructure Audit for exactly this reason—the same discipline as your financial audit, focused on classification, wage-and-hour, policies, comp, and personnel files. If your organization has 5–50 staff and you’ve been meaning to look under this particular hood, see if we’re a fit. This is the next step if you want that same audit mindset applied to people risk.
Sources
ADP — Understanding the Benefits of Employment Practices Liability Insurance (EPLI)
Gallagher — 2025 Nonprofit D&O Management Liability Report
Gregory & Howard, The Nonprofit Starvation Cycle, Stanford Social Innovation Review (2009)
Hiscox — Employee Charge Trends Across the United States
National Council of Nonprofits — Independent Audits
Nonprofit Risk Management Center — Employment Practices Liability resources
Risk Strategies — 2025 Nonprofit Insurance Market Outlook
The Hartford — Employment Practices Liability resources
The Overhead Myth letter (GuideStar, Charity Navigator & BBB Wise Giving Alliance, 2013)
Towers Watson Directors & Officers Liability Survey (via The D&O Diary)
U.S. Equal Employment Opportunity Commission — FY2024 Enforcement and Litigation Statistics
WTW — Employment Practices Liability: 2024 Year in Review
