Top 5 HR Compliance Concerns for Small Business

As the economy evolves, small and medium-sized companies sometimes find themselves focusing so tightly on core business operations that they overlook what might be their most serious and costly pitfalls — HR compliance issues. They may lack the time and resources to build infrastructure and processes that are beyond core business objectives.

This can affect a huge number of people, because those companies, which typically have 10 to 500 employees, represent 99.9 percent of all employers, according to the U.S. Small Business Administration (SBA). If entrepreneurs and SMB owners are focused solely on growth and product, how do they know what issues to look for in order to protect their companies and employees?

Here's a look at the eight top HR compliance issues that SMBs face and strategies for addressing these concerns.

1. Workplace Litigation Surrounding Employment-Related Practices

Businesses have quite a few concerns when it comes to matters such as discrimination, harassment, wrongful termination, and unlawful retaliation claims. All these issues can be costly and time consuming, as well as damaging to your reputation as a company.

Discrimination and harassment

The Equal Employment Opportunity Commission (EEOC) received 81,055 new charges of discrimination in fiscal year 2023, up more than 10% from the previous year. The federal agency says that race and sex discrimination are the most prevalent forms of workplace discrimination in 2023.

If businesses fail to provide proper training on workplace diversity and sexual harassment prevention, they can open themselves to a wide range of risks. It's much cheaper to prevent a claim than deal with its consequences.

Yet, despite the possibility of being sued, small business owners may not be fully addressing the problem head on. According to SmallBusiness.com, only 53% percent of companies provide sexual harassment prevention training programs or education. That means 47% of small businesses could be putting themselves at risk for potential claims.

Studies show that a company's defense costs in a wrongful termination lawsuit can cost $85,000 or more, and that winning plaintiffs receive judgments averaging $500,000.

Health and workplace safety violations

Violations of federal OSHA rules can lead to increased liability for on-the-job accidents. Employees who have been injured due to precarious conditions or a lack of workplace safety equipment are typically covered by workers' compensation insurance. The system typically provides benefits for medical expenses and lost wages without requiring the employee to prove negligence. However, it's a process with a lot of steps and details, especially within claims processing, that can be easily missed, leading to bigger issues. Employers also have to keep an eye out for fraudulent workers' compensation claims and deal with the subsequent fallout.

Wage and hour laws

Another danger area for small businesses is violation of wage and hour laws, including minimum wage, overtime pay, final pay, and timekeeping requirements, all of which can result in noncompliance penalties. With a skeleton crew of employees tending to HR matters — and potentially wearing many different hats — it can be easy for workplace policies and practices to drift from compliance. This can be especially true for companies with employees working remotely, from different states, on different schedules.

Union and labor laws

In 2023, over 16.2 million workers were represented by a union — an increase of 191,000 from 2022. Failure to comply with labor laws like the National Labor Relations Act (NLRA) can lead to consequences, including fines and penalties. Companies must adhere to employment contracts as well as employees' rights to unionize, bargain collectively and engage in protected concerted activities.

Employee misclassification

One of the most common mistakes that small businesses make is misclassifying employees — typically misclassifying employees as independent contractors. Some employers may attempt to take advantage of potential "loopholes" to avoid offering employees benefits such as paid leave and retirement plan. The consequences could be much worse than a slap on the wrist.

Business owners who make this mistake may face fines and back taxes for failing to pay payroll taxes, unemployment insurance and workers' compensation. Moreover, misclassified workers may file lawsuits or complaints with government agencies, leading to potential costs and settlements.

2. Payroll and Benefits Regulations

Employment regulations can be a difficult burden for small companies, primarily because the associated overhead expense is spread over a smaller workforce. According to an SBA survey, small companies spend up to 80% more per employee on federal regulatory compliance than large companies. Poor management of personnel-related tasks can make compliance even more costly.

Health and retirement benefits

For the small business owner who offers retirement and health benefits, keeping up with all the new regulations and changing laws can be daunting. The required tests must be conducted, plan provisions must be properly applied, required notices and documents must be provided to employees, and all required government filings must be completed. Plus there's the alphabet soup legislation to comply with, including:

• ACA
• HIPAA
• COBRA
• FMLA

Employee leave policies

While FMLA provides a baseline for requirements surrounding mandatory health and family leave, state and local laws, which can frequently change, provide greater leave right. This can get especially tricky if you have remote employees working in different states or countries.

Payroll compliance

With payroll, you need to have expertise on the minutiae of payroll reporting requirements and filings at the federal, state and local level. A payroll manager is also required to manage multiple unemployment insurance claims and inquiries, among a wide array of other tasks related to getting the employees their correct paychecks with the adequate amount withheld for taxes and benefits. It's a lot for one person to handle, and errors can lead to employee dissatisfaction and issues.

It's also important to note that minimum wage laws differ from state to state and change often. Businesses should review regulations periodically to stay on top of the changes.

Pay transparency

The issue of pay transparency is making headlines as more states and cities enact laws requiring employers to publicize their positions’ wage ranges.

New York City was one of the first to require employers to publish salary ranges for internal and external job advertisements. Similar legislation has been enacted in California, District of Columbia, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, Washington and Vermont.

As businesses navigate these rules, they must pay attention to whether the laws apply to their company.

3. Multiple HR Policies and Procedures but No Qualified Guidance

For a small to medium-sized business, the human resources "department" often consists of one person with a heavy load of responsibilities. This HR generalist may be responsible for compensation and benefits, HR management, employee relations, HR issues, staffing, HRIS, training and much more. Thorough, independent research of HR trends and workplace ethics often falls into the "nights and weekends" environment, which can become both costly and time consuming.

While a typical HR generalist may know a bit about everything, expert HR guidance is crucial given the constant presence and oversight of entities such as the Internal Revenue Service (IRS), the Department of Labor (DOL), and the EEOC. The old adage "ignorance of the law is no defense" certainly applies when a company is faced with an audit, an investigation by a government agency, or even litigation.

This is particularly true when areas of concern include everything from compensation and benefits to corporate governance, staffing and workers' compensation. An HR generalist who makes the wrong decision about a crucial issue — even something as simple as asking the wrong question in an interview — can result in significant consequences.

4. Paperwork Errors

With every new hire comes a mountain of paperwork. If a company doesn't use online services and must deal with hard copies, errors can multiply. Think about what happens when an employee enrolls in benefits. Payroll has to double-check that appropriate deductions are made from employees’ checks. When an employee undergoes a life status change event and alters his or her benefits election, benefits and payroll must be adjusted accordingly and within the required timeframe.

These administrative processes tend to reside in different parts of the organization, and yet they're dependent upon one another. At each step, when information is transferred from one HR process to another, there's always the vulnerability for error. Multiply this possibility by the number of employees and the reams of paperwork, and that possibility starts looking like a probability. When one area fails, the whole process comes to a halt.

Mistakes in these core functions cause employees to focus on the errors rather than appreciating the benefits that HR delivers them. Many employees don't realize how much money a company spends on employee benefits. The costs can easily reach between 5% and 10% of an employee's salary, depending on coverage options. So instead of appreciating comprehensive benefits including flexible spending accounts, employees may worry about incorrect paycheck deductions. This kind of concern can quickly become a topic of conversation among employees.

5. HR Functions Not Being Coordinated

As demonstrated above, in order for the correct amount of deductions for benefits to be taken out of an employee's paycheck, accurate information must flow to and from payroll and HR system. The records for payroll and benefits must directly sync. Otherwise, payroll deductions can be wrong. This can affect employee confidence in their workplace, and addressing these concerns can require valuable time.

Software systems can help. But if you use one vendor for payroll and one for benefits, you are responsible for making sure that everything is coordinated and running smoothly. This can entail calls back and forth from the vendors while trying to understand the technicalities of the different systems. On top of that, the payroll software must be continually upgraded, and without proper data protection, could be vulnerable to leaks and breaches. With all the moving parts and compliance standards, even a great manager can make costly errors.

To mitigate this trouble, many SMBs choose a human resource information system (HRIS) that covers their HR needs — or gives you the flexibility to choose and pay for only the services you need. The ideal solution also would scale with your business as it grows and integrate easily with your other business software applications.

There are plenty of do-it-yourself payroll software options available, but when you consider overall long-term costs, a comprehensive HRIS or an HR outsourcing solution like a PEO or an ASO might be more cost-effective.

6. Mismanaged Technology

While emerging technology surrounding AI seems powerful, it may cause HR compliance issues. One area in particular is recruiting technology applications, such as applicant tracking systems.

Many companies use automated decision-making technologies to assess whether a job candidate is qualified or if an existing employee is suitable for promotion, these may reflect bias toward certain groups.

To tackle this issue, some states and cities are introducing regulations. For instance, in April 2023, New York City mandated an audit process to look for bias in these automated employment decision-making tools before they can be used. Moreover, according to this law, candidates and employees living in the city must be informed about the use of these technologies and the criteria and characteristics they will evaluate. California, Colorado, Illinois, and Maryland also have similar related laws impacting employers. At the federal level, the EEOC recently initiated efforts to make sure that these tools comply with federal civil rights laws.

7. Remote Work

The rise in popularity of remote work has brought new compliance issues. The most common problem is dealing with payroll tax requirements across different states, which vary depending on certain factors as employee status, where the employee is working and the length of time they are working there.

If some employees work in a different state than where the company is located, employers may be responsible for paying additional taxes. These can include, but are not limited to, state unemployment tax, city taxes, school district taxes and workers’ compensation taxes.

Other state-specific requirements that business leaders should keep in mind are:

• Family and Medical Leave Act (FMLA) and sick pay
• Anti-discrimination laws
• Overtime limits
• Non-compete agreement enforceability
• Paid time off (PTO) requirements
• Post-separation payments
• Unemployment and workers' compensation
• Fair Labor Standards Act (FLSA)
• Location specific expense reimbursement requirements such as those in California and Illinois among other locations.

8. Marijuana

Marijuana laws are another area of HR compliance that is continually evolving. While marijuana was illegal at the federal level as of October 2024, many states have legalized medical and recreational use.

Employers need to stay informed about their state’s regulations. For example, New Jersey's Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act (CREAMMA) prohibits employers from refusing to hire or taking negative action against individuals solely for engaging in recreational marijuana use. Additionally, the act requires employers to conduct a physical evaluation of an employee before administering a marijuana drug test and to use a Workplace Impairment Recognition Expert (WIRE) to assess an employee's usage or impairment from cannabis or other intoxicating substances.

It's prudent to check your state's requirements before you start testing employees for marijuana use.

The Solution for HR Compliance Issues

Many of these pitfalls can be mitigated with a little careful planning and — most importantly — by seeking outside help. Small businesses often work with an outside HR consultant or a lawyer who specializes in compliance.

But when you need a comprehensive solution, TriNet provides HR services for smaller companies that include payroll and benefits administration, as well as assistance with many aspects of employer-related risk mitigation and compliance. Our full-service PEO and our ASO can help SMBs and their employees navigate HR compliance concerns.

TriNet is a leading provider of human resources solutions for small to medium-sized businesses. We enhance business productivity by enabling our clients to outsource their HR functions to one strategic provider. This allows them to focus on operating and growing their core businesses. Our PEO is tailored by industry and includes:

• Payroll and payroll tax administration
• Risk mitigation and compliance support
• Access to comprehensive benefit plans
• Workers' compensation coverage and administration
• A dedicated HR team

TriNet's proprietary, cloud-based technology platform enables efficient anytime, anywhere for HR administration.

This communication is for informational purposes only, is not legal, tax or accounting advice, and is not an offer to sell, buy or procure insurance. TriNet is the single-employer sponsor of all its benefit plans, which does not include Enrich products and voluntary benefits that are not ERISA-covered group health insurance plans and enrollment is voluntary. Official plan documents always control and TriNet reserves the right to amend the benefit plans or change the offerings and deadlines.

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