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What Small Businesses Need to Know About HR Compliance

What Small Businesses Need to Know About HR Compliance

Congratulations on opening up your business. You’re likely starting out small and really focusing on taking care of your customers, as you should. You want to remain in business long enough to really grow though, right? And you can’t do that if you’re in jail.

That last bit may sound harsh, but it’s true. Entrepreneurs are often so focused on their industry that many make mistakes about or simply ignore areas of HR compliance. If your new business employs people, or is considering hiring anyone, you need to pay attention. These are legal matters that, if done improperly, can cost you thousands of dollars in fines or possibly involve jail time.

As a widget expert, no one thinks you should be an HR expert, too. Even HR experts don’t know everything. “HR is compartmentalized and specialized: learning and development, safety, benefits, payroll, recruiting, drug testing, etc. You can go your whole career in HR and never personally have to deal with workplace violence or certain other issues, so you’d never be an expert on that,” says Kevin Ryder, chief financial officer with HR Solutions, an HR consulting firm in Baton Rouge.

Instead of learning everything yourself, it’s more important that you be aware of areas that are likely to trip you up and get appropriate help from experts to make sure you’re covered everywhere you need to be. Here’s where Ryder sees small businesses go wrong most often.

Employee Classifications and Verifications

When you hire a new employee, will you make them hourly or salary? Do you know the duties test to determine which one is appropriate? Do you know the rules about paying overtime correctly, even to salaried employees? What about contractors? Do you know the determining factors to make someone a real employee versus a contractor?

“Many entrepreneurs understand their industry and its norms, but not whether those norms are legal or compliant. They say, ‘We’ve always done it this way,’ but that may not be correct. Oilfields and other industrial areas are notorious for this,” Ryder says. You have to make sure the industry norm is, in fact, legal. Many times it’s not, and the penalties for misclassifying employees are huge, he says.

Another area rife for inspections and penalties is verification of someone’s authorization to work in the United States. This is the dreaded I-9 form, in HR parlance, and it requires someone check an employee’s identification documents as listed on the form. “You have to physically look at documents and signature. You are required to keep the forms and verify that on a case-by-case basis,” he says. These violations come with steep penalties, but the bigger issue is that once you’re on the radar, many other organizations — such as the IRS and the Occupational Safety and Health Administration — will demand inspections also, he says.

Payroll and Taxes

Payroll (including its associated taxes) is one of the most complex areas of HR compliance. Do you know the specific tax rate of various classifications of employees in Louisiana? What about that one remote employee in California? Are you withholding the correct amounts, paying the government in a timely fashion and also ensuring unemployment insurance coverage? It can be complex, and you can go to jail if you make mistakes here, Ryder says.

It’s possible to do payroll in-house via software programs, but these can be costly or leave your business exposed to liability in case of error, Ryder says. This is harder on small businesses. An easier solution is to use an accountant, payroll company or HR consultancy. Whichever way you choose for your organization, he recommends a provider with SOC 1 (Service Organization Controls), Type 2 certification. “This ensures the company has a good process, including checks and balances to ensure they do it accurately,” he says.

Employee Handbook

Many entrepreneurs think that if they don’t have a formal handbook, the labor laws already in place will protect them if anything bad happens, and that having no formal policies will allow them more flexibility and protection. Nothing could be further from the truth, Ryder says.

“If a problem comes up, the first document that will be subpoenaed will be that handbook, and if you don’t have one, it weakens your case to say ‘We don’t have a policy about that.’ If you have no living document written up, you have no leg to stand on,” he says. You can’t just rely on the laws already on the books. You need to demonstrate a good-faith effort to create a living document and relate it to your company and share it with your employees.

“No one reinvents the wheel these days,” he says. There are templates online to get you started, but once you put something together, it needs to be reviewed by a professional to make sure it addresses all appropriate issues. And it will need to be amended as your company grows. Laws multiply with your size, he says.

Safety and Workers’ Comp

“Safety is one of those areas that, until you have an issue, most people won’t appreciate the need for,” Ryder says. The problem with this is that safety can’t be neglected, and many safety laws apply even to very small organizations. OSHA has reporting requirements that need to be researched for every organization, he says.

Workers’ compensation insurance is also an important safety and budgetary consideration, and one that many employers fear.

Fortunately, both of these issues can be helped tremendously with a comprehensive safety program. “There are indicators that lead up to an accident in most cases. Once there’s an accident and it’s a reportable incident, it will cause a detrimental impact to bottom line,” Ryder says. You will be responsible for some medical expenses, and your workers’ comp rates can go up. If you prevent accidents and injuries with a safety program and training, he says, it speaks to your intent that you value employee safety and are trying to do the right thing. Employees, especially those in industrial fields, need to hear or read a little bit of safety information every day, he says. They want to know this is important to their employer.

Plus, if you do well and have few or no injuries, your rates can go down or you can get dividends back, he says. Beyond these financial incentives, if the Labor Department or OSHA ever shows up for an inspection and you have nothing to show, they won’t give you a break on any violations they find, he says. “A safety program and a review of your workers’ comp insurance can take your risk of liability off your plate and let you focus on your business,” Ryder says.

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