Accuchex Blog

Labor Law Compliance and Steering Clear of Employee Lawsuits

Posted by Tristan Ruhland on Aug 16, 2016 9:30:00 AM

The regulatory maze of labor laws can be complex.  And as the core of your HR management functions it can also be confusing for both you and your employees.

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There issues such as hiring practices, employee classification, and wage requirements that necessitate time to research so you can ensure proper compliance.

A great strategic approach is to develop and implement a process for regularly reviewing and updating your compliance procedures and the constantly changing labor laws.

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

Preventing Hiring Compliance Issues and Discrimination

While it is generally understood that businesses cannot discriminate in hiring based upon race, color, religion, sex, age, disability or national origin, there are a number of questions that cannot be asked in a pre-employment interview.

The same legal proscriptions forhiring also apply in the pre-employment interview process. While the owner of a store may think he is simply sharing common life experiences with a potential employee, such questions like what year the candidate graduated from high school are strictly prohibited in the hiring 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.

In California, state level discrimination claims are taken up with 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).

Consequences of Employee MisclassificationFree Download: Payroll Outsourcing Guide

The consequences of non-compliance for employers can be time-consuming and costly, with fines, penalties, lawsuits and – in some cases - even jail time.

Depending on the severity of the infractions the fines levied by the U.S. Department of Labor, IRS and state agencies for worker misclassification can be in the millions. The temptation to cross the line with employee classification should be tempered with the very real threat of class action.

In addition to simple employee misclassification there can be wage law violations, I-9 violations, unemployment insurance issues, worker’s comp violations, improper exclusion from benefits, anti-discrimination violations, FMLA violations, and more. And this does not take into account problems with the IRS!

Misclassification Fines and Penalties

Even unintentional misclassification can leave an employer facing costly penalties:

  • $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

Compliance Tests for Worker Classification

While the government has several tests for employee classification compliance including Economic Reality, IRS 20-Factor, Common Law, “ABC”, and so on, there is little standardization and even some conflicting “rules. For example, one test may define a worker as an employee while another designates the same worker an independent contractor.

The IRS 20-Factor test, for example, 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.

The Economic Reality test, on the other hand, places emphasis on the economic dependence of a person on the employer as its litmus.

Simply put, under federal tax and labor law, contractors must have greater independence than employees, which limits their usefulness for most employers. According to one New York Times article, “… if you tell someone when, where and how to work, you do not have a contractor relationship.”

Ensuring Compliance With Wage Laws

Employees are covered under the Fair Labor Standards Act (FLSA) and are either designated exempt or nonexempt. Typically, salaried employees are exempt, while hourly employees are nonexempt and eligible to receive overtime.

There are various criteria used when determining whether an employee is considered exempt or nonexempt:

  • 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 2015, saw a record number of lawsuits filed addressing alleged violations of the FLSA. Some observers attributed this increase in claims to a greater understanding of the inaccurate classification of workers.  There were 8,781 filed in FY 2015, which represented an 8% increase from 2014.

Employee claims under the FLSA can result when an employee is incorrectly classified and is doing overtime work as an exempt employee when they should have been classified as nonexempt. With the recent pressure being put on employers by both the IRS and various state agencies, it is critical that businesses be fully informed regarding the correct status and proper employee classification of all their workers.

Payroll Management Best Practices and California Labor Law

Outsourcing payroll may not be the answer 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 or payroll manager, you have a number of options for your 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 payroll management service provider. If you are currently looking to invest in outsourcing you get your Free Download: Payroll Outsourcing Guide to help you make an informed decision or call Accuchex Payroll Management Services at 877-422-2824.

Free Download: Payroll Outsourcing Guide

Topics: minimum wage law, recruiting and hiring, HR compliance, employee classification, IRS, employee lawsuits, discrimination

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