On January 10, 2024, the U.S. Department of Labor published a final rule, effective March 11, 2024, revising the Department’s guidance on analyzing who is an employee or independent contractor under the Fair Labor Standards Act (FLSA). This final rule rescinds the Independent Contractor Status Under the Fair Labor Standards Act rule (2021 IC Rule), which was published on January 7, 2021, and replaces it with an analysis for determining employee or independent contractor status that is more consistent with the FLSA as interpreted by longstanding judicial precedent.

The misclassification of employees as independent contractors may deny workers minimum wage, overtime pay, and other protections. Misclassification is a serious issue that denies employees’ rights and protections under federal labor laws and hurts the economy. This final rule will reduce the risk of employees being misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.

Under the new rule, employers would use a totality-of-the-circumstances analysis, in which none of the factors carry greater weight.

The new test includes six factors:

1. The degree to which the employer controls how the work is done.
2. The worker’s opportunity for profit or loss.
3. The amount of skill and initiative required for the work.
4. The degree of permanence of the working relationship.
5. The worker’s investment in equipment or materials required for the task.
6. The extent to which the service rendered is an integral part of the employer’s business.

The Small Entity Compliance Guide will assist small businesses in complying with the final rule. This guide includes an overview of the rule, the six factors of the economic reality test, common questions, and additional resources.

Source: https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking.

The Forde Firm offers a best practice advisory package to discuss classifying employees as well as a payroll review tool to help ensure that your payroll and contractor classifications and documentation are operating correctly.

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Most prospective employees probably won’t accept a job based on the availability of an accountable plan. But offering one can help you retain valuable workers who submit frequent reimbursement requests.

What’s covered?

The IRS stipulates that all expenses covered in an accountable plan have a business connection and be “reasonable.” Additionally, employers can’t reimburse employees more than what they paid for any business expense. And employees must account to you for their expenses and, if an expense allowance was provided, return any excess allowance within a reasonable time period.

Examples of expenses that might qualify for a tax-free reimbursement through an accountable plan include tools and equipment, home office supplies, dues and subscriptions. Certain meal, travel and transportation expenses also qualify.

Informal documentation

How do you establish an accountable plan? It isn’t required to be in writing. But formally documenting your plan makes it easier for your nonprofit to prove its validity to the IRS if it’s challenged.

When administering your plan, your nonprofit is responsible for identifying the reimbursement or expense payment and keeping these amounts separate from other amounts, such as wages. The accountable plan must reimburse expenses in addition to an employee’s regular compensation. No matter how informal your nonprofit, you can’t substitute tax-free reimbursements for compensation that employees otherwise would have received.

Keep good records

The IRS also requires employers with accountable plans to keep good records for expenses that are reimbursed. This includes, to the extent applicable, documentation of:

• The amount of the expense and the date,
• Place of the travel, meal or transportation,
• Business purpose of the expense, and
• Business relationship of the people fed.

You also should require employees to submit receipts for any expenses of $75 or more and for all lodging unless your nonprofit uses a per diem plan.

Simple process

Because plans don’t have to be formal, they’re relatively simple to establish. But contact us if you need help setting up an accountable plan.

The post Give Your Staffers A Break With An Accountable Plan appeared first on The Forde Firm.

According to the Nonprofit Times, only 41% of not-for-profits have whistleblower policies. Perhaps nonprofit leaders believe their organizations are too small or collegial to worry about illicit activities — let alone people reporting them. Or perhaps a whistleblower policy seems like one more thing that requires time and money they don’t have. This is a mistake. Here’s why.

Why you should bother

No federal law specifically requires nonprofits to protect people who risk their jobs to report illegal or unethical practices. Instead, various federal, state and local laws contain whistleblower protection provisions, including the Sarbanes-Oxley Act and The Dodd-Frank Wall Street Reform and Consumer Protection Act. Also, nonprofits are asked on IRS Form 990 to report whether they’ve adopted a whistleblower policy.

Adopting a whistleblower policy increases the odds that you’ll learn about activities before the media, law enforcement or regulators do. Encouraging stakeholders to speak up also sends a message about your commitment to good governance and ethical behavior.

What it should say

Your policy should be tailored to your organization’s unique circumstances, but most policies need to spell out who’s covered. In addition to employees, volunteers and board members, you might want to include clients and third parties who conduct business with your organization, such as vendors and independent contractors.

Also specify covered misdeeds. Financial malfeasance often gets the most attention. But you might also include violations of organizational client protection policies, conflicts of interest, discrimination and unsafe work conditions.

And how should whistleblowers report their concerns? Must they notify a compliance officer or can they report anonymously? Is a confidential hotline available? Whom can whistleblowers turn to if the designated individual is suspected of wrongdoing?

What to do with a report 

Covered individuals need to know how you’ll handle reports once they’re submitted. Your policy should state that every concern will be promptly and thoroughly investigated and that designated investigators will have adequate independence to conduct an objective query.

Also describe what will happen after an investigation is complete. For example, will the reporting individual receive feedback? Will the individual responsible for the illegal or unethical behavior be punished? If your organization opts not to take corrective action, document your reasoning. Finally, explain in your policy that although you’ll do everything possible to maintain the whistleblower’s anonymity, you can’t guarantee it if the whistleblower needs to act as a witness in criminal or civil proceedings.

How to act now

Make sure you have your attorney review your whistleblower policy before releasing it. For more information about encouraging staffers to speak up when necessary, contact us. We can help you strengthen internal controls and implement a confidential reporting hotline.

The post Whistleblower Policies Protect Both Staffers and Your Nonprofit appeared first on The Forde Firm.

One best practice

A study published in the Journal of Accounting, Ethics & Public Policy makes the case that the specific steps an organization takes following a fraud incident can mitigate significant reputational damage. In its hypothetical example, the study lists several ways a nonprofit might act after discovering money has been embezzled:

• Make a formal apology,
• Undergo an external audit,
• Improve the board of directors’ oversight function,
• Pursue legal action against the guilty party,
• Improve internal controls, and
• Terminate the executive director.

The study found that improving board oversight was the only response to elicit a statistically significant positive effect on supporters’ intentions to donate. Stronger oversight also helped restore an organization’s perceived trustworthiness.

To signal improved board oversight to would-be donors, the authors suggested that an embezzled organization start requiring board members to be completely independent from management and bar employees from serving on the board. Researchers also informed study participants that a nonprofit should increase the number of voting board members and mandate that at least one member has a financial or accounting background. Participants were further told that all board members must review the financial statements at least monthly.

Comply with regulations

The study’s authors call improving board oversight “an ideal image repair strategy” because it comes at a relatively low cost. But while reputational repair is of utmost importance, it’s not the only consideration for victimized nonprofits. If your nonprofit loses funds to fraud, it must comply with federal and state reporting obligations, too.

The IRS generally requires organizations to report any “significant diversion” of assets on Form 990. A significant diversion happens when the gross amount of all diversions discovered during the tax year exceeds the lesser of 1) 5% of gross receipts for the year, 2) 5% of total assets at year end or 3) $250,000. Check with your state for other required reporting.

Act now

You may be able to save yourself a lot of heartache by preventing rogue employees from committing fraud in the first place. Tighten internal controls and board oversight now. And just in case a criminal slips through the cracks, be ready with a fraud contingency plan that can guide you in the aftermath of an incident. Contact us for help with controls or to investigate fraud.

The post Defrauded? How to Help Your Nonprofit Recover appeared first on The Forde Firm.

Finding the data

Data analytics is the science of collecting and analyzing sets of data to develop useful insights, connections and patterns that can lead to more informed decision making. It produces such metrics as program efficacy, outcomes vs. efforts, and membership renewal that can reflect past and current performance and, in turn, predict and guide future performance.

The data usually comes from two sources, internal and external data. Internal data includes your organization’s databases of detailed information on donors, beneficiaries or members. External data can be obtained from government databases, social media and other organizations, both non- and for-profit.

Facilitating discussions and plans

Data analytics can help your organization validate trends, uncover root causes and improve transparency. For example, analysis of certain fundraising data makes it easier to target those individuals most likely to contribute to your nonprofit.

It typically facilitates fact-based discussions and planning, which is helpful when considering new initiatives or cost-cutting measures that stir political or emotional waters. The ability to predict outcomes can support sensitive programming decisions by considering data on a wide range of factors — such as at-risk populations, funding restrictions and grantmaker priorities.

Getting your money’s worth

Some basic analytics tools are free, such as those offered by Google Analytics. But for more sophisticated and powerful functions, you may need to spend a little money.

Your organization’s informational needs should dictate the data analytics package you buy. Thousands of potential performance metrics can be produced, but not all of them will be useful. So identify those metrics that matter most to stakeholders and that truly drive decisions. Also ensure that the technology solution you choose complies with any applicable privacy and security regulations, as well as your organization’s ethical standards.

Obtaining professional help

If you don’t already have experienced staff, you may need to hire someone to conduct data analytics and convert the results into actionable intelligence. Contact us for more information and for resource suggestions.

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In one recent cybercrime scheme, a mortgage company employee accessed his employer’s records without authorization, then used stolen customer lists to start his own mortgage business. The perpetrator hacked the protected records by sending an email containing malware to a coworker.

This particular dishonest worker was caught. But your company may not be so lucky. One of your employees’ cybercrime schemes could end in financial losses or competitive disadvantages due to corporate espionage. 

Best practices

Why would trusted employees steal from the hand that feeds them? They could be working for a competitor or seeking revenge for perceived wrongs. Sometimes coercion by a third party or the need to pay gambling or addiction-related debts comes into play.

Although there are no guarantees that you’ll be able to foil every hacking scheme, your business can minimize the risk of insider theft by implementing several best practices: 

Restrict IT use. Your IT personnel should take proactive measures to restrict or monitor employee use of email accounts, websites, peer-to-peer networking, Instant Messaging protocols and File Transfer Protocol.

Remove access. When employees leave the company, immediately remove them from all access lists and ask them to return their means of access to secure accounts. Provide them with copies of any signed confidentiality agreements as a reminder of their legal responsibilities for maintaining data confidentiality.

Don’t neglect physical assets. Some data thefts occur the old-fashioned way — with employees absconding with materials after hours or while no one is looking. Typically, a crooked employee will print or photocopy documents and remove them from the workplace hidden in a briefcase or bag. Some dishonest employees remove files from cabinets, desks or other storage locations. Controls such as locks, surveillance cameras and restrictions to access can help prevent and deter theft.

Treat workers well. Create a positive work environment and treat employees fairly and with respect. This can encourage loyalty and trust, thereby minimizing potential motives for employee theft.

Wireless risk 

In addition to the previously named threats, your office’s wireless communication networks — including Wi-Fi, Bluetooth and cellular — can increase fraud risk. Fraud perpetrators can, for example, use mobile devices to gain access to sensitive information. One way to deter such activities is to restrict Wi-Fi to employees with special passwords or biometric access.

For more tips on preventing employee-originated cybercrime, or if you suspect a fraud scheme is underway, contact us for help.

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It’s been a tough year for not-for-profits. Many have experienced an increased demand for services just as revenues have plummeted. Until the COVID-19 pandemic is over, your organization’s board of directors will likely play a special role in ensuring that it remains on track financially. In particular, the board should focus on two issues:

1. Budget variances
2. Consistency of financial statements

Budget Variances
Each month, the board should compare your nonprofit’s budget to actual results and look for unexplained variances. Some discrepancies are bound to happen in this tumultuous time, but your staff should be able to explain all significant differences thoroughly.

There may be reasonable explanations for changes in incoming revenue and expenses, such as increased program demands, funding changes or event cancellations. When necessary, the board should direct management to modify activities to mitigate negative variances or institute cost-saving measures. Board members also should keep an eye open for overspending in one program that’s funded by another. And they should watch for dips in the organization’s “rainy day” fund (its “reserves”), the raiding of an endowment or unplanned borrowing.

Consistency of Financial Statements
Inconsistent financial statements — or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) — can lead to poor decision-making. It also can make it difficult to obtain funding or financing or compare your organization’s metrics to those of other nonprofits in the same niche. If your organization isn’t using GAAP (or another comprehensive basis of accounting), it may be time to implement it.

For larger nonprofits, the board or audit committee also should insist on annual audits and expect to select the audit firm. Members of the responsible group, such as an audit committee, should communicate directly with auditors before and during the process. All board members should have the opportunity to review and question the audit report.

Additionally, your audit firm may provide a management comment letter that reflects issues noted during the audit and opportunities for improvements in accounting, internal controls and operations. The board should carefully consider these recommendations and determine if suggested changes will lead your organization to a stronger financial footing.

Other Warning Signs
Your board should also be alert to other potentially troubling signs — for example, if members start hearing from long-standing supporters who are worried about your nonprofit’s finances. Also, the board should make sure that your executive director adheres to expense limits, even if a program’s needs unexpectedly expand. Going outside of budget or policy guidelines should require board approval.

Contact us for additional advice about your board’s fiscal role and for help restoring financial order following a disruptive period.

The post Nonprofit Boards Must Remain Vigilant as Long as the Crisis Continues appeared first on The Forde Firm.

So it’s important to continue to schedule internal audits. Comprehensive independent audits help assure stakeholders that your nonprofit is ready for anything that might come its way — including opportunities.

Looking for vulnerabilities

On its most basic level, the internal audit function provides assurance of compliance with a nonprofit’s internal controls and their effectiveness in mitigating financial and operational risk. Potential risks include fraud, insufficient funds to support programming and reputational damage.

Internal auditors, whether they’re staff members or outside consultants, start by identifying a nonprofit’s vulnerabilities and prioritizing them from high to low. Through testing and other methods, they:

• Assess the effectiveness of internal controls,
• Evaluate compliance with laws, regulations and contracts,
• Document their results in reports that include recommended improvements, and
• Follow up on management’s remediation actions to eliminate identified risks and assist external auditors, when applicable.

The effectiveness of the internal audit function hinges on auditor independence. Auditors should be independent from management and all areas they review to avoid bias or a conflict of interest. Auditors should report directly to the board of directors or its audit committee.

More to offer

Although the internal audit function is often viewed mainly through the prism of compliance and internal controls, it has a lot to offer beyond risk assessments and audit plans. Savvy nonprofits have begun to tap internal audit for strategic purposes. For example, auditors may serve as internal consultants, providing insights gathered while performing compliance and assessment work. While reviewing invoices, they could discover a way to streamline invoice processing.

A familiarity with an organization’s inner workings also affords internal auditors with an unusual perspective for evaluating strategic opportunities. Does your nonprofit have a financial weakness that could undermine plans for continuing current programs or launching new ones? Your internal auditor probably knows the answer.

Ask for more

With their cross-departmental perspective, internal auditors can help anticipate and mitigate a variety of risks, improve processes and help evaluate your nonprofit’s strategies. Social distancing guidelines can make in-person audits challenging right now. But we have strategies for conducting thorough audits while also protecting the safety of audit participants. Contact us for more information.

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