HR compliance is one of the most significant legal and financial exposures small and medium-sized businesses face, and most violations aren’t the result of intentional wrongdoing. They stem from limited HR resources and the reality that employment law is complex, frequently updated and easy to apply incorrectly. The fines and penalties that result from HR compliance mistakes can be substantial, and in some cases they compound across multiple violations. Understanding where these mistakes most commonly occur is the first step toward making sure your business isn’t exposed to them.
Employee misclassification is one of the most common and costly HR mistakes you can make. It typically happens when you treat a worker as an independent contractor to avoid payroll taxes, benefits obligations and other costs associated with employment, when the nature of the working relationship actually qualifies that worker as an employee under federal law.
The IRS and Department of Labor use specific criteria to determine whether a worker is an employee or an independent contractor, and the distinction comes down to the degree of control your business exerts over the worker’s schedule, methods and tools. If your business dictates how, when and where the work gets done, that worker is likely an employee regardless of what your contract says.
The financial consequences of misclassification can be severe. If your business is found to have misclassified employees, you can be held liable for back payroll taxes, unpaid overtime, benefits the worker should have received and civil penalties. When misclassification is found to be willful, the penalties increase significantly.
Wage and hour violations are among the most frequently cited HR compliance issues small and medium-sized businesses face, and they’re often the result of misunderstanding or misapplying the rules rather than intentional wrongdoing. The Fair Labor Standards Act (FLSA) establishes federal requirements for minimum wage, overtime pay and recordkeeping, and failing to comply with these requirements exposes your business to significant liability.
Overtime miscalculations are a common source of violations. If your hourly employees work more than 40 hours in a workweek, you’re required to pay them at least one and a half times their regular rate of pay for those additional hours. Misclassifying employees as exempt from overtime when they don’t meet the legal criteria for exemption is one of the most expensive mistakes you can make in this area.
Off-the-clock work is another frequent issue. If your hourly employees are performing work-related tasks before clocking in, after clocking out or during unpaid breaks, you may be required to compensate your staff for that time under the FLSA. Allowing this to happen, even unintentionally, can result in back pay claims and penalties that add up quickly across your entire workforce.
Every employee you hire must complete an I-9 form verifying their eligibility to work in the United States. Your business is required to retain those forms and make them available for inspection if requested by federal authorities. I-9 compliance is an area where it’s easy to make mistakes that result in significant fines.
Common errors include:
Fines for I-9 violations are assessed on a per-violation basis, which means errors that span multiple employees or multiple hiring cycles can add up to a substantial penalty very quickly.
The paperwork requirements around I-9 compliance are specific, and the burden of getting them right falls entirely on your business. Staying current on the requirements and conducting periodic internal audits of your I-9 records are the most effective ways to avoid exposure in this area.
Federal law requires employers to provide certain types of leave to eligible employees, and failing to comply with these requirements can expose your business to lawsuits, regulatory penalties and back pay liability. The Family and Medical Leave Act (FMLA) is the most widely applicable federal leave law. Under the FMLA, eligible employees at covered employers are entitled to up to 12 weeks of unpaid, job-protected leave per year for qualifying medical and family reasons.
Common violations include:
Beyond FMLA, the Americans with Disabilities Act (ADA) may require you to provide leave as a reasonable accommodation for employees with qualifying disabilities, even if your business isn’t covered by FMLA. Navigating the terms of these two laws can often be challenging without dedicated HR support.
Federal law prohibits workplace harassment and discrimination based on protected characteristics including race, color, religion, sex, national origin, age and disability. As an employer, you’re responsible for maintaining a workplace that is free from harassment and discrimination, and failing to do so exposes your business to EEOC complaints, lawsuits and significant financial liability.
Failing to have formal harassment and discrimination policies in place or having policies that are outdated, poorly communicated or never enforced are the most likely reasons you’ll incur a fine. It’s important to understand that simply having a policy on paper isn’t enough. Your employees need to know the policy exists, understand what it covers and have a clear process for reporting violations.
Common issues that increase your liability exposure include:
The cost of getting this wrong goes beyond regulatory fines. A single harassment or discrimination lawsuit can result in civil damages, legal fees and reputational harm that far exceed any penalty a regulatory agency might impose.
Payroll tax compliance is an area where mistakes can be costly and, in cases where the error was willful or fraudulent, result in criminal liability. As an employer, you’re required to withhold federal income tax, Social Security and Medicare taxes from your employees’ paychecks, match your employees’ Social Security and Medicare contributions and remit all of those funds to the IRS on a prescribed schedule.
Common payroll tax mistakes include:
The IRS takes payroll tax violations seriously, and the Trust Fund Recovery Penalty allows the agency to hold business owners and other responsible parties personally liable for unpaid payroll taxes. That means your personal assets can be at risk, not just your business finances, if your payroll taxes aren’t handled correctly.
Even if you’re aware of these HR compliance risks, staying on top of them while running a business is a significant challenge. Employment law changes regularly, the administrative burden of maintaining compliance across multiple areas is substantial, and the costs associated with noncompliance can be severe. Working with a PEO company can ensure you remain compliant and insulate your business from incurring these costly penalties.
When you work with a PEO company, you gain access to a dedicated team of HR professionals who manage compliance on your behalf. Your PEO company monitors changes in employment law, ensures your policies and practices stay current and helps you avoid the kinds of mistakes that result in fines and penalties. If your business doesn’t have a dedicated HR department, that expertise is difficult to replicate on your own.
Working with a PEO company doesn’t eliminate your responsibility as an employer, but it gives you the infrastructure and expertise to meet that responsibility without exposing your business to unnecessary risk.
At PassioHR, we can help ensure your business avoids the common mistakes that result in costly HR violations. We provide comprehensive PEO services to small and medium-sized businesses, including HR consulting to ensure your business remains compliant. Our team of HR experts is constantly monitoring the changes in HR regulations, and we understand the ways specific federal, state and local laws vary by industry. This expertise will ensure all compliance matters at your business are addressed properly.
Contact us today to schedule a consultation.
The most common HR mistakes that result in fines include misclassifying employees as independent contractors, wage and hour violations, improper I-9 and employment eligibility verification, failure to provide required leave under the FMLA or ADA, inadequate harassment and discrimination policies, and payroll tax errors. Each of these areas carries its own set of penalties, and violations in multiple areas can compound quickly.
If your business misclassifies an employee as an independent contractor, you can be held liable for back payroll taxes, unpaid overtime, benefits the worker should have received and civil penalties. When misclassification is found to be willful, the penalties increase significantly.
Wage and hour violations under the Fair Labor Standards Act can result in back pay liability for affected employees, an equal amount in liquidated damages and civil penalties for repeat or willful violations. These penalties apply per affected employee, so violations that span your entire workforce can result in substantial liability.
Fines for I-9 violations are assessed on a per-violation basis, which means errors across multiple employees or multiple hiring cycles add up quickly. The specific fine amounts are adjusted periodically by the federal government, so checking the most current penalty schedule with your HR advisor or legal counsel is the best way to understand your current exposure.
Under the Family and Medical Leave Act, eligible employees at covered employers are entitled to up to 12 weeks of unpaid, job-protected leave per year for qualifying medical and family reasons. The Americans with Disabilities Act may also require you to provide leave as a reasonable accommodation for employees with qualifying disabilities, even if your business isn’t covered by FMLA.
The Trust Fund Recovery Penalty allows the IRS to hold business owners and other responsible parties personally liable for unpaid payroll taxes. If your business fails to remit payroll taxes correctly, your personal assets can be at risk, not just your business finances.
A PEO company gives you access to a dedicated team of HR professionals who monitor changes in employment law, ensure your policies and practices stay current and manage compliance on your behalf. For businesses without a dedicated HR department, a PEO company provides the infrastructure and expertise to meet your employer responsibilities without exposing your business to unnecessary risk.
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