1. Employee Classification & Wage Compliance
The Challenge
Misclassifying workers and failing to meet wage law requirements are among small businesses’ most common—and costly—compliance issues. In 2023, the Department of Labor (DOL) recovered over $100 million in back wages from small businesses alone.
Mistakingly treating employees as independent contractors to avoid paying payroll taxes, workers’ comp, and benefits can lead to IRS penalties and wage lawsuits. Additionally, many small businesses fall short of Fair Labor Standards Act (FLSA) regulations, especially when tracking overtime or minimum wage compliance for non-exempt employees.
The Solution
✔ Verify employee classification – Use IRS and DOL guidelines to determine whether someone is a W-2 employee or a 1099 contractor. Misclassification can trigger audits, back taxes, and penalties.
✔ Comply with FLSA overtime rules – Non-exempt employees must be paid 1.5x their hourly rate for all hours worked over 40 per week. Document hours worked clearly.
✔ Follow state/local wage laws – In many states, minimum wage rates exceed the federal level. Ensure you’re paying the higher amount where applicable.
✔ Use digital timekeeping systems – Track hours accurately to avoid wage disputes or unpaid overtime claims.
✔ Conduct quarterly payroll audits – Regularly review pay rates, hours, and tax withholdings to identify and fix issues early.
✔ Ensure accurate payroll tax reporting – Incorrect deductions can result in IRS penalties and strained employee relations.
✔ Automate your payroll – Small businesses using cloud-based payroll software reduce errors by up to 75%.
✔ Train managers on wage law basics – Supervisors should understand overtime eligibility and time-tracking expectations.
2. Workplace Safety & OSHA Compliance
The Challenge
Many small businesses underestimate their obligation to maintain a safe work environment. But whether you’re running a retail shop, catering business, warehouse, or office, OSHA compliance applies to you. In 2023, OSHA issued more than 50,000 safety citations to small businesses.
No matter how minor, injuries can lead to inspections, fines, workers’ compensation claims, and even lawsuits. Some states also enforce stricter safety standards, making compliance even more complicated for owners wearing multiple hats.
The Solution
✔ Provide OSHA-compliant safety training – Ensure all employees complete safety orientation appropriate to your industry (e.g., slips and falls, lifting procedures, machine safety, fire prevention).
✔ Maintain a written injury & illness prevention plan (IIPP) – OSHA recommends IIPPs even if not federally mandated. Structured plans reduce injury rates by 30%.
✔ Enforce PPE usage – Require and document the use of personal protective equipment (PPE) like gloves, masks, eye protection, or ergonomic tools.
✔ Implement emergency protocols – Have documented and visible evacuation routes, fire extinguishers, and first aid kits. Conduct periodic drills.
✔ Track OSHA 300 logs if applicable – Businesses with 11+ employees in certain industries must record and post workplace injuries/illnesses annually.
✔ Conduct annual workplace safety audits – Even small offices benefit from routine walkthroughs to identify and fix hazards (e.g., loose cords, broken equipment).
✔ Stay current with state-specific safety rules – California, for instance, mandates ergonomic standards and heat illness prevention for outdoor workers.
✔ Offer ergonomic evaluations for office-based teams – Adjust chair heights, monitor placement, and desk posture to prevent repetitive strain injuries.
By making safety part of your everyday business operations, you can avoid costly claims and ensure your team stays healthy and productive.
3. Hiring, Onboarding & Employee Records Compliance
The Challenge
Small businesses often rely on informal hiring processes, but those shortcuts can lead to serious compliance risks. Companies expose themselves to EEOC complaints, I-9 violations, and recordkeeping penalties without clear policies or documentation.
Unstructured onboarding can also result in missed paperwork, safety gaps, or disengaged new hires. Improperly stored employee files—especially I-9s or wage records—can result in fines during audits or investigations.
The Solution
✔ Ensure hiring practices follow EEO laws – Job postings, interviews, and selection processes must be free from discrimination based on race, gender, age, disability, or other protected characteristics.
✔ Verify employment eligibility with Form I-9 – Complete this form within 3 business days of hire and store it separately from the employee’s personnel file.
✔ Implement a structured onboarding checklist – Include handbook acknowledgment, safety training, benefits enrollment, and job-specific training. A good onboarding process can reduce turnover by up to 50%.
✔ Provide workplace conduct and anti-harassment training – This is especially important for businesses in customer-facing or team-based roles. Companies with training see a 25% drop in harassment complaints.
✔ Maintain all employee records securely – Store records such as offer letters, tax forms, evaluations, and signed policies in a secure, centralized system for at least 3 years (or longer depending on state/federal law).
✔ Document hiring decisions and rationale – Keeping notes on why a candidate was selected or rejected protects against discrimination claims and supports future HR planning.
✔ Track training and certifications – Especially important for industries requiring safety, health, or licensure.
4. Employee Benefits & Leave Policies Compliance
The Challenge
Benefits and leave policies are among small businesses’ most common HR pain points. Regulations vary widely based on company size, location, and whether you offer health or retirement benefits. Without dedicated HR staff, it’s easy to miss federal mandates like FMLA, ACA, and COBRA, or fall behind on state-level leave laws.
Failing to provide benefits or miscommunicating leave policies can result in turnover, employee dissatisfaction, and compliance penalties.
The Solution
✔ Understand FMLA obligations – If you have 50+ employees, you must provide up to 12 weeks of unpaid, job-protected leave for qualifying medical or family events. Track eligibility carefully.
✔ Comply with ACA employer mandate – Applicable to employers with 50+ full-time equivalents. You must offer health insurance or pay IRS penalties. Confirm affordability and minimum value coverage.
✔ Ensure ERISA compliance for 401(k) plans – If you offer retirement plans, follow reporting and fiduciary requirements. Review your provider’s disclosures and testing requirements.
✔ Follow state-mandated leave laws – Paid sick or family leave is required in many states (e.g., CA, MA, NJ). Know your state’s rules and update your handbook accordingly.
✔ Audit PTO and holiday pay policies – Clearly define how vacation time accrues, when it expires, and how it’s paid out upon termination.
✔ Provide workers’ compensation insurance – It’s mandatory in nearly all states. Ensure your coverage aligns with your industry classification and payroll levels.
✔ Follow COBRA continuation coverage rules – If you offer health benefits and have 20+ employees, you must offer departing employees temporary health coverage.
Providing competitive and compliant benefits minimizes legal risk and helps retain top employees in a competitive labor market.
5. Remote & Hybrid Work Compliance
The Challenge
Remote work has opened doors for small businesses, but it’s also introduced new compliance challenges. Employers must now manage multi-state tax rules, wage law compliance, cybersecurity risks, and proper time tracking for remote non-exempt employees.
A 2023 IRS report found that 35% of small businesses with remote staff failed to comply with tax rules, resulting in unexpected penalties. Without clear policies, you also risk wage disputes, productivity drops, and data breaches.
The Solution
✔ Implement accurate time tracking tools – Non-exempt remote employees must track all hours worked. Use cloud-based systems that log time automatically and allow for supervisor review.
✔ Comply with multi-state tax laws – Remote employees working across state lines may trigger state income tax, unemployment tax, and workers’ comp rules in multiple jurisdictions.
✔ Create a remote work policy – Outline working hours, communication tools, responsiveness, cybersecurity, and equipment use expectations. Have each remote worker sign it.
✔ Reimburse home office expenses if required – Some states (e.g., California, Illinois, Massachusetts) mandate reimbursement for required expenses like internet or phone bills.
✔ Protect company data – Require use of VPNs, secure passwords, antivirus software, and encrypted file-sharing platforms. Train employees on phishing and cybersecurity risks.
✔ Use non-invasive productivity tools – To ensure compliance and accountability, consider time logs, project tracking apps, or daily check-ins, without over-monitoring.
✔ Regularly review remote agreements – Update agreements annually or as laws change. Make sure job descriptions, wage classifications, and performance expectations are documented.
✔ Recheck employee classification – Ensure your remote staff are correctly categorized as exempt or non-exempt per DOL criteria.
Remote work offers flexibility and retention benefits, but without structure and compliance, it can increase risk. Smart policies help protect both your team and your business.
Conclusion
Small business owners wear many hats, but HR compliance isn’t one to overlook. The risks of non-compliance are real, from wage laws and safety training to hiring, benefits, and remote work.
By adopting simple systems, conducting periodic audits, and staying informed of employment law changes, you can build a compliant, efficient, and engaged team without needing a full-time HR department.
Need help managing HR compliance for your small business? Contact TargetedHR for tailored support.