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How to ace HR compliance basics (and what you stand to lose by getting it wrong)

May 16th, 2023 | 5 min. read

By Robbie Bryant

The term “Human Resources” covers an incredible breadth of people operations and behind-the-scenes tasks in a business, but when most people think of HR, compliance is a huge aspect of the job. This is likely because compliance mistakes can potentially cause real pain for businesses. There are several common HR compliance mistakes that organizations can make, and each of these can have serious consequences. Some of the most common HR compliance mistakes are:

  • Improperly Classifying Employees
  • Inaccurate Recordkeeping
  • Discrimination and Harassment
  • Wage and Hour Law Compliance
  • Immigration Law Violations

Look, we aren't going to give you a comprehensive overview of common HR compliance mistakes and their consequences, as it would be nearly impossible to review all HR compliance fines and penalties for each of the above. There are too many variables that each Federal agency reviews and investigates pertaining to the top compliance issues outlined above. We will, however, showcase the potential severity of HR non-compliance that could accompany each of the top HR compliance mistakes.

Let’s take a look at some of the most common HR compliance issues businesses face:

Failure to properly classify employees

Entering employees as exempt/non-exempt or classifying employees as 1099 contractors carries much more weight than one would think. According to a recent survey, at least 30 percent of employers have misclassified at least one employee.

So, what’s the big deal? Misclassifying an employee has downstream impacts on the employer and the employee. For example, an employee classified as exempt, when they are truly non-exempt could miss out on overtime pay that they would be entitled to as a non-exempt employee. Check out this blog to learn more about how to classify an employee as exempt or non-exempt properly.

As for an improperly classified 1099 contractor who truly should be an employee, there are a multitude of residual impacts to that employee, such as not being offered benefits, not having taxes withheld, and not having a regular paycheck such as W2 employees.

The IRS can determine if an employee has been misclassified should an employee report that they may be misclassified. If the IRS determines that a company violated employment law, the employer may face HR compliance penalties, including class-action lawsuits, potentially millions in fines for each misclassified employee, and potentially jail time if it is determined that the employer misclassified intentionally. At a minimum, back pay and benefits, such as overtime pay, paid time off, and health insurance, may need to be offered to the misclassified employee. Lastly, the employer can have a tarnished reputation that leads to negative publicity, making it difficult for the employer to attract and retain talent and customers.

Inaccurate Record-Keeping

Employers must keep accurate and complete employee information records, including hours worked, wages paid, and benefits provided. The basic employee records that need to be kept are personnel, payroll, and medical files. One of the most common personnel files that need to be properly stored is the I9. This document should be stored for three years following the employee’s hire date or one year following the employee’s termination. All payroll records should be kept for a minimum of two years. Work schedules, wage rate tables, and wage changes should be kept for two years. The EEOC provides a comprehensive overview of recordkeeping requirements for HR compliance purposes. These requirements can be found here!

Discrimination and Harassment

The EEOC defines harassment as unwelcome conduct that is based on race, color, religion, sex (including sexual orientation, gender identity, or pregnancy), national origin, older age (beginning at age 40), disability or genetic information (including family medical history). Harassment can happen from a company level or supervisory level. Even from a supervisory level, the company can be held vicariously liable based on the actions of their employees.

Discrimination is held close to harassment in the workplace. Discrimination in the workplace can take on many forms including age, disability, equal pay, national origin, race/color, religion, retaliation, sex, etc. The EEOC provides in-depth information about each type of discrimination in the workplace.

Discrimination and harassment in the workplace can lead to lawsuits, loss of reputation, and damage to the organization's culture. Employers must take steps to prevent and address these issues, including implementing policies and training programs. Compensatory and punitive damages may be awarded in cases involving intentional discrimination based on a person’s race/color, national origin, ex, religion, disability, or genetic information. Also, victims of discrimination and/or harassment may be able to recover attorney’s fees, expert witness fees, and court cost among the various other financial fees that are incurred based on the discrimination/harassment such as back pay, placement in a specific job and additional company benefits that were forfeited due to the harassment/discrimination. There are limits on the amount of compensatory and punitive damages a person can recover as seen below (based on size of the employer):

Employers with 15-100 employees Limit of $50,000
Employers with 101-200 employees Limit of $100,000
Employers with 201-500 employees Limit of $200,000
Employers with more than 500 employees Limit of $300,000

Failing to Comply With Wage and Hour Laws

Enforcement of the Fair Labor Standards Act (FLSA) is critical for every employer in the United States no matter the size of their organization. From ensuring that you have the proper employment posters in high-traffic areas of your workplace or ensuring that you are paying at least the federal minimum wage or state minimum wage (whichever is higher), paying out overtime correctly, documenting and paying all hours worked, recordkeeping and child labor, an employer must be meticulously paying attention to all areas of pay and compensation for their employees. The FLSA has written a comprehensive reference guide to all things FLSA and that guide can be found here.

Employers must comply with federal and state wage and hour laws, including minimum wage and overtime requirements. Failure to comply with these laws can result in penalties, fines, and lawsuits. Such penalties include but are not limited to the payment of back wages, civil penalties of up to $1,000 for each violation, up to $10,000 civil money penalties for child labor violations and a potential criminal prosecution and fine up to $10,000 including imprisonment.

Improper Termination

Improper termination refers to the act of ending or terminating someone in a manner that is considered incorrect, unauthorized, or unjust. Examples of improper termination include terminations based on quid pro quo, discrimination, retaliatory firings, wage, and hour violations. All states except Montana are at-will states, but that does not mean that you can terminate someone due to some of the reasons stated previously.

Terminating an employee without following proper procedures or for discriminatory reasons can result in lawsuits and damage to the organization's reputation. Improperly terminated employees may be entitled to lost wages from the date of termination, the differences in wages or income between the employee’s prior and new employment, benefits that were lost when improperly terminated, out-of-pocket expenses such as costs incurred in a job search for new employment, and emotional distress if the employee was subjected to a hostile work environment before termination. In short, it can be incredibly costly to find yourself wrapped up with improper termination in addition to being an HR compliance violation.

Immigration Law Violations

All employees hired within the United States must provide proof of citizenship or the right to work in the United States. The Form I-9 is used to verify the identity and employment authorization of individuals hired for employment within the United States. All employers must properly complete the I-9 for everyone hired including citizens and non-citizens.

Employers must comply with immigration laws when hiring employees. Failure to comply can result in fines and penalties, as well as the loss of the ability to hire foreign workers in the future. The Immigration Reform and Control Act of 1986 imposed civil and criminal fines for the unlawful hiring of aliens. A maximum penalty of six months imprisonment and a fine of $3,000 per worker may be imposed.

HR Compliance summary

Overall, HR compliance mistakes can have serious consequences for organizations, including financial penalties, legal action, and damage to reputation. Employers must take steps to ensure that they are complying with all relevant laws and regulations and seek the guidance of legal counsel when necessary. It is best to partner with a company that can help take the HR compliance struggle and guesswork off of your plate. Whirks provides HR support to clients large and small. When you outsource with Whirks, organizations gain the tools and resources needed to become HR-compliant, plus access to an HR leader that is in your corner to answer any questions and provide the help you need. Click here to learn more about our HR services, or check out 5 Mistakes to Avoid in your Employee Handbook to keep learning some HR best practices.

Conversely are you ready to make sure you're HR compliant?

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