Small Business Compliance: 4 Common Law Violations

Small business compliance can feel like a moving target—rules change, regulations overlap, and even small missteps can carry big consequences. Misclassifying employees as independent contractors can lead to steep fines and back pay, overlooking labor laws can trigger audits and lawsuits, failing to verify work authorization exposes your business to penalties, and ignoring workplace safety can result in serious injuries and OSHA violations.

Understanding these four common compliance pitfalls and taking proactive steps to address them protects your business, your employees, and your bottom line.

 From reviewing job classifications and labor practices to maintaining proper I-9 documentation and enforcing safety protocols, staying informed and proactive is the key to reducing risk and supporting long-term growth.

Employee Misclassification

Misclassifying employees as independent contractors is one of the most common – and costly – compliance mistakes small businesses can make. 

When a worker is classified as a contractor instead of an employee, they lose access to benefits like health insurance, retirement contributions, and overtime pay. At the same time, the business risk penalties from the IRS, Department of Labor, and state agencies.

What is an Independent Contractor vs an Employee? 

An independent contractor is typically a self-employed individual or business entity hired to perform specific tasks or deliver goods or services under a contractual agreement. They operate with a high degree of autonomy, often setting their own hours, using their own tools, and determining how the work is completed. They are also responsible for managing their own taxes and benefits. 

An employee, on the other hand, works for a company under an employment agreement and is compensated with wages or a salary. Employees work under the direction and control of their employer, meaning the employer can set work duties, schedules, and the methods by which tasks are performed. Employees also receive certain legal protections, benefits, and entitlements that independent contractors do not.

How Employee Misclassification Can Impact Your Business

Recent high-profile settlements show just how costly misclassification can be. In June 2024, both Uber and Lyft agreed to pay $140 million to settle claims for misclassifying their drivers as independent contractors. Similarly, DoorDash paid $100 million in 2022 for the same violation.

These settlements emphasize that even large, well-known companies face serious consequences, and the stakes are equally high for small businesses. 

How To Stay Compliant

• Review job roles regularly. Ensure they are classified correctly based on actual work performed, not just titles.
• Follow IRS and Department of Labor guidelines for determining worker status. 
• Document working relationships clearly with contracts that accurately reflect the nature of work and level of control
• Train managers and HR staff on classification rules so hiring and role changes are handled correctly. 
• Consult with legal or HR compliance experts before making classification decisions, especially for new or hybrid roles.

Violating Federal and State Labor Laws

Small businesses often juggle multiple priorities, and compliance can unintentionally take a back seat. Overlooking labor laws, whether at the federal or state level, can quickly lead to costly penalties, lawsuits, or even reputational damage. 

Federal laws like the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), and Occupational Safety and Health Act (OSHA) set nationwide standards for wages, overtime, leave, and workplace safety. But compliance doesn’t stop there; states have their own labor regulations that go beyond federal requirements. 

Common ways small businesses violate labor laws include

• Failing to pay the required overtime or minimum wage 
• Misclassifying employees (as discussed above) 
• Denying required leave under FMLA or state leave laws
• Not providing mandated meal or rest breaks where required
• Failing to maintain accurate employee records

Penalties can be severe, ranging from back pay and damages to civil fines and legal fees. In many cases, violations also trigger follow-up inspections or audits that could uncover additional compliance issues. 

The best defense? Stay proactive. Stay up to date on labor laws in every state where you operate, review your payroll and timekeeping practices regularly, and train managers to recognize compliance risks before they turn into violations. Partnering with an HR compliance expert can help small businesses navigate the challenges of federal and labor laws with confidence. 

Violating Federal Immigration Laws

Every employer in the US, no matter the size, is required to verify that every new hire is authorized to work in the country. This process is governed by the Immigration Reform and Control Act (IRCA) and enforced by U.S. Immigration and Customs Enforcement (ICE). 

For most small businesses, compliance starts with Form I-9, which must be completed for each employee within three business days of their start date. The responsibility doesn’t end there; employers must also properly store I-9s, keep them for the required retention period, and be ready to produce them during an audit. 

Mistakes like incomplete forms, missing signatures, or failing to reverify expiring work authorizations can result in fines. 

In July 2025, Congress passed “The One Big Beautiful Bill Act”, providing an increase in funding for immigration and border enforcement agencies, allowing them to ramp up workplace investigations. Even unintentional errors can add up quickly: fines can range from a few hundred to several thousand dollars per violation, and repeat offenders face higher penalties. 

Common Violations 

• Not completing I-9 forms for all employees
• Accepting documents that are expired or not on the approved list
• Discriminating based on national origin or citizenship during hiring
• Failing to reverify employees when their work authorization expires

How You Can Stay Compliant

• Training HR and hiring managers on proper I-9 procedures 
• Using E-Verify (when required or recommended) to confirm work authorization
• Conducting periodic internal audits of I-9 records 
• Keeping I-9s separate from general personnel files for easier review during audits

By building a consistent and accurate verification process, small businesses can reduce the risk of costly fines while fostering a fair, lawful, and inclusive hiring environment.

Unsafe Workplace

Providing a safe work environment isn’t just a good business practice; it’s the law. The Occupational Safety and Health Act (OSHA) requires employers to maintain workplaces free from recognized hazards that could cause serious harm or death. This responsibility applies to all businesses, regardless of size or industry. 

For small businesses, the risks often come from overlooked hazards, such as inadequate safety training, poorly maintained equipment, or missing protective gear. Even office-based businesses aren’t exempt; blocked fire exits, poor ergonomics, or neglected safety protocols can create hazards that lead to injuries and regulatory violations.

OSHA violations can result in steep fines and penalties that are higher for repeat or willful violations. Beyond fines, unsafe conditions can harm employee morale, increase turnover, and damage your company’s reputation. 

Common safety violations include: 

• Failing to provide the required personal protective equipment (PPE) 
• Not training employees on safe equipment operation
• Ignoring workplace ergonomics and injury prevention
• Blocked emergency exits or faulty fire safety equipment
• Not reporting workplace injuries or illnesses as required

How to protect your business and employees: 

• Conduct regular workplace safety inspections 
• Train employees on safety protocols relevant to their roles
• Keep detailed safety and incident records 
• Address hazards immediately when they’re identified
• Stay current on OSHA regulations and industry-specific safety requirements

A culture of safety is one of the best investments a small business can make. It prevents accidents, reduces liability, and shows employees that their well-being is a top priority. 

Stay Compliant and Protect Your Business

Compliance doesn’t have to be overwhelming for small businesses, but it does require attention and proactive steps. From employee misclassification to labor law violations, immigration compliance, and workplace safety, these common pitfalls can carry serious financial and legal consequences if overlooked. 

The best way to protect your business is to take action now. Review your policies, train your team, and make sure your practices align with federal and state laws. Regular audits and expert guidance can help prevent costly mistakes and build a strong foundation for growth. 

Next Steps for Small Business Owners

• Conduct an internal compliance review covering hiring, payroll, workplace safety, and labor laws. 
• Provide training for managers and staff on key compliance areas. 
• Download our Ultimate HR checklist to ensure you’re covering all critical areas.

Need help navigating the complexities of compliance? CoAdvantage partners with businesses like yours to simplify HR, payroll, and compliance, helping you reduce risk, protect your employees, and focus on growth. 

With expert guidance and practical solutions, we make compliance manageable, so you can spend more time running your business and less time worrying about legal pitfalls. Contact us today to get started.