Small Business Employment Law: 3 Mistakes to Avoid

Small Business Employment Law: 3 Mistakes to Avoid


As an employer, you do everything you can to treat your employees fairly and follow the appropriate labor regulations. But small business employment law can be tricky to navigate and it’s possible to make mistakes without even knowing it. You can’t plead ignorance in the face of an employment lawsuit, though. To keep your business safe and stay out of legal trouble, we’ve covered the top mishaps to avoid.

Misclassifying Employees As Contractors

When you hire workers, you need to classify whether they’re an employee or an independent contractor. Financially, it’s less expensive to hire contractors because, unlike employees, you don’t have to manage their tax withholding through payroll, enroll them in benefits or pay the employer’s share of FICA taxes.

As a result, there’s a temptation for employers to misclassify employees as contractors. Be aware that the Department of Labor (DOL) is on the lookout for this. Not only could you be on the hook for the unpaid taxes, but you could also face a government fine, a lawsuit from the employee and even criminal penalties.

The IRS created a series of questions to determine whether someone is a contractor or an employee. For example, can the worker set their own schedule and hours? Contractors can set their own schedules, but employees don’t usually have this flexibility. Does the worker have a definite end date for a specific project or contract (more like a contractor), or will they work for you indefinitely (employee)?

Depending on the answers, it may not be 100% clear whether the worker is an employee or contractor. If so, you can submit Form SS-8 to the IRS, and they will give you their ruling on the worker’s status. Another option is to ask your tax advisor for their professional opinion on tricky situations.

If you’ve accidentally misclassified workers in the past, the IRS offers a Voluntary Classification Settlement Program where you can report the error and catch up on the missed small business taxes. By doing so, the IRS will give you some partial relief on the missed taxes and your business will no longer be liable for potential fines or an employment lawsuit from the mistake.

Electrician working with employer who followed small business employment law

Lacking the Proper Documentation

Verbal agreements with your staff may seem like a good idea when things are going smoothly, but when you need to discipline an employee or potentially let them go, you will need proper documentation.

If you let an employee go for a certain cause but don’t have the proper documentation, they could potentially sue you. The former employee may say that there weren’t clear grounds for dismissal and that you’re firing them for discrimination, breach of contract or retaliation for a non-work issue.

This applies even for at-will employment, when you don’t need a cause to let an employee go. They could still pursue legal action, which will be harder to defend without evidence on your end.

Your best protection against these employment lawsuits is to clearly document everything. Consider writing down workplace expectations and rules in an employee handbook. That way, if someone starts breaking the rules, you can clearly point out why their performance is falling short.

You and your HR staff should also get in the habit of documenting employee performance, especially issues like missed deadlines, grievances, unapproved absences and other workplace problems. If an employee is having these issues, let them know that it could lead to dismissal in the future, so they aren’t caught off guard and file a lawsuit out of anger. But then if they do, you’d be protected by having the documentation in place to justify your decision.

Not Paying for All Hours Worked

If you hire workers that are paid by the hour, you need to properly track and pay for all their time worked. In addition, if they work more than 40 hours a week, any hours above that point are considered overtime and should be paid 1.5 times their hourly rate.

If you don’t pay close attention to employees’ hours, you could miscalculate how much to pay them. For example, an employee’s hours could change each week and you won’t realize they went into overtime territory. Or if an employee works during their unpaid lunch break, that time is still supposed to be paid. You will break a small business employment law if you don’t pay for this work. The employee could sue you for the missed wages, interest and legal fees, and the government could charge you an additional penalty.

Employers may be tempted to misclassify employees to avoid paying overtime. Non-exempt employees are paid by the hour with overtime, whereas exempt employees are paid a fixed salary and do not receive overtime when they go over 40 hours. If you misclassify employees as exempt, you could later be sued for their missed wages and overtime.

You should track the time worked for all your hourly workers, using a manual punch card or automated time tracking system. In fact, this is a requirement of the Fair Labor Standards Act and you’re supposed to keep these records for at least two years.

By paying attention to these weekly trends, you’ll notice when an employee is moving into overtime territory. You can either pay them a higher rate or ask them to work fewer hours for the remainder of the pay period.

To prevent employees from putting in work during their breaks, you could set up policies that require them to clock out for lunch or to eat somewhere other than their worksite, where they might be tempted to put in unpaid work.

Finally, review the DOL’s guidelines to determine an exempt salary worker versus a non-exempt worker. In general, someone can only be exempt from overtime if their salary is at least $455 per week and they are in an administrative, executive, professional, computer or outside sales role. You can call the DOL for clarification if you are unsure whether someone counts.

When it comes to following small business employment law, a little preparation goes a long way toward preventing legal difficulties. By watching out for these common trouble spots, you can protect yourself while creating an even better work environment for your employees.