Why the Cost of Non-Compliance Could Be Your Company's Biggest Expense (and How to Avoid It)
- Human Resources
6 min. Read
Last Updated: 07/16/2021
Table of Contents
Regardless of your company's size or the industry you are in, there are rules that your business must adhere to. Compliance with some of these rules can be easy, and almost intuitive. In other cases, the rules may be more complex.
It's also important to note that non-compliance with these rules can come at a high cost. Your business could face steep fines or other monetary penalties. Your business could also face costly remedies to achieve compliance with various industry regulations. And then, there are the associated costs from business disruption and the potential for productivity loss to consider. In short, non-compliance can have a devastating impact on your company's bottom line.
To avoid these costs, anticipating risks and taking proactive steps to prevent non-compliance is critical.
What is compliance?
To understand non-compliance, it's important first to understand what compliance means for your business. To be compliant, you must be sure that your business is adhering to all of the laws, rules, and regulations set forth by local, state, and federal government entities and agencies.
Staying on top of these many and ever-changing laws, rules and regulations can be a difficult task, so it's important to have the right processes and systems in place to help mitigate your risk of non-compliance. While these processes and procedures may require additional investment, the cost of being non-compliant can be far greater — even detrimental — to the success of your business.
Part of managing compliance is about putting processes and systems in place to meet the various employer responsibilities and then monitoring that these processes and procedures are being adhered to.
With so many laws, rules and regulations to consider, businesses can easily fall victim to non-compliance. That's why it's important to remain vigilant. Much can be said for hiring compliance experts in business areas like human resources, taxes, and financial reporting, as well as investing in facility modifications to help your facility meets existing legal requirements.
So, what might compliance look like, and what are the potential costs?
Business areas where compliance is key
While compliance issues can permeate all areas of a company, the following functions are common across most businesses.
When it comes to your human resources department, part of being compliant means writing and implementing company policies that are based upon all applicable federal, state and local laws, rules and regulations involving recruitment, hiring, termination, and treatment of employees. For example, ensuring eligibility to work in the U.S. is verified and documented for all new hires is an important compliance-related task. Failure to do so may result in fines and other penalties.
Your hiring policies and practices must not violate federal, state or local laws, rules or regulations protecting employees and applicants against employment discrimination based on race, ethnicity, gender, disability, and more. Not only can violating these rules result in potential penalties and fines but, in some cases, the fallout could damage the reputation of your company and result in lost business and reduced profitability.
Employee rights and labor laws
There are also numerous labor laws and regulations regarding employee right that must be adhered to; for example, here are some of the standards established by the Fair Labor Standards Act (FLSA) of 1938:
- Minimum wage rules
- Rules regarding what constitutes overtime and the level of overtime pay
- Rules covering workers who deliver home care services
- Employee recordkeeping requirements
- Child labor rules and requirements
- Rules regarding worker classification
Compliance with labor laws not only helps ensure your employees are being treated fairly but can save you from costly penalties.
Health and safety
It's also important to make sure your business maintains compliance with Occupational Health and Safety Administration (OSHA) and applicable state safety standards, which help ensure safe and healthful working conditions for all employees.
OSHA has its own inspectors that may check on a company's health and safety compliance. Their inspectors include trained industrial hygienists and safety professionals who help ensure companies maintain workplace health and safety standards in order to minimize workplace injury. In addition, OSHA provides whistleblower programs for employees who wish to report unsafe working conditions. By following these guidelines, you can mitigate your risk of an employee injury or illness, or being slapped with a large fine or lawsuit.
Taxes and financial reporting
Regardless of whether you are a sole proprietor or a multinational corporation, there are important things to consider in terms of financial reporting. For example, each state has its own rules, regulations and tax rates when it comes to conducting business there. In many states, you'll find variation when it comes to payroll taxes — and sales taxes, if you're a retailer. So, it's important to be aware of these differences when conducting business across state lines, to avoid being non-compliant.
What are the consequences of non-compliance?
The consequences of non-compliance may depend upon:
- The area of your business in which you are non-compliant;
- The type of non-compliance (does it pertain to an internal process or procedure, or does it involve compliance with a federal or state rule?);
- The severity and frequency of your company's non-compliance; and
- Whether it is your company's first offense.
In addition to the damage non-compliance could cause to the reputation of your business your business could also be subject to:
- A warning — Consequences can be as tame as a warning with a directive to fix the problem within a certain time frame.
- Penalties or fines— Monetary penalties and fines are the most common consequences of non-compliance.
- Ceasing business operation— In extreme cases (often related unsafe working conditions or the violation of environmental rules) your business could be forced to shut down some, or all, of its operations.
- Criminal penalties— In other extreme cases, owners or managers of the business could face criminal charges. The consequences of non-compliance can still be personally devastating and severe for the people involved, and for your business as a whole.
How to minimize your risk
While there may not be a surefire way to guarantee compliance with every rule at all times, there are some steps your organization can take to help minimize your compliance risks.
Establish new policies or procedures
In general, one of the best ways to help ensure compliance with applicable rules and laws is to implement processes and procedures throughout various areas of your business so that tasks are done the same way each time, and to ensure that everything is being properly reviewed, where applicable. Policies and procedures you may want to review include hiring practices, the process of collecting sales taxes, and other routine business transactions and tasks.
Conduct an internal audit
Internal audits and reviews can also help you minimize your risk, in some cases. This is common for financial functions such as internal accounting, and can also make sense in areas like environmental compliance and facility safety, where the consequences of non-compliance can be great both in financial terms, and in the risk to human life. Before conducting a review or an internal audit, it's important to become familiar with the best practices for the particular function you will be reviewing. These best practices might be for businesses in general, or within your particular industry.
To better assess your business' risk of non-compliance and to assist with certain types of internal audits, ask yourself the following questions:
- Does your company have written job descriptions, including the essential functions for every position?
- Is your company adhering to the most current COVID-19 workplace safety protocols?
- Do you understand your responsibilities surrounding the prevention of violence in the workplace, and do you have effective processes in place?
- Are you aware of all OSHA regulations that apply to your business, and are you in compliance?
- Do you have an up-to-date safety manual for the company, all divisions, and departments? Are all managers trained in the implementation of these measures?
- Have you filed all applicable financial statements and reports at the federal and state levels?
- Do your financial statements accurately reflect the company's financial position?
- If needed, do you have regular audits by an independent outside firm?
- Are all financial statements in connection with any bank loans or other debt accurate and current?
- Do you have an emergency action plan if there is an accident in one of your facilities?
- Do you have a process in place to manage hazardous materials?
- Do you have a plan to deal with any workplace injuries that may occur?
- Do you have a preventative action plan to help ensure that all safety protocols surrounding workplace safety that are applicable to your business are reviewed and followed by all employees?
Protecting your business, and your bottom line
Protecting your business' bottom line goes well beyond just looking at financial statements; it requires identifying vulnerabilities — such as non-compliance — and solving for those vulnerabilities to help minimize their risk to the business. This includes staying on top of the many and ever-changing laws, rules, and guidelines that can impact your business.
And, in the wake of the COVID-19 pandemic, many businesses face new challenges from a regulatory and compliance standpoint. These may include increased health and safety requirements, added internet security requirements due to an increase in remote work, and more.
Fortunately, with Paychex HR Services, clients have access to OSHA and safety programs, as well as our dedicated HR professional who acts as an extension of your team, understands legislative and regulatory guidelines that impact your industry, and can help guide you through HR challenges at every step.