Avoiding Common Compliance Pitfalls: What Small Businesses Often Miss (September 2025 TogetHR Times)
Avoiding Common Compliance Pitfalls: What Small Businesses Often Miss
By Joan Klopfer
For small business owners, compliance with HR laws and regulations can feel like navigating a maze. Unlike large companies with dedicated legal and HR departments, small businesses often operate with lean teams, tight budgets, and a focus on growth, leaving compliance as an afterthought. Unfortunately, even well-intentioned oversights can lead to costly fines, audits, or lawsuits.
Understanding the most common compliance pitfalls can help small businesses avoid legal trouble and build a solid foundation for success. Here’s an overview of the areas most frequently overlooked along with practical guidance on how to steer clear of trouble.
Misclassifying Employees and Independent Contractors
One of the most frequent and costly compliance mistakes small businesses make is misclassifying workers. Business owners sometimes classify workers as independent contractors to save on taxes, benefits, and payroll costs, but doing so improperly can trigger serious penalties from the IRS and Department of Labor (DOL).
Misclassification happens when a worker is treated as an independent contractor when, by law, they function as an employee. Employees are subject to minimum wage, overtime, tax withholding, and workers’ compensation rules, contractors are not.
Use the IRS’s or your state’s criteria to determine whether a worker is truly independent. If you control what the person does, how they do it, and when they work, they are likely an employee. When in doubt, consult an employment law expert or HR professional.
Not Paying Overtime Correctly
Another common compliance failure is improper overtime pay. Some small businesses mistakenly believe that paying a salary means an employee is exempt from overtime, but that’s not always the case.
Under the Fair Labor Standards Act (FLSA), employees must meet certain job duty and salary threshold criteria to be classified as exempt from overtime. Simply labeling someone “salaried” does not exempt them from earning overtime for hours worked over 40 in a workweek.
Review each employee’s classification (exempt vs. non-exempt) based on both their job duties and salary level. Track hours worked, and ensure all non-exempt employees are paid 1.5 times their regular rate for overtime hours.
Incomplete or Inaccurate Recordkeeping
Proper recordkeeping isn’t just good practice—it’s required by law. Yet small businesses often neglect to maintain essential documents such as time sheets, I-9 forms, and personnel records.
Failure to maintain accurate and complete records can result in penalties during audits or investigations. For example, the DOL requires timekeeping records for all non-exempt employees, and the U.S. Citizenship and Immigration Services (USCIS) mandates the completion and retention of I-9 forms for all hires.
Create a checklist for required employee records and implement a filing system, physical or digital, that ensures documents are secure and accessible.
Overlooking State and Local Laws
Federal laws provide a baseline, but many states and cities impose stricter regulations. Small businesses that operate in multiple locations, or those unfamiliar with local laws, can easily miss these additional requirements.
Common areas where state and local laws differ include minimum wage, paid sick leave, scheduling laws, and final paycheck requirements. Ignorance of these rules doesn’t excuse noncompliance.
Stay informed about employment laws in every jurisdiction where your employees work. This includes remote workers, who are typically governed by the laws of their physical work location. Partnering with an HR consultant or subscribing to a compliance service can help keep you up to date.
Failing to Post Required Labor Law Notices
Federal and state laws require employers to post specific workplace notices in areas that are visible to all employees. Many small businesses either forget to display them or don’t update them when laws change.
Missing or outdated posters can lead to fines and may affect your defense if an employee files a claim.
An easy option is to purchase an up-to-date labor law poster from a reputable source that includes both federal and state requirements. If you have remote employees, provide electronic access to these notices as well.
Not Having an Employee Handbook or Written Policies
While not legally required, an employee handbook can help small businesses avoid compliance problems by clearly communicating expectations, procedures, and legal obligations.
Without documented policies, employers may struggle to enforce rules consistently, or defend themselves in legal disputes. Policies on harassment, time off, discipline, and workplace conduct are especially important.
Develop an employee handbook that reflects your company’s culture and complies with applicable laws. Review and update it regularly, and have employees sign an acknowledgment form to confirm receipt and understanding.
Ignoring Anti-Discrimination and Harassment Laws
Failure to prevent or address discrimination, harassment, or retaliation can lead to lawsuits and significant reputational damage.
Provide training for managers and employees on discrimination and harassment. Establish a clear process for reporting complaints and respond promptly and thoroughly to all concerns.
Compliance may not be the most exciting part of running a small business, but it’s one of the most important. Overlooking even one of these common issues can put your business at risk, financially and legally.
Taking a proactive approach, through education, clear policies, proper documentation, and professional guidance can protect your business and support a fair, safe, and productive workplace.
