The Cost of HR Mistakes
Even if you’re running a small business without a dedicated HR department, there are plenty of HR issues you need to be aware of to avoid fines and penalties from government agencies. Recruiting and hiring employees, managing payroll, and employee management can be handled by a small business owner in a pinch, but there are plenty of details that are too easy to overlook when you’re trying to “do HR” on top of running your business.
Failures of compliance can be very costly, but they hurt even more if they could have easily been avoided in the first place. It is understandable that, for some small business owners, it’s not feasible to establish a true HR department because of lack of resources. A “do it yourself” HR strategy only works, however, if you have the foresight and resources to avoid the most common HR compliance mistakes before they happen.
Making poor hiring decisions
Identifying, recruiting, and hiring talent is time-consuming work that requires a particular set of skills—namely, very good people skills. The cost of a bad hire is steep when you factor in recruiting, training, benefits, and salary costs. In terms of actual dollars, a failed hire can cost you upwards of $50,000.
Hiring has exponentially more importance when your company is just starting out or has fewer than 50 employees. You’re building the foundation for continued success on these new hires: they are the people who will assume positions of leadership in your succession planning. All the more reason to get the right person for the job the first time around.
Once you’ve hired the right employees, you have to ensure you adhere to the guidelines for classifying employees as put forth by the IRS. Some small businesses have cut corners on this and been punished severely when caught.
Most commonly, a small business can incorrectly categorize its workers in one of two ways. Some will declare employees as vendors or independent contractors, even though they don’t meet the guidelines for degree of company control and worker independence. To determine whether you are properly classifying an employee as a full-time employee or as an independent contractor, you should ask yourself the following questions:
* Does my company control when, what, where, and how the worker does
* Are the means by which the worker accomplishes their work provided by my company? For example, how they’re paid and how the equipment needed for doing the job is provided to the worker?
* Does my company provide the worker with employee benefits? Is there a written contract specifying the nature of the company-worker relationship?
If the answer to each of these questions is yes, then that person cannot be classified as a independent contractor.
The second mistake employers make is classifying a salaried employee as exempt instead of non-exempt, thus preventing the company from having to pay overtime and break wages. This is even more crucial with the soon-to-arrive increase in the overtime exemption threshold, meaning more white collar employees will be eligible for overtime pay.
Not knowing the government regulations that affect you
Proper classification of employees is a large part of being compliant with Department of Labor regulations, but full compliance entails much more.
Part of this is knowing the specific guidelines of your industry. Certain things apply regardless—like securing protected health information—while other things are dependent on what products or services your company provides, whether it’s a food and beverage permit or environmental regulations for manufacturing.
The other aspect is providing your employees with the benefits that the federal government mandates based on your company’s size and number of full-time equivalent employees. Nationally, social security taxes, unemployment insurance, and workers’ compensation are required. Other elements, like medical leave and disability insurance, vary from state to state. As you likely know, the Affordable Care Act outlines the health care coverage employers are required to provide.
Failing to create corporate guidelines and policies
The previous points all had to do with the monetary cost of HR mistakes, each of which can cost you a lot of cash. But, much like how poor hiring can set your company back in other ways, failing to set policies for how employees should conduct themselves can hurt, as well.
Even smaller companies have to set clear guidelines and expectations for workers and hold them to those standards. This means handling training, performance evaluations, promotions, and firings in the right way. Not having policies for these items in place means risking unhappy employees and an uncertain future. Something as simple as creating an employee handbook can go a long way in terms of effectively controlling your employees’ behavior and preventing HR violations before they happen.
Running a business is hard. Paycor can help make it easier. Check out our other articles for entrepreneurs, or contact us to learn how we can help you stay in compliance with constantly changing government regulations like the Affordable Care Act and Fair Labor Standards Act.
Sources: Entrepreneur.com, IRS.gov, SBA.gov, HR Morning, Inc., UC Berkeley Haas School of Business
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