What Is HR Compliance [+ Free HR Audit Checklist]
Human resource (HR) compliance is the process of ensuring your company adheres to all employment laws and regulations. Developing policies and procedures to ensure your company’s practices comply with all federal, state, and local labor laws is part of this process.
Small businesses are uniquely susceptible to compliance violations because they often lack the oversight necessary to notice and correct issues. Performing a regular HR audit, or an examination of your company’s HR policies and practices, will keep you out of legal trouble and your employees more engaged and loyal.
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HR Compliance Concerns for Small Businesses
HR compliance rules and regulations touch every aspect of your business. From hiring and onboarding new employees to administering their benefits and ending the employment relationship, your HR team will face legal hurdles. Having clear policies will give them a roadmap that helps keep your company compliant with all applicable labor laws.
Staying on top of these laws, however, presents challenges for small businesses that do not have dedicated in-house HR teams or HR compliance officers. Many small businesses operate with a skeleton HR crew that does myriad tasks. In some cases, it’s even the small business owner handling HR tasks.
Compliance penalties are steep but avoidable with the right practices. Here are the biggest HR concerns for small businesses.
There are many regulations you’ll need to stay abreast of to maintain payroll compliance. For instance, most states require businesses to establish a payroll cycle without modification. Whether your company pays weekly, every other week, or twice monthly, you cannot change this schedule without advance notice to your employees. Some states even require companies to pay at least twice per month or more frequently.
Your company must pay employees at least a certain minimum wage. The federal minimum wage of $7.25 per hour applies to all employees in the U.S., but many states have gone above the federal amount and set their own minimum wage. Some cities have even gone beyond that, so make sure you know the minimum wage you must pay your team.
You must also ensure compliance with your local payroll and overtime laws. California, for example, goes beyond the federal overtime laws and requires daily overtime pay for employees who work over eight hours in a single day.
Record retention for payroll is extremely important, and your company must keep certain records under federal law. Your state may also require you to keep additional records relating to when you paid employees, how much you withheld from paychecks, and how many hours they worked during each pay period.
The Equal Pay Act (EPA) requires pay equity between men and women for similar work duties. Like overtime laws, many states have enacted their own equal pay laws that go above and beyond the EPA.
Make sure you know and follow your state’s laws—find your state in the drop-down below for a payroll guide specific to your business.
Once you get to 50 full-time employees, you need to adhere to the Affordable Care Act (ACA) and the Family and Medical Leave Act (FMLA). Even if you have always offered benefits to your employees, hitting the 50 full-time employee mark makes it mandatory for your company.
The ACA mandates that you must offer healthcare options to your employees. Administering healthcare benefits can be problematic for small businesses, especially those with inexperienced or overworked HR staff.
Under the FMLA, you must provide unpaid leave to eligible employees. The FMLA covers employees out for the birth of a child, recovering from an injury, caring for a sick family member, and many other scenarios. Small businesses too often ignore the requirements of FMLA and mandate employees to use paid time off or sick leave or even terminate employees for being out of work for an FMLA-covered reason. These actions, even innocent mistakes, can lead to serious penalties and employee lawsuits.
Your company’s employment practices can create problems for even the best-intentioned hiring managers. At the federal level, your small business must adhere to the Americans with Disabilities Act (ADA), the Age Discrimination in Employment Act (ADEA), the Equal Employment Opportunity Commission (EEOC), and Title VII of the Civil Rights Act of 1964. These federal laws affect small business hiring practices and prohibit discrimination in employment, starting from the job posting itself.
The biggest concern for your small business is the training your hiring managers receive. If they don’t understand what issues to avoid, they may get your company into trouble. I recommend annual compliance training for any employee who will be involved in the hiring process.
You need to ensure that employees know the difference between questions that are illegal to ask in interviews and those questions that are just bad. Your hiring managers also need to know how to navigate a conversation when an employee says they’re pregnant or have a disability.
Exempt vs Nonexempt
The Fair Labor Standards Act (FLSA) governs overtime pay. This is a complex employment regulation that often trips up even multinational corporations.
Many companies, especially small businesses, interpret this to mean salary versus hourly employees. It’s not. Salaried employees can still be entitled to overtime pay.
There are several tests to determine whether an employee is exempt or nonexempt. Working through these tests can be confusing, and it’s not always cut and dry. You may even need to engage an employment attorney to make sure you are correctly paying overtime. Violations of this law can result in costly fines and penalties, including your company having to pay back overtime to employees and cover their share of taxes, including your company’s.
Employee vs Contractor
Especially given the recent rise in freelance workers, many small businesses now work with freelancers to help supplement their business needs. But the Internal Revenue Service (IRS) has made clear distinctions between employees and contractors.
Your company pays employees through a salary or hourly wage. You tell them when to work, where to work, and what work to do. You withhold money from an employee’s paycheck to cover half of the Social Security and Medicare taxes and your company pays the other half. Businesses also withhold and pay federal and state taxes on behalf of the employee.
One of the biggest business benefits to partnering with contractors is that you don’t have any of those operational headaches. A contractor is considered self-employed and must handle all of their own withholdings. You simply pay them a flat amount and they must take care of their responsibilities.
Many companies, however, misclassify employees as contractors. If your small business uses contractors and any of the following is true, your contractors may actually be employees and your company could be subject to massive fines and penalties:
- A contractor has a supervisor at your company.
- Your company tells a contractor when to work, how many hours to work, and what work to do each day.
- Your company conducts regular performance reviews for contractors.
Ultimately, a contractor works independently. Your company tells a contractor what project you need done, and the contractor scopes the project, provides a timeline; you then negotiate a price. If your company controls the contractor’s daily work duties, you might be stepping over the line and inadvertently converting a contractor into an employee, subjecting your company to fines and penalties.
All employers in the US are required to verify an employee’s eligibility to work in the country. Every new employee must complete Form I-9 and provide the appropriate identification within three days of hire. This form is used to verify a worker’s eligibility to work in the US. Because this form contains personal and sensitive information, it must be kept separate from an employee’s personnel file. Keeping an I-9 in an employee’s personnel file can result in fines.
Even how you complete the form can subject your company to compliance violations. When having an employee provide documentation for you to complete the employer portion of the I-9, you cannot mandate the documentation a new hire gives you. Direct them to the instructions on the form, stating clearly what documentation is allowed and how many forms of identification are required.
I recommend keeping all employee I-9 forms together in one location, outside of personnel files, in a locked cabinet in a locked room. Double locking provides your company with extra legal protection.
At-will employment is the standard across nearly all states and cities. This means that employers can terminate employees at any time, and employees can leave a company at any time. Even though employers can terminate employees without a reason, if challenged, the company must have a non-discriminatory reason for the termination.
Terminating an employee for any of the following reasons could lead to a wrongful termination lawsuit against your company:
- Discrimination against a protected class (race, gender, national origin, disability, religion, gender, age)
Ensuring Compliance Through HR Audits
An HR audit is a review of your HR policies to ensure compliance with all applicable federal, state, and local labor laws. Conducting regular HR audits will show you gaps in your HR compliance, giving you direction and focus on improving your processes. The best time to complete an HR audit is before a compliance issue arises but, because you never know when that will be, I recommend doing them at least annually.
Payroll is a major part of HR but also separate from some HR components. To ensure you’re maintaining payroll compliance, follow our step-by-step payroll audit guide.
Doing an HR Audit
If your company has never done an HR audit, do it now using our free HR compliance audit checklist. You will uncover compliance issues that you can fix before they become a larger problem; then you can review your processes annually, ensuring that you stay up to date and compliant with changing labor laws and regulations.
When deciding to do your first HR audit or your regular annual audit, you have two options for conducting the audit itself: external or internal. An HR audit done by an external auditor or HR compliance expert might cost more, but could provide more accurate results. Doing an internal audit could be faster, but could mean you miss some important details.
Whether you hire an employment lawyer or an HR compliance company to handle your HR audit, an external auditor may be more thorough and uncover more issues than an internal team member. External HR compliance experts stay up to date with changing labor laws and will know quickly where your big issues are and direct you on how to correct them.
However, an HR compliance expert will be costly. HR consultants and employment lawyers usually charge by the hour and, depending on the size of your company and the scope of your requested audit, the audit could take weeks or even months to complete. Identifying major compliance issues will save you money in the end, but it will cost you up front.
If you instead choose to run your HR audit internally, either doing it yourself or having an HR team member do so, you can save money. You already have HR staff working for you, so it will only cost you their salary and time to complete the audit.
Be careful, however, choosing an HR team member to conduct your audit because you need a person you trust explicitly to not only know what to look for but also report truthful findings. Especially if the employee doing the HR audit could uncover an error they caused, the employee may try to cover that error and not report it to you, leaving you with inaccurate details about what processes you need to fix. This could leave your company open to compliance issues, including fines and employee lawsuits.
Ignoring a problem does not make the problem go away. Ignoring potential HR compliance issues only makes it more likely that your company will face fines or employee lawsuits, costing you even more than what it would to conduct regular HR audits. Knowing what your compliance issues are through an HR audit allows you to correct those issues so you can avoid costly fines and lawsuits.