Maintaining detailed time records for staff may not be your favorite task. Unfortunately, it’s not negotiable. Timekeeping — for volunteers and individuals paid for their work — is necessary for most not-for-profit organizations. However, there are ways to make the job less onerous.

Why Timekeeping Is Critical

Understanding why timekeeping matters can help you put the task in perspective. At minimum, you’ll be compelled by federal and state wage-and-hour laws to do a certain amount of time tracking. These laws require you to keep records of the hours worked by hourly employees. And even though you don’t pay salaried workers by the hour, if you get into a dispute over wages or an employee’s exempt status, you’ll need proof of time worked. Exempt employees generally include executive, administrative, professional and outside salespeople who earn a salary.

Governmental and corporate funders also may stipulate certain timekeeping practices. You must document incurred costs for funders that reimburse expenses or fund specific programs or activities. Because payroll is generally your largest cost, you need to document the actual amounts paid and allocate these costs to the proper programs and supporting services. Federal cost principles clearly require that the allocation methods used are documented and consistent. Employee pay could be allocated to a category that is allowable or unallowable under a federal grant, and can be reimbursable or non-reimbursable based on the type of work performed.

Generally Accepted Accounting Principles (GAAP) may come into play, too. GAAP requires you to allocate expenses to programs and supporting services. Again, because payroll is a major category for most not-for-profits, you must provide support for the allocation of expenses and related taxes and benefits. The best support consists of written records that specify exactly the time spent and work being performed. The same holds true for supporting employee pay deducted from unrelated business income.

Timekeeping is further necessary to comply with the Patient Protection and Affordable Care Act. Under the law, employees who work, on average, 30 or more hours per week are considered full-time. Beginning in 2015, employers with 50 or more full-time and full-time equivalent employees may face a penalty if they don’t offer full-time employees sufficient health care coverage.

Required or not, timekeeping is just a good business practice. Careful allocation of payroll and other expenses is necessary for you to know the true cost of running each program. This can help you decide how to invest your resources, maximize your cost recovery and increase the likelihood of continued funding for these programs.

How to Track Expenses

There are many ways to track and allocate payroll and related expenses. Generally, the most effective procedures involve collecting information in a timely manner, verifying its validity and letting your software program do the rest. For example, you can require employees to record their own time daily (or use a time clock system that does it automatically) and then require managers to review and approve it on a weekly basis. Consistency is important: Once you’ve established a policy, make sure staff and managers adhere to it.

Tracking time for employees who work exclusively in a single program is easy. But others may supervise or work in multiple programs or a combination of program and supporting service areas. Particularly important is that you capture these employees’ time with enough detail as to the area or program they worked on that day. If funders or governmental requirements don’t apply you may consider capturing time data for a few representative periods and allocate time by applying those percentages to the full year.

Avoiding Trouble

Timekeeping isn’t simply a best practice. Failure to properly record worker and volunteer hours could bring legal and financial consequences. If you’re unsure about what you need to track and how to do it, talk with your timekeeping software provider and your financial adviser.