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HR Compliance Checklist: What Business Owners Need to Know

Human Resources

Every small business should have an HR compliance checklist. After all, compliance is a top area of focus and concern for both human resources departments and company executives. Staying in compliance requires a thorough understanding of applicable laws and regulations, while also being aware of the company's larger human capital resources objectives.

Companies of all sizes face increasing HR complexities as the number of employment laws and regulations are on the rise, and the risk of penalties for non-compliance has perhaps never been greater. When developing HR policies and procedures, business owners should know, for example, that:

  • An employer must be in compliance with all applicable federal, state, and local laws and regulations.
  • A business may be subject to an audit from an enforcing agency that may levy fines and penalties for non-compliance.
  • Not knowing or understanding your compliance obligations is not an acceptable legal defense.
  • A lawsuit settlement can bankrupt a company.

"Regardless of a business's size or scale, timely and proactive compliance with federal, state, and local employment regulations is critical," notes Paychex HR consultant Jillienne Allgauer. "With the frequency and scope of audits by government agencies increasing, organizations must comply with ever-changing regulatory mandates — or deal with the adverse consequences that may result from non-compliance."

Meeting HR goals and staying in compliance

What can HR leaders do to help ensure that they meet a firm's larger human resources goals, while also staying in compliance with applicable regulations?

One of the key roles of HR departments is bridging the gap between the company's growth trajectory and objectives — and compliance practices that influence activities such as hiring, employee development, and retention. Striking the balance between strategy and compliance may start with a clearly defined set of goals.

For example, plans to take the company to new global markets can make international hiring a priority. Similarly, if the company is going to invest in developing its software platform, hiring code developers becomes a top consideration.

Understanding the strategic priorities that your department must support lays the foundation for a better understanding of different scenarios and how compliance concerns may impact decisions. When your HR goals are defined, it's important to consider different scenarios and the compliance implications.

For example, if your goal is to increase diversity within your organization, what compliance factors come into play as you develop your recruiting strategy? Alternatively, how does managing costs for benefits and compensation amid the federal, state, and local laws that regulate these areas impact what path your company will follow?

 Regulations don't always mean that HR leaders should change strategy. It suggests that every major decision should be balanced by looking at the potential pros and cons of each path, including compliance considerations, to determine the best way forward.Decision making through pros and cons including compliance\

Compliance issues faced by small businesses

Business owners face demands on their time from every direction and may need to wear many hats — including that of the compliance officer.

But too often, business owners aren't aware of the need to comply with human resource-related regulations until an enforcement agency contacts them, and by then it's often too late. Government agency auditors aren't likely to give a casual reminder.

Let's take a look at a few important compliance issues every business owner should be familiar with:

Form I-9: Form I-9 verifies both the identity of new employees and their authorization to work in the United States. You must ensure that Forms I-9 are completed in a timely manner and in compliance with Immigration and Customs Enforcement (ICE) audit standards, and that they are properly retained on file (a best practice is to retain them in consolidated, secure folders for active and terminated employees, outside of the general personnel file).

With immigration issues continuing to be highlighted on the enforcement forefront, complying with the most recent standards and requirements for employment verification should be on top of business owners' compliance checklist.

Non-discriminatory hiring: Federal anti-discrimination laws enforced by the Equal Employment Opportunity Commission (EEOC) include the Americans with Disabilities Act (ADA), the Age Discrimination in Employment Act (ADEA), the Genetic Information Nondiscrimination Act (GINA), and Title VII of the Civil Rights Act of 1964, all of which prohibit discrimination in employment based on protected classes.

Employers should ask themselves:

  • Do I know which federal, state, and local employment laws prohibiting discrimination in recruitment and hiring apply to my business?
  • Have my managers been trained on these laws recently?
  • Do I have policies in place to communicate our efforts to comply with these laws?
  • Have I analyzed company practices for making employment decisions including recruitment, hiring, promotion, and access to training?

It's a good idea to take a closer look at ensuring a workplace free of discrimination in compliance with applicable federal, state, and local laws.

Exempt vs. non-exempt status: Fair Labor Standards Act (FLSA) regulations regarding employee classifications for exempt versus non-exempt status are often confused with the designation of hourly versus salaried employee payment methods.

The U.S. Department of Labor (DOL) aims to ensure employees are paid in compliance with the federal wage and hour law. Under the law, employees are classified as either exempt or non-exempt from some or all of the provisions of the FLSA. Non-exempt employees must be paid at least minimum wage for all hours worked up to 40 in a workweek and the applicable overtime rate for hours worked over 40 in a workweek.

Risk factors for a DOL wage and hour audit

To help achieve and maintain compliance with applicable wage and hour requirements, it is important for payroll, HR, legal, and other groups at your company to work together. Consider whether you and your partners need to address the following potential risks to help your business avoid a DOL audit:

Pay issues: Does your regular rate of pay include wages, commissions, shift or job differential, premium pay for hazardous work, non-discretionary bonuses, and other incentive payments? Include them in your calculations for overtime where applicable and avoid shortcuts, such as averaging hours over multiple workweeks.

Off-the-clock work: Employees must record all hours worked, including work performed outside of regular working hours or off work premises even if the work was not authorized or requested. It's your responsibility to make sure time cards are correct.

However, employers should avoid adjusting the weekly salary of an exempt employee due to the quantity of hours worked. Such action could jeopardize the salary basis test and the individual's exempt status.

Improper salary deductions for exempt employees: Some examples of improper salary deductions include partial-day absence or a full-day of pay because your business was closed due to inclement weather.

Training: Non-exempt employees don't generally need to be compensated for time spent in training if all the following apply: attendance is outside employee's regular work hours, training is voluntary, it’s not directly related to the employee's job, and the employee does not perform any productive work.

Breaks and meal periods: The FLSA doesn't require you to provide meal or rest breaks, but some states do. If your business does provide rest breaks, the FLSA dictates that employees must be paid for breaks lasting 20 minutes or less. These breaks must also be counted as time worked for purposes of calculating overtime hours for non-exempt employees.

If your business provides a meal period (typically 30 minutes or more) it generally doesn't need to be compensated as work time if the employee is completely relieved from duty and the meal period is generally not counted as time worked.

Travel time: Traveling from home to work and back doesn't generally count as paid travel time, but travel from one job site to another will likely be compensable and count as time worked for non-exempt employees.

For home-based workers, traveling to the office may be considered compensable and time worked. Other types of travel may also be considered compensable under federal and state wage and hour regulations.

Ensuring HR compliance can be a tall order, but here are three pointers to get you started:

  1. Conduct an internal audit of strengths and weaknesses of existing compliance levels. If unsure about where to begin, seek a subject matter expert's advice or research requirements on the enforcing government agency's website.
  2. Ensure that anyone accountable for compliance in the organization is properly trained. Remember, supervisors and managers represent the business in day-to-day employment decisions.
  3. Finally, install a monitoring mechanism to ensure that internal processes for compliance are up to date and consistently followed.

A small business HR compliance checklist

Ultimately, it is critical that today's HR leaders balance HR strategy and compliance. By having an overarching strategy that lays out your company's goals and objectives – and ties that to compliance planning — firms can make more informed decisions that may minimize risk and keep compliance as an achievable goal.

Many organizations find it useful to develop a compliance checklist that functions as a compass for areas that they must keep in mind at all times. As noted above, some key areas to monitor and ensure are compliant at all times include:

  • Completion and compliant retention of Form I-9 for every employee
  • Ensuring non-discriminatory hiring practices
  • Accurate classification of exempt vs. non-exempt employees

When a sensitive area is part of the decision-making process, it's immediately highlighted and they can take a deeper dive into how different outcomes could impact business performance.

The compliance outsourcing option

Many businesses choose to outsource certain HR functions to help mitigate these potentially costly HR pitfalls. Doing so can mean having access to experienced professionals who have in-depth, up-to-date knowledge of federal, state, and local laws and regulations.

Small businesses, however, may be hesitant to go this route, and assume that having a limited budget won't make human resources outsourcing feasible. There may also be the perception that outsourcing is designed to help only larger operations streamline their business functions and cut down on costs. But there's an increasing need for small businesses to consider the financial and other potential practical benefits of outsourcing HR functions to a trusted provider.

Potential cost savings: In many cases, HR outsourcing helps save costs and alleviates administrative burdens. Outsourcing may also help in-house staff focus their efforts on core business functions without additional overhead.

On-hand HR expertise: The greatest challenge is that failure to comply with applicable employment laws can lead to penalties, loss of business license, or lawsuits from employees or former employees. Outsourcing HR functions to a trusted provider can help business owners better understand the laws and regulations that apply to them.

Access to the latest technology: HR outsourcing can allow companies that may have minimal resources to use cutting-edge technology that could otherwise be costly to maintain on their own. With an outside expert running some of the functions, businesses may enjoy better and more innovative technological systems without necessarily having to own them.

If HR teams at small businesses are looking to focus their efforts on areas of the business that have a direct impact on the bottom line, outsourcing HR functions may be a worthwhile consideration. Without the compliance knowledge, depth of expertise, and technological advancements that a professional HR outsourcing service can provide, small business owners could be at an increased risk for non-compliance, costly employee lawsuits, and other HR pitfalls.

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This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.