No business wants to be subject to an employee lawsuit. Effective HR management and improved HR best practices can help prevent them.

[This post was modified and updated from a previous post published in January 2017]

There are issues such as hiring, employee classification, and wage requirements that call for HR best practices in order to ensure proper HR compliance.

A good strategy for HR management is to develop and implement processes for regularly reviewing and updating compliance procedures and the constantly changing labor laws. This cannot be left to chance or a simple, cursory overview.

One strategic tactic for staying ahead of the compliance changes is to designate one staff member as the "point person" for researching and updating compliance policies. In this way, you can  ensure that your HR and payroll management practices are always up to date and in accordance with any annual changes.

Hiring and Employee Compliance and Discrimination

It is generally understood that businesses cannot discriminate in hiring based upon race, color, religion, sex, age, disability or national origin. In addition, there are a number of questions that cannot be asked in a pre-employment interview. The same legal requirements for hiring also apply in the pre-employment interview process.

On the federal level, the U.S. Equal Employment Opportunity Commission (EEOC) enforces anti-discrimination laws. The EEOC website provides information that highlights some of the primary areas which can cause potential legal trouble for small business owners.

And in California, for example, any state level discrimination claims are submitted to the California Department of Fair Employment and Housing (DFEH).  According the agency website, the California anti-discrimination statute covers some smaller employers not covered by federal law. This is defined as a workplace with between 5 and 14 employees (or one or more employees for harassment claims).

Steps to Avoiding Employee Misclassification

Unfortunately, the consequences of dealing with allegations of non-compliance can be time-consuming and costly, with fines, penalties, lawsuits and even jail time, in some cases.

The fines levied by the U.S. Department of Labor, IRS and state agencies for worker misclassification can be in the millions, depending on the severity of the infractions . The issues around employee classification should be managed carefully and diligently because of the very real threat of class action.

Not only is there simple employee misclassification mistakes that can be made, there are also wage law violations, I-9 violations, unemployment insurance issues, worker’s comp violations, improper exclusion from benefits, anti-discrimination violations, FMLA violations, and more.

Misclassification Fines and Penalties

Employers face potential costly penalties even for unintentional misclassification:

• $50 for each Form W-2 the employer failed to file by classifying workers as independent contractors
• 5 percent of the wages for failure to withhold income taxes
• 40 percent of FICA taxes that not withheld from the employee
• 100 percent of matching FICA taxes the employer should have paid
• Interest accrued on penalties daily from the date they should have been deposited
• Additional IRS fines and penalties if it suspects fraud or intentional misconduct

Independent Contractor of Employee - Worker Classification Matters

There is little standardization and even some conflicting “rules" when it comes to establishing worker classification. For example, it is possible for one test to define a worker as an employee while another test classifies the person as an independent contractor. The government provides several tests for employee classification compliance and these include the Economic Reality, IRS 20-Factor, Common Law, “ABC”, and so on.

The IRS 20-Factor test uses the degree of behavioral and financial control the employer exercises, as well as the type of relationship that exists between the two parties (written contracts or employee-type benefits), to determine whether or not a worker is an employee or independent contractor.

On the other hand, the Economic Reality test, relies on the economic dependence of a person on the employer as its litmus. What this means is, that under federal tax and labor law, contractors must have greater independence than employees, which limits their usefulness for most employers.

A simpler way of putting is "If you tell a worker when, where and how to work, you do not have a contractor relationship: that person is an employee.”

With Exempt and Nonexempt Status - Clarifying the Line Between Them

All employees are covered under the Fair Labor Standards Act (FLSA) and are either designated exempt or nonexempt. Typically, salaried employees are exempt and do not receive overtime pay, while nonexempt employees are paid hourly and must be paid overtime, usually for any hours worked over a normal workday or workweek.

Although a recent change was put forward by the FSLA under President Obama, known as the Final Rule, this is still in a legal battle. The changes would have increased the standard salary level from $455 to $913 per week and HCE total annual compensation requirement would have gone from $100,000 to $134,004 per year.

There were also future automatic updates to those thresholds to occur every three years, beginning on January 1, 2020.

However, since it appears the so-called Final Rule will not go into effect, businesses must continue to use the current criteria when determining whether an employee is considered exempt or nonexempt. These include:

• Those earning less than $455 per week are nonexempt
• The basis test means that a salaried employee generally has a specific amount that they can count on each pay period
• The job duties test generally means that those with managerial duties and the ability to hire and fire are exempt employees

In recent years there have been record number of lawsuits filed because of alleged violations of the FLSA. One reason for this increase in claims may have been due to a better understanding of proper employee classification by workers. For example, in 2015 alone there were over 8,700 claims filed which represented an 8% increase from the previous year.

One cause of employee claims under the FLSA is incorrectly classifying an employee. Employees working overtime work as an exempt employees when their classification status should be nonexempt is a common example. Increased enforcement by the IRS and various state agencies means that businesses must be fully informed regarding proper employee classification of all their workers.

California Labor Law and HR Management Best Practices

Although outsourcing HR functions may not be right for every small business, the advantages and benefits are worth asking about. In addition to reducing your in-house costs, increasing accuracy and security, you can also benefit by freeing your limited HR resources for improving operational functions, recruiting efforts, and training. 

As a business owner, or HR manager, you have a number of options for your HR and payroll functions. Software that can be installed in-house, or cloud-based programs offer a good alternative. But if you really want to take full advantage of the benefits available to you, outsourcing to a provider like Accuchex can still be the best decision.

Reliability, full-service options, and reputation are the hallmarks of a quality HR management service provider. If you are currently looking to invest in outsourcing you get your Free Download: California Labor Law guide to help you make an informed decision or call Accuchex Payroll Management Services at 877-422-2824.