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Small Business Compliance: The Top 2 Most Common HR Mistakes

CoAdvantage- Regulatory compliance is a perennial headache for small business owners because it’s incredibly time-consuming and costly to enforce. Indeed, the only thing more expensive than compliance is … non-compliance.

Time-wise, the National Small Business Associations says that nearly half of small companies spend 40 hours or more annually on federal regulations; over a quarter spend more than 80 hours. Financially, non-compliance costs 2.71 times as much as compliance, according to the Ponemon Institute.

That’s because a wide variety of costs associated with compliance violations can aggregate quickly: initial incident response; business disruption; customer loss; penalties and fines; legal fees, settlements, and judgments; and more can lead to staggering expenses when a business violates or is believed to have violated tax law, labor law, and/or privacy and cybersecurity regulations.

But here’s the real rub: it’s surprisingly easy to fall afoul of regulations. Here are two of the most common compliance violations committed by small and midsize organizations, often unintentionally.

1: Employee misclassification

The National Employment Law Project (NELP) says that as many as 30% of employers (or more) misclassify employees as independent contractors. These employers risk owing back taxes and penalties if the IRS audits them. In fact, sometimes the misclassification is an intentional violation to avoid paying employment taxes, but often it’s because the business doesn’t clearly understand the rules around classifying employees. The guidelines can be genuinely confusing.

The risk is often higher than employers realize, too, because they may not have to wait for the IRS or state authorities to audit. A report from Harvard Law School says that 71% of state authorities initiated investigations in response to complaints filed by affected workers.

2: Overtime

Technically, this is another area of employee classification: are workers exempt from being owed overtime pay or non-exempt. Specifically, the Fair Labor Standards Act (FLSA) mandates that non-exempt employees be compensated at 1.5 times their regular hourly rate for any hours worked more than 40 hours per week.

As with employee versus contractor classification, exempt versus non-exempt classification can be complicated. At its simplest, it comes down to two questions: how much the employee is paid (if they make under a certain amount, they are automatically non-exempt), and what the employee’s duties are.

Complicating matters, overtime pay can be owed for after-hours work the employer may not have realized was happening, such as checking work-related email in the evenings. This payroll headache can compound if the employer lets non-exempt employees set their own hours.

CoAdvantage, one of the nation’s largest Professional Employer Organizations (PEOs), helps small to mid-sized companies with HR administration, benefits, payroll, and compliance. To learn more about CoAdvantage’s ability to create a strategic HR function in your business that drives business growth potential, contact us today.