September 28, 2018 Payroll en_US Small business owners can often unknowingly make legal mistakes in three key areas: FSLA, employee classifications and not staying up-to-date on new laws. Experts weigh in on why these areas are important to pay attention to. Common Legal Mistakes for Small Businesses to Avoid

Common Legal Mistakes for Small Businesses to Avoid

By Eric Carter September 28, 2018

Small business owners and their employees are responsible for many jobs.

There aren’t enough hours a day for even the best-run teams to keep track of everything. From finance to sales, marketing, and compliance—and everything in between—there is more to manage than your eyes can track.

It’s easy for minute details to be missed, and as your small business grows, problems have the potential to multiply. Even worse, you don’t know what you don’t know: challenges can creep up in the form of a healthy fine.

The best way to stay ahead of legal and compliance challenges is to get ahead of them: work with a lawyer and advisory board to navigate unknowns that may impact your business.

Read about common mistakes so that you can actively avoid them. The QuickBooks team recently interviewed a mix of experts, to gain perspective on potential problems that can arise.

Here were some of the insights that they shared:

1. Know the most common broken laws for your industry

Romin Currier, attorney at Pincus and Currier LLP, explains that from his perspective, the most common law violations relate to the Fair Labor Standards Act (FLSA), Title VII of the Civil Rights Act of 1964, and the Occupational Safety and Health Administration Law (OSHA). He elaborates:

“FLSA is a very complex statute that is often violated despite employer’s best efforts. The risks include back pay, liquidated damages as well as attorney’s fees and costs.

Title VII [of the Civil Rights Act is also often violated because it can be very difficult to police all employee conduct all the time and the employer is ultimately responsible. Damages under this statute include back pay, possible punitive damages and attorney’s fees, and costs.

The other repercussions of violating both of these statutes are the cost of defending oneself. OSHA addresses safety in the workplace and it is difficult to get all workers to adhere to all of a company’s safety rules. Small violations could trigger warnings or small fines. Larger violations could result in the shutting down of the business for some period of time.”

All of these laws are complex, with many business-specific nuances. And many claims, even when unsubstantiated will get settled. A small business that isn’t prepared or that doesn’t have funds to defend itself may go out of business.

The path to avoiding potential problems will depend on your business.

“Employers must adopt policies and procedures and take great steps to ensure that the policies and procedures are complied with,” says Currier. “I recommend that the company work with their employment law attorney to review the policy and procedures and make revisions to them.”

2. Pay attention to your wage, employee classification, and payroll taxes

From the perspective of Alix Rubin, an owner of an employment law firm in New Jersey who also practices in New York and Pennsylvania, small businesses are most at risk with respect to payroll, taxes, and hiring.

Small business owners will run into challenges when misclassifying employees as independent contractors, for instance. This law has gotten businesses into trouble with respect to paying overtime.

This legal area is entwined with workers compensation insurance requirements, according to another attorney, Michael Hernandez, in San Diego, California.

“I often see problems beginning with clients that bring on ‘employees’ as 1099 independent contractors,” explains Hernandez. “The most obvious reason for this is to avoid the perceived burden of payroll and payroll taxes.”

This misclassification, especially for onsite employees, can have negative repercussions that tricking into other areas of the business. Companies that don’t pay payroll taxes and misclassify their employees likely don’t have the appropriate insurance programs in place.

“I have had several clients who failed to secure workers’ compensation insurance, had an investigator from the Department of Industrial Relations conduct a site visit, and perform an insurance audit. These clients have needed to pay between $20,000-$100,000 in penalties alone. There is also the added complication of criminal penalties. In California, failure to obtain workers compensation insurance is a serious offense, punishable by jail time and a $10,000 fine.”

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3. Stay up-to-date with laws that often change

Laws often change, and if you’re not up to speed, you could find yourself missing a critical update.

That’s why Elizabeth McLean, compliance counsel at background check company GoodHire, recommends that businesses have at least one employee tasked with the responsibility of staying up to date on changing policy.

This individual could also be a consultant, outsourced HR firm, lawyer, or payroll specialist—most likely, you’ll be working with a combination of experts to ensure that your business stays compliant.

“Many business owners do not realize that the use of employment background checks must be done in compliance with a number of federal, state, and local laws,” says McLean in an interview.

“These laws include the federal Fair Credit Reporting Act (FCRA, the federal law regulating both the furnishing of employment background checks by consumer reporting agencies and the use of those reports by employers), and ‘ban-the-box’ regulations (which exist at both state and

local levels, making compliance even more complicated!).

Employers who violate the Fair Credit Reporting Act may be subject to private lawsuits filed by aggrieved applicants and employees. These suits can come in the form of single-plaintiff suits or class action lawsuits. It is not unusual for class action settlements to climb into the 6 and 7 figure range.”

Some jurisdictions provide a private right of action for employees to sue employers. Other jurisdictions have agencies with enforcement power.

“In the employment law space, background screening lawsuits have become a go-to area of litigation for the plaintiff’s bar,” explains McLean. “This is due to the availability of statutory damages and the relative ease in which plaintiff’s lawyers can force settlements from employers who are wanting to avoid litigation and disruption to operations.”

The Bottom Line

It’s impossible for a small business to have their legal, regulatory, and compliance bases covered from every angle. Every time a company sets up a new process, it’s important to get help from an external consultant. Unknowns expose your business to risk. Manage this uncertainty by getting help ahead of time and making sure that you have enough insurance to cover you.

If you need help getting grounded with Payroll taxes, consider downloading our free eBook, The Beginner’s Guide to Payroll Taxes.

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Eric is the founder of Dartsand and Corporate Counsel for a global technology solutions provider. He is a frequent contributor to technology media outlets and also serves as primary legal counsel for multiple startups in the Real Estate Development, Virtual Assistant and Mobile App industries. Read more