Small Business HR Compliance

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Liz Strikwerda

Content strategist and corporate blogger (2000+ posts). Her work has been featured on G2's Learning Hub, Human Resources Today, CloserIQ, Better Buys and over 500 business websites. She plays bluegrass mandolin and enjoys hiking in the red rock wilderness of southern Utah. Connect with me on LinkedIn

Zeigler Auto Group paid $85,000 in back wages to 214 employees for misclassifying non-exempt workers, failing to pay minimum wage and neglecting to maintain accurate payroll records.

A Florida restaurant had to pay $19,000 in back wages and penalties when they failed to pay servers for their entire shift. The investigation found that the company didn’t compensate for time worked prior to when the servers’ first customers arrived.

An Ohio-based home health agency was fined $327,848 for multiple violations including not paying overtime when travel time between clients pushed aides over a 40-hour workweek.

An investigation by the DOL found Minnesota-based Cable Equipment Services violated FLSA overtime, minimum wage, and recordkeeping requirements when they failed to pay 41 market contractors and drivers overtime and minimum wage. The company treated the workers involved as independent contractors instead of employees. However, investigators found that the workers met the definition of employees. The defendants agreed to pay $350,000 in back wages and liquidated damages.

Small business HR compliance has never been more complex. It’s critical that small business owners understand regulations and create a culture of compliance at their organization.

We will discuss the following compliance categories that apply to small business employers:

  1. Hiring Laws
  2. Family Medical Leave, COVID Leave, and Paid Time Off
  3. Exempt vs Non-Exempt Employee Classifications
  4. Minimum Wage
  5. Meals and Breaks Tracking
  6. Tracking and Calculating Overtime
  7. Contractor vs Employee Classification
  8. Predictive Scheduling

1. Hiring Laws

Here is a listing of the main hiring laws that apply to U.S. employers. Keep in mind that your state may have additional ones. Union and government contracts may have special requirements as well.

Your compliance burden never decreases. You are responsible for all the regulations that apply to one employee. When you hire your 15th worker, you are subject to additional laws. And so on.

1. Employers With At Least 1 Employee

  • FLSA (Fair Labor Standards Act)
  • Immigration Reform & Control Act (IRCA)
    • Don’t hire employees who aren’t legally permitted to work in the U.S.
    • Keep I-9 forms for all workers on the payroll.
  • EPA (Equal Pay Act)
    • Male and female employees must be compensated equally for the same job role.
    • The Lilly Ledbetter Fair Pay Act (passed in 2009) expanded the EPA significantly.
  • Uniform Guidelines for Employment Selection Procedures (under EEOC)
    • You cannot discriminate on the basis of race, color, religion, sex, or national origin
  • EPPA (Employee Polygraph Protection Act)
    • You cannot use lie detector tests in pre-hire screening or while the worker is employed. There are some exceptions for incidents when an employee is suspected of fraud. Consult your legal counsel or PEO if you have such a scenario at your company.

2. Employers With 15 or More Employees

  • EEOC
    • The U.S. Equal Employment Opportunity Commission prohibits discrimination against a job applicant or an employee because of the person’s race, color, religion, sex (including pregnancy, transgender status, and sexual orientation), national origin, age (40 or older), disability or genetic information.
  • ADA (American with Disabilities Act)
    • You can’t discriminate against applicants/employees with disabilities.
  • GINA (Genetic Information Nondiscrimination Act)
    • You can’t discriminate against applicants/employees based on genetic information such as family medical history or genetic risk factors.

3. Employers With 20 or More Employees

4. Employers With 50 or More Employees

  • AAP (Affirmative Action Program)
    • You must take active measures to recruit persons in designated classes: women, minorities, disabled, covered veterans. You must keep records of AAP hiring programs.

5. Employers With 100 or More Employees (May Apply to Government Contractors With 50+ Employees)

Remember that you have many other compliance requirements. FMLA, ACA, OSHA, and COBRA are some of them. As mentioned, these are the laws that affect recruiting directly.

If you contract with the federal government, you are subject to another layer of laws. They are similar to the laws mentioned previously but may kick in at earlier thresholds. Consult the DOL Office of Federal Contract Compliance Programs.

The following states have additional hiring requirements.

  1. New York—marital status can’t be a factor in hiring
  2. Washington D.C.—political affiliation can’t be a factor in hiring

Ban the Box

These laws are named for the ‘box’ on job applications that indicates a criminal history. Each of the following states have a law related to hiring applicants with a criminal history. If you live in one of the following states, consult your state department of labor for the details. Additional states have ban the box provisions for public employers.

  • California
  • Colorado
  • Hawaii
  • Illinois
  • Massachusetts
  • Minnesota
  • New Jersey
  • Oregon
  • Rhode Island
  • Vermont
  • Washington

Protect Your Company

Are your workplace processes compliant with hiring laws? We recommend that you:

  • Provide compliance training for hiring managers and all members of your recruiting team.
  • Use structured interviews with scripted questions.
  • Consult your legal counsel when creating employment contracts.
  • Stay on top of local and state laws.
  • Maintain comprehensive records.
  • Verify eligibility to work.
    • Ensure new hires fill out I-9 completely, including signature, within 3 days of hire.
    • Require supporting documentation for applicants with a temporary work visa.
    • Review eligibility status frequently.

Case Study: Bass Pro Outdoor World

$10.5 million. That’s what it cost Bass Pro Outdoor World to settle an Equal Employment Opportunity Commission case in 2017. Bass agreed to pay this amount to a class of Hispanic and African-American applicants who claimed they weren’t hired based on their race. The EEOC agreed.

As part of the settlement, the EEOC ordered Bass to proactively increase diversity hiring. The chain of sporting goods stores agreed to recruit at minority colleges/trade schools and post jobs in publications popular with underrepresented groups. (Note that Bass didn’t admit wrongdoing.) Hiring laws should be taken as seriously as, well…a $10 million check.

Hiring Compliance Solution: Applicant Tracking System

An applicant tracking system (ATS) makes it easier to comply with multiple layers of hiring laws. It helps you create compliant workflows with checklists to track progress and assign tasks. Manage structured interviews. Create compliant screening applications. Don’t sweat the recordkeeping requirements with powerful ATS databases and search functions.

2. FMLA, COVID Leave, and PTO

Occasionally, employees need to leave work. This can be for medical emergencies, planned medical procedures, family support, or leisure. Several labor laws govern the management of these kinds of leave, and they affect most employers. Let’s break down the main leave laws:

Family and Medical Leave 

The Family and Medical Leave Act (FMLA) entitles eligible employees to take unpaid, job-protected leave for specified family and medical reasons with the continuation of employer health insurance coverage. 

In March 2020, Congress passed the Families First Coronavirus Response Act (FFCRA) which includes The Emergency Paid Sick Leave Act (EPSLA).

The FFCRA requires employers to provide paid leave through two separate components; 

  • The Emergency Paid Sick Leave Act (EPSLA) 
  • Emergency Family and Medical Leave Expansion Act (Expanded FMLA) 

The EPSLA is the second law contained in the FFCRA that provides paid leave. Specifically, it provides full-time employees up to 80 hours (two weeks) of paid sick leave for basically the same coronavirus-related reasons as outlined in the EFMLEA. 

Paid Time Off 

Paid Time Off is offered by many employers. In most cases, employees accrue time off throughout the year. Typically, employers offer a specified number of accruable hours for every week on the job. Tracking and managing the number of hours accrued, and the number of time off hours the employee has requested is where employers can get tripped up.

Except for the previous types of family and medical leave, there are no federal laws that mandate employers provide Paid Time Off. However, many states regulate PTO to some degree. 

24 states: Alaska, Arizona, California, Colorado, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island (after one year of employment), Tennessee, West Virginia, and Wyoming—and the District of Columbia have laws regarding payment of accrued vacation time. 

 ‘Use it or lose it’ policies are prohibited in California, Montana, and Nevada. In addition, some cities regulate PTO. Check your state and local departments of labor. 

Case Study: Delta Fabrication

Delta Fabrication, a California-based sheet metal manufacturer, paid $19,694 in back wages to 71 employees after a Department of Labor (DOL) investigation. The company wrongly paid workers only two-thirds of their regular rates when they took coronavirus-related sick leave, a violation of the Families First Coronavirus Response Act (FFCRA). 

DOL investigators found that Delta Fabrication first used the employees’ available accrued sick days to compensate them, wrongly subtracting hours from the workers’ accrued sick leave instead of providing the additional leave provided by the act. https://www.dol.gov/newsroom/releases/whd/whd20201124

Correctly administering leave is a compliance minefield for even experienced Human Resources professionals. Common problems include:

  • Failure to notify employees of FMLA and COVID-related leave rights
  • Failing to confirm when employees become eligible for state or federal leave
  • Managers who don’t understand FMLA or EPSLA or who neglect to inform HR when an employee takes leave
  • Failure to keep sufficient records including separate documentation for FMLA and COVID leave
  • Penalizing an employee who takes protected leave
  • Failure to create a formal PTO policy
  • Failure to enforce PTO policies equitably

Leave Compliance Solution: Automated PTO and Leave Management

With Automated PTO and Leave Management, you simply set up custom time-off categories. This allows you to allocate, accrue and track the use of federal FMLA and COVID leave, state family leave, vacation, and company PTO. Automatically.

Automated leave management benefits employees and managers as well. Employees can check their leave balances and request time off using any mobile device. Managers have all PTO requests in one location and can approve, modify or deny. 

In addition, managers can see employees on leave or scheduled for leave as they build shift schedules.

Automated PTO and Leave Management streamlines PTO tracking and ensures employers can see the big picture before approving or declining time off. PTO and Leave Management are most useful when they sync with your time and attendance system.

Exempt vs Non-Exempt Classification

Employers must recognize the classification of their employees. State and federal laws regarding overtime and variable pay schedules depend on those classifications, and there can be trouble if records are inaccurate or absent, altogether.

What is an exempt employee? 

The ‘exempt’ in exempt employee signifies that the employee is exempt from the overtime protections in the Fair Labor Standards Act (FLSA). In other words, the employer doesn’t have to pay overtime, generally time-and-a-half their regular rate for weekly hours above 40.

What qualifies for exemption from overtime laws?

The Department of Labor lists several categories of employees who are exempt from overtime laws. This is sometimes called the ‘white collar’ exemption. To be exempt, employees must meet the duties and wage test for all requirements. Remember that it’s the actual job duties that count, not the job title. Note that the salary threshold increase in 2020 did not affect the classification rules.

What is a non-exempt employee?

Any employee that doesn’t meet the salary and duties test mentioned previously must be paid overtime. Most hourly workers are non-exempt. This is far from straightforward. Even if the employer classifies correctly, if they don’t track time properly, they can violate overtime laws. Pitfalls include failing to track rest periods, illegal tip pooling practices, off-the-clock work, and difficulty tracking time for mobile and remote employees.

Case Studies: Zeigler Auto Group and MetLife

Zeigler Auto Group paid $85,000 in back wages to 214 employees for misclassifying non-exempt workers, failing to pay minimum wage and neglecting to maintain accurate payroll records.

One of the most famous cases of misclassification involved a $50 million judgment against MetLife. The claimants were former Claim Specialists. Up until 2013, these employees were paid hourly. As non-exempt, they were also paid overtime when they exceeded 40 hours a week. According to the plaintiffs, weekly overtime work was common. In 2013, MetLife reclassified the Claims Specialists as exempt salaried employees. Since their job duties didn’t change, MetLife was asking for trouble. The plaintiffs claimed that they continued to work 45-60 hour weeks. The judge agreed that the employees were due overtime pay.

Classification affects more than overtime laws. It can impact benefits eligibility, minimum wage protections, and workers’ comp eligibility. In addition, employers who fail to pay legitimate overtime could face state as well as federal penalties.

Classification Compliance Solution: Automated Time and Attendance

There are three main steps for complying with classification laws: 

  1. Follow the federal and state rules for classification,
  2. Track every minute worked by all employees regardless of classification, and
  3. Save all timecards and payroll records.

With automated time and attendance, employees punch in and out with a hardware clock or mobile app. The software creates and saves virtual timecards so you don’t have to worry about the recordkeeping requirements.

In addition, automated time and attendance helps you avoid the complicating factors that can trip up employers. These involve meals/breaks, mobile employee oversight, tip tracking, and employee timecard padding.

  • Meal/break prompts and early break clock-in lockout
  • Schedule enforcement
  • Geofencing for mobile employees
  • Missed punch alerts
  • Tamper-proof virtual timecards
  • Audit-ready timekeeping records

Meals and Breaks

While there is no federal law on work breaks, many states have laws that apply to rest periods. Generally, the laws mandate a paid or unpaid break for a minimum number of hours worked. Thousands of employers violate these laws every year.  In many cases, the employer assumes employees are okay with a lax policy. However, when challenges arise, the employer will always be the one to be penalized if records aren’t in order.

Case Studies

A San Diego company agreed to pay $35,000 to settle a lawsuit over meal breaks. The court found the company automatically deducted 30 minutes from employees’ time worked regardless of whether the employee took a break. The employer had to pay 30 minutes’ back pay plus penalties for each day an employee was improperly docked time.

In April 2019, a jury awarded a class of 5,000 California-based Walmart fulfillment center employees over $6 million in damages for multiple violations including missed meal breaks which are required in California. The court found the company failed to pay for all hours worked, pay overtime, provide meal periods, provide rest breaks, pay final wages, and provide accurate itemized wage statements.  

Meals/Breaks Compliance Solution: Automated Time and Attendance

Don’t let rest periods cause compliance problems. Each of the items listed above can be solved with a fully automated time and attendance solution. With this solution in place, you can rest assured that you have your bases covered when it comes to break and mealtime compliance.

Protect yourself with:

  • Time clock prompts for unpaid breaks
  • Manager alerts for missed break punch-outs
  • Real-time manager oversight of mobile employees on break
  • Automated recordkeeping of shift punches including rest periods

Minimum Wage

A minimum wage law sets the lowest hourly rate an employer can pay employees who are covered by the law. The current federal minimum wage is $7.25 per hour. It was enacted July 24, 2009. 29 states and the District of Columbia have a minimum wage above the federal level. 

Most state-level minimum wage laws increase incrementally over several years. The upward adjustments generally occur on January 1, but some states don’t stick to the calendar year. It’s critical to know the specifics of your state’s minimum wage law!

In addition, it’s crucial that employers understand that when the state and federal minimum wage laws differ, employers are obligated to pay the minimum wage that is most favorable to the employee. In other words, if your city passes a minimum wage of $14/hr, you can’t pay the federal minimum wage of $7.25.

What about workers who receive tips?

The federal law allows an employer to pay a tipped employee not less than $2.13 an hour in direct wages as long as all three of the following conditions are met:

  1. If $2.13 per hour (or hourly rate above this) plus the tips earned equals at least the federal minimum wage
  2. The employee is allowed to keep all earned tips
  3. The employee customarily receives more than $30 a month in tips

If an employee’s tips combined with their direct wages (at least $2.13/hr) do not equal the federal minimum wage, the employer must make up the difference.

Note that the federal minimum wage doesn’t apply to all young workers and full-time students. Get details on these exceptions on the Department of Labor website.

Minimum Wage and Overtime

Wage and hour laws, especially those involving minimum wage don’t exist in a vacuum. When you violate one law, there is a domino effect. 

For example, suppose you use paper timecards and one of your managers isn’t strict about employees recording their time. At the end of the pay period, she gathers the timecards and notices several missed punches.

She’s too busy to ask each employee when they worked, so she estimates the shift times. Then she sends the completed time cards to the payroll manager. When the checks are deposited, a minimum wage non-exempt employee gets a paycheck that’s based on inaccurate hours. The employee had actually worked 43 hours that week but the timecard listed 38.

At this point, you have violated both minimum wage and overtime. When you divide the check total by the time the employee actually worked, the hourly rate had fallen below minimum wage, PLUS, you owe the employee overtime for the 3 overtime hours.

Case Studies

Businesses that violate minimum wage laws routinely face hefty fines. For example, two Connecticut restaurants paid $137,465 in back wages and liquidated damages to workers after the DOL ruled that they violated both minimum wage and overtime.

Off the Clock Work is Illegal

A Florida restaurant had to pay $19,000 in back wages and penalties when they failed to pay servers for their entire shift. The investigation found that the company didn’t compensate for time worked prior to when the servers’ first customers arrived.

Minimum Wage Compliance Solution: Automated Time and Attendance

Automated time and attendance assures that your employees are logging their hours and recording breaks and overtime. 

With automation in place and multiple punch-in options for your employees, automated time and attendance can help keep you clear of any future trouble regarding minimum wage issues.

The following features protect you from violating minimum wage laws:

  • Biometric time clocks with schedule enforcement
  • Configurable pay rates
  • Tip tracking
  • Meals/breaks prompts

Overtime

The Fair Labor Standards Act has been around since 1938. Regardless, thousands of employers fail to comply (either knowingly or unknowingly) with the FLSA overtime rules. Some violators are well-known multi-million dollar corporations.

When is overtime pay mandatory?

Employers must pay overtime when hours worked by a non-exempt hourly worker exceed 40 in a defined work week. The overtime pay rate under the Fair Labor Standards Act (FLSA) must be at least time and one-half the employee’s regular rate of pay. No limit is imposed on the number of hours worked in a workweek for those over age 16. Overtime pay is not required for work on weekends, holidays or regular days of rest, unless the employee has exceeded the overtime hours limit in the workweek. State, local, union and industry-specific laws may also apply.

Case Studies

Overtime violations usually result from either misclassifying non-exempt employees or failing to track all employee time.

A Las Vegas plastering company had to pay $137,174 in back wages owed to 156 piece-rate employees who weren’t paid overtime. 

An Ohio-based home health agency was fined $327,848 for multiple violations including not paying overtime when travel time between clients pushed aides over a 40-hour workweek.

The first line of defense against overtime violations is to track all employee time for every shift!

In addition:

  1. Make sure overtime-exempt employees meet FLSA duties test
  2. Make sure independent contractors meet the IRS criteria
  3. Don’t require off-the-clock work
  4. Know overtime laws regarding piece-rate work
  5. Know tip laws
  6. Compensate correctly for “call-in” shifts or “on-call” work
  7. Know meals/breaks laws
  8. Pay employees for training time, putting on uniforms and traveling between job sites throughout the day (traveling from home to the first job site or client is not generally compensable time)

Unplanned Overtime Costs You Big Time

While we’re on the subject of overtime, it’s worth pointing out how unplanned overtime impacts your labor budget. A recent Deloitte study of over 800 U.S. employers revealed an average of 31 unplanned overtime hours each week, per company. Let’s do the math: if your company has an overtime wage of $25, 31 hours a week would add up to a yearly cost of over $40,000. 

By limiting unplanned overtime, you not only reduce the risk of a violation, but also save your labor budget.

Overtime Compliance Solution: Automated Time and Attendance

Automated time and attendance can help you track employee time and provides alerts and notifications when an employee is approaching overtime status. With automation in place, you have more control over your budget and all the right information for an accurate audit.

Automated time and attendance provides the following tools for overtime compliance:

  • Alerts for overtime hours thresholds
  • Meal/break early punch lockout
  • Overtime calculation by job code
  • Tip reporting
  • Flexible scripting for state or local overtime laws
  • Audit-ready recordkeeping and reporting
  • Mobile location management

Contractor vs Employee Classifications

Do you employ independent contractors? Are you sure they qualify as “independent?” The DOL estimates that between 10% and 30% of employers misclassify their employees and independent contractors. Misclassification can result in minimum wage, overtime, and FMLA violations. You can find the duties tests here: US Department of Labor.

Case Study

Companies often misclassify employees because of the additional costs and expenses typically related to employees. However, misclassifying employees leaves the employer open to litigation, a tarnished reputation, and costly fines.

An investigation by the DOL found Minnesota-based Cable Equipment Services violated FLSA overtime, minimum wage, and recordkeeping requirements when they failed to pay 41 market contractors and drivers overtime and minimum wage. The company treated the workers involved as independent contractors instead of employees. However, investigators found that the workers met the definition of employees. The defendants agreed to pay $350,000 in back wages and liquidated damages.

Has your Human Resources manager reviewed your independent contractors to determine if any of the workers should be classified as employees?

Employee Classification Compliance Solution: Automated Time and Attendance

Automated time and attendance minimizes much of the administrative and regulatory burden of classifying workers, tracking work time, and maintaining compliant records.

Tools include:

  • Employee classifications
  • Automated timekeeping
  • Audit-ready recordkeeping

WorkforceHub Gives Small Businesses Compliance Confidence

WorkforceHub, Swipeclock’s small business HR solution, contains tools to help you with all of the compliance issues discussed previously. To learn more, schedule a demo today.

Simplify HR management today.

Simplify HR management today.

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