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Updated Jun 17, 2024

HR Compliance Challenges Small Businesses Face Today

HR regulations are always evolving, and businesses need to monitor them to stay compliant. Here are some common compliance challenges many businesses face today, and how you can overcome them.

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Skye Schooley, Senior Lead Analyst & Expert on Business Operations
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Table of Contents

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There are many regulations imposed on small businesses. Once you hire employees, you must abide by these ever-changing laws. Not only do you have to keep your finger on the pulse of federal agencies’ requirements, but you must also track changes at the state and local levels. Although there are countless HR compliance challenges you can face, we’ve identified eight primary evolving employment and HR compliance regulations you’ll need to monitor.

HR compliance challenges small businesses face

Understanding how these eight HR challenges affect you is the first step toward maintaining legal compliance. 

1. Avoiding discrimination on job applications

The U.S. Equal Employment Opportunity Commission enforces laws that make it illegal to discriminate against candidates and employees based on a protected class (e.g., race, color, religion, sex, national origin, age, disability, genetic information). Asking for certain information on a job application may put you at risk for discrimination lawsuits. To protect yourself, avoid asking about the following:

  • Previous convictions: Thirty-seven states and more than 150 cities embrace “Ban the Box,” which prohibits employers from asking candidates about arrest or conviction records before considering their qualifications. This helps give convicted applicants a fair chance at employment.
  • Salary history: Asking about someone’s prior earnings may perpetuate the gender wage gap.
  • Age, birthdate or graduation year: The Age Discrimination in Employment Act of 1967 protects workers who are 40 years or older.
  • Citizenship: To prevent discrimination claims based on race or national origin, applicants should only be asked if they’re authorized to work in the United States.
  • Pregnancy, children or marital status: You might eliminate a candidate because you fear they’ll often be out of the office to care for their family.
  • Religious holidays: You’re required to accommodate religious beliefs and practices. Candidates may think you’re discriminating against them if you ask about holidays.
  • Alcohol or tobacco usage: Tobacco and alcohol usage can affect a person’s quality of work and your company’s health insurance rates, but it cannot influence your hiring decisions. Instead, ask if they’ve ever gotten in trouble for violating an employer’s policies.
  • Disabilities: Under the Americans with Disabilities Act, you must make reasonable accommodations for workers with disabilities.

Editor’s note: Are you looking for help with your business’s HR tasks? Fill out the below questionnaire to have our vendor partners contact you with free information.

2. Protecting staff from workplace harassment

Harassment happens in businesses of all sizes. This has always been the case, but the #MeToo movement has brought it into the spotlight. Because of this, many states have introduced legislation that increases penalties, mandates employee training or requires the implementation of anti-harassment policies. If you don’t protect your staff from harassment, you might face damage to your reputation and significant financial consequences.

You can protect your team by taking three steps:

  1. Adopt and enforce anti-discrimination and anti-harassment policies. In your employee handbook, provide specific examples of prohibited conduct. These examples can help avoid confusion and prevent problems before they arise. State that the company will handle all charges confidentially and investigate them promptly, thoroughly and impartially. Then, confirm that you’ll take corrective action when warranted.
  2. Develop a reporting system to act quickly if someone submits a harassment complaint. Explain how to report complaints and to whom. Consider designating multiple people to receive and examine harassment claims. This will protect victims if the primary person responsible for investigations is the target of the charge. If possible, choose at least one man and one woman so your staff feels comfortable reporting issues.
  3. Teach your employees to promote a fair, civil and harassment-free work environment. Your staff might not know how to recognize harassment or respond to victims. Train your employees to protect themselves, their co-workers and your company.
TipBottom line
Familiarize yourself with employment and anti-discrimination laws in the workplace, and then create workplace guidelines that enforce these laws. Be sure to include a detailed section about workplace harassment in your employee handbook.

3. Classifying workers correctly

You have different responsibilities for an employee versus an independent contractor. For example, you must withhold federal and state taxes from an employee’s paycheck and file a W-2 for them at the end of the year. When it comes to contractors, you don’t usually have to withhold taxes from their pay, but you will need to submit a 1099-NEC for them at tax time. To meet these different requirements, you must classify your team members correctly. Unfortunately, there’s no set definition of “contractor,” which can make this difficult.

To determine a worker’s status, examine three aspects of your relationship:

  1. Behavioral control: If you have the right to control your worker’s behavior, they’re likely an employee.
  2. Financial control: If you pay the person per project and don’t reimburse them for job-related expenses, they’re probably an independent contractor.
  3. Type of relationship: If the relationship will last indefinitely or you offer benefits, you’ll typically treat them as an employee.

Some states are making the definition of “contractor” more stringent. For example, in California, you must use the “ABC test” to find out if someone is a contractor:

  1. The worker must be free from your control and direction with respect to performance.
  2. They must perform work outside your usual course of business.
  3. The person is routinely engaged in an independently established trade, occupation or business of the same nature as the work they’re doing.
FYIDid you know
When you hire employees, they must be classified as exempt or nonexempt. There are a few differences between the two, including salary level, salary basis and duties performed.

4. Paying employees at least minimum wage

The current federal minimum wage for covered nonexempt employees is $7.25 per hour. If you pay your workers less than that, you could be responsible for back wages and steep penalties.

Although the rate has been stagnant for over 10 years, there is a nationwide movement to increase the minimum wage to $15 per hour. In fact, more than half the states and several localities have set their minimum wages higher than the U.S. Department of Labor’s (DOL) standard.

If your state’s minimum wage differs from the federal limit, you will usually need to pay your workers the higher of the two.

Did You Know?Did you know
To determine how much you must pay your team members, contact your state's DOL branch. The best online payroll providers also help you maintain compliance by processing your payroll for you.

5. Knowing when to pay overtime

Employers must abide by various overtime pay laws. According to the DOL, an employee is exempt from overtime if they meet all of the following criteria:

  • They are paid on a salary basis.
  • They make at least $35,568 per year, or $684 per week.
  • They perform exempt job duties, such as supervising two or more people.

For all others, you will likely need to pay at least 1.5 times their hourly rate for any time worked over 40 hours in a single workweek.

As with most employment regulations, federal law is not the only law you must consider here. Several states have their own overtime rules. For example, in Alaska, you will need to pay your workers 1.5 times their regular hourly rate for any time worked over eight hours in a day.

To track overtime and ensure you’re accurately paying your employees, consider using payroll software that integrates with a time clock.

6. Understanding medical coverage requirements

The tax penalty for not having health insurance was eliminated at the beginning of 2019. However, under the Affordable Care Act, employers with 50 or more full-time equivalent employees (FTEs) must provide health insurance. An FTE is anyone who works an average of 30 hours or more per week. You might face steep penalties if you don’t offer health coverage when you should.

When you get close to 50 team members, start reviewing your options to ensure you’re prepared for the potential healthcare costs. 

7. Offering paid sick and parental leave

Federal rules do not mandate paid time off, and many employers don’t offer it. This means people must often choose between bringing home a smaller paycheck and going to work ill. To prevent this, several states have adopted paid sick leave laws and allow workers to use that time for themselves or a family member.

Under the Family and Medical Leave Act, employers with 50 or more employees must provide employees up to 12 weeks of unpaid, job-protected time off for qualifying family and medical reasons. The qualifying employee must have worked at least 1,250 hours during the 12 months prior. There may be exceptions to this law.

8. Preparing employees for retirement

Several states have passed legislation that requires employers to provide retirement plan options. These include California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, Nevada, New York, Ohio, Oregon, Vermont, Virginia and Washington.

For small businesses, it can be challenging to offer these benefits because of the associated costs and upkeep. If you’re required to provide retirement benefits, you may be able to use a state-run option to alleviate the administrative burden. For example, employers in Illinois can use the Illinois Secure Choice retirement savings program to manage their workers’ retirement plans. There are no fees associated with the program; you simply need to deduct each employee’s retirement contributions from their paychecks and submit the amount to Illinois Secure Choice through its website.  

HR compliance checklist

The HR challenges you face as a business owner can depend on factors such as your organization’s size, what type of HR management process you have in place, and what industry and state you’re in. The specific federal and state labor laws you must follow will likely change as your business grows.

Regardless, most HR compliance challenges boil down to five key areas of HR:

  • Recruiting, hiring and onboarding: There are several federal, state and local labor and employment laws that ensure equal opportunity employment for job candidates. Stay up to date with these laws to maintain legal compliance during the recruitment, hiring and onboarding processes.
  • HR management: It is important to protect your employees from harassment in the workplace. Establish clear policies and procedures that dictate how employees can and can’t behave, including a detailed section about workplace harassment. Add these policies to your employee handbook, review the book with your team and have them sign an acknowledgement.
  • Worker classification: There are a few different worker classifications you must consider. First, determine whether each worker is an employee or a contractor. If they are an employee, you need to classify them as full time or part time, as well as exempt or nonexempt.
  • Payroll and timekeeping: Paying your staff correctly is much more than simply cutting a check. There are several federal, state and local laws that dictate employee pay, such as minimum wage and overtime.
  • Employee benefits administration: While many employee benefits may be optional to offer, some are mandatory (e.g., family and medical leave, health insurance, FICA, unemployment insurance, and workers’ compensation insurance). Look at federal, state and local laws to see which requirements apply to your business.

Best HR software and services for compliance help

HR compliance can be challenging to manage on your own, especially if you are doing everything by hand. Luckily, many great HR software options are available to help automate your processes. HR software is also a great way to record HR information for compliance and auditing purposes. 

If you are looking for an HR software to help with compliance, here are some top-rated options:

  • BambooHR: BambooHR centralizes and automates processes, reducing errors and ensuring accurate record-keeping for effortless HR compliance. To learn more about this software, read our BambooHR review.
  • Gusto: Gusto is especially helpful for maintaining compliance with payroll standards by automatically calculating, deducting and filing taxes, ensuring accuracy and compliance with every paycheck. Read our Gusto review to learn more.
  • Paycor: Paycor empowers proactive compliance with built-in risk assessments and predictive analytics that identify potential pitfalls before they become penalties. Learn more in our Paycor review.

If you need more hands-on assistance with maintaining HR compliance, there are outsourcing providers like professional employer organizations (PEOs) and HR outsourcing (HRO) services. The primary difference between the two is that a PEO acts as a co-employer, shouldering some of your legal responsibilities, while an HRO solely outsources for specific functions. Both are great solutions for helping with compliance issues, whether that be maintaining compliance or rectifying problems.

If you are looking for outsourced HR support, here are some top-rated HR outsourcing providers:

  • Paychex: Paychex’s HR outsourcing shields you from compliance risks with dedicated experts, automated compliance tools and ongoing monitoring, freeing you to focus on your core business. Read our Paychex review to learn more.
  • Bambee: Bambee provides you with a dedicated HR manager, and it simplifies HR compliance with HR audits, automated policies and proactive training. Learn more in our Bambee review.
  • ADP: With its extensive expertise and industry-leading scale, ADP HR outsourcing streamlines compliance, providing secure data management, automated regulatory updates and dedicated specialists. Learn more in our ADP review.

If you are looking for hands-on HR assistance via a co-employment model, here are some of the best PEO services on the market:

  • Rippling: With customizable processes and workflows, the Rippling platform can automate virtually any HR process for you. It also combines HR and IT management for a more streamlined approach. Read our Rippling review for more information.
  • TriNet: With deep expertise across various industries, TriNet PEO navigates the nuances of your specific compliance landscape, ensuring your HR practices keep pace with regulations and industry best practices. Read our TriNet review to learn more.
  • Justworks: With Justworks PEO, staying compliant feels effortless thanks to its intuitive software. It allows you to easily navigate complex HR tasks like payroll, benefits and taxes. Learn more in our Justworks review.

Dennis O’Keefe contributed to this article.

author image
Skye Schooley, Senior Lead Analyst & Expert on Business Operations
Skye Schooley is a dedicated business professional who is especially passionate about human resources and digital marketing. For more than a decade, she has helped clients navigate the employee recruitment and customer acquisition processes, ensuring small business owners have the knowledge they need to succeed and grow their companies. In recent years, Schooley has enjoyed evaluating and comparing HR software and other human resources solutions to help businesses find the tools and services that best suit their needs. With a degree in business communications, she excels at simplifying complicated subjects and interviewing business vendors and entrepreneurs to gain new insights. Her guidance spans various formats, including newsletters, long-form videos and YouTube Shorts, reflecting her commitment to providing valuable expertise in accessible ways.
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