You Audit the Books Every Year. You’ve Never Audited the Risk Behind So Many Nonprofit Claims.

Each year, your board approves the financial audit without question. It’s already in the budget, the finance committee expects it, and a $1 million organization will spend $5,000 to $15,000 on it without hesitation.

Meanwhile, one of the most significant sources of nonprofit management liability often gets far less scrutiny. Employment practices claims are consistently among the most common and costly claims nonprofits face, yet many organizations have never subjected their people infrastructure to anything resembling an audit.

The numbers.

I spent nearly a decade as a litigator before I started building people infrastructure instead of fighting over its absence or neglect. Allow me to 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 ten years.

Employment practices claims, including wrongful termination, discrimination, harassment, retaliation, and wage-and-hour disputes, consistently rank among the leading sources of nonprofit management liability claims. The Nonprofit Risk Management Center describes employment claims as both common and costly, a finding echoed by major nonprofit insurers.

“Routine” employment disputes can become expensive. Employers often spend tens of thousands of dollars defending discrimination claims before any judgment or settlement is reached, and litigation costs can quickly exceed the value of the underlying dispute. For an organization running on grant cycles, that can cost an entire 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 missing HR infrastructure by name 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 includes “adequate timekeeping and proper written documentation.”

The wider 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. Employment disputes are not confined to large companies. 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 are nonprofits especially vulnerable? The answer is structural. From counsel’s chair, I saw three forces show up again and again. One of them, in fact, starts with the funder.

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 especially striking 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 often looks like it was funded by the ratio police rather than the letter writers. Employment claims are one predictable consequence of long-term underinvestment in people infrastructure.

2. Mission attachment can make disputes hotter.

Employment claims are driven by a complex web of factors. They’re about people.

People take nonprofit jobs, often at below-market pay, because they believe in the work. That’s the sector’s superpower. It can also raise the emotional stakes when something goes wrong. A termination, a denied accommodation, or a promotion that went sideways may be experienced as a personal betrayal as much as a business decision.

Betrayed people call lawyers. And the “we’re family here” culture that made the workplace warm and gave it grit is often the same culture that skipped the documentation, applied discipline inconsistently, and never wrote down a rationale for the last three personnel decisions.

From counsel’s chair, those facts mattered. A record full of positive reviews, undocumented concerns, shifting explanations, or inconsistent treatment can make an otherwise defensible employment decision much harder to defend.

Interpersonal trust is a noble instinct. It gets dangerous when it becomes load-bearing.

3. Volunteer boards with professional exposure.

Nonprofit boards are staffed by generous volunteers who are often asked to oversee employment matters without deep employment or HR expertise. A for-profit of the same size may have a professional management layer that absorbs more of those decisions.

Volunteer board governance can complicate employment decisions and create additional management liability exposure, especially when a board operates at one of two extremes: board members become directly involved in personnel matters, or they exercise too little oversight to catch problems before they grow.

What this means for your next board meeting.

This is not an argument against the financial audit. You absolutely need it to be taken seriously in the sector, and funders often require it.

It is an argument for bringing some of that same discipline to people infrastructure before a dispute forces the review for you.

I run a fixed-fee People Infrastructure Audit for exactly this reason. It applies that discipline to classification, internal policies, compensation, performance management, 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.

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