Step 1: Hiring & Employee Classification
Why It Matters
Hiring is one of the most critical moments in the employee lifecycle—and one of the riskiest from a compliance perspective. Whether hiring your first employee or growing a team of 10 or more, you must follow federal and state employment laws. Misclassifying employees as contractors, skipping work eligibility forms, or using biased job descriptions can result in DOL audits or EEOC claims.
According to Gallup, a well-structured onboarding process sets expectations early, reinforces your company culture, and reduces early turnover by up to 50%.
What to Audit
✔ Are employees and independent contractors properly classified using IRS and DOL criteria?
✔ Are I-9 forms completed within 3 business days and stored separately from personnel files?
✔ Do job descriptions reflect essential duties, FLSA classification, and any physical or scheduling requirements?
✔ Do new hires receive a formal offer letter, job expectations, and a signed handbook acknowledgment?
✔ Are hiring decisions documented to show consistency and fairness (especially important if EEO claims arise)?
✔ Is your onboarding process standardized and includes role-specific training, workplace policies, and benefits enrollment?
Step 2: Wage Compliance & Payroll Management
Why It Matters
Payroll violations are among the most common and costly mistakes small businesses make. In 2023 alone, the Department of Labor recovered over $100 million in back wages from small businesses, largely due to overtime errors, unpaid hours, or misclassification.
Even unintentional payroll issues—like forgetting to pay for prep time, rest breaks, or mandatory meetings—can result in lawsuits or penalties. As your workforce grows, accurate wage tracking becomes more complex and essential.
What to Audit
✔ Are all non-exempt employees paid overtime at 1.5x their rate for hours over 40 per week?
✔ Does your timekeeping system accurately capture employee work hours, breaks, and remote time if applicable?
✔ Are payroll taxes correctly calculated, withheld, and remitted to local, state, and federal agencies?
✔ Are pay stubs clear, compliant, and distributed on time each pay cycle?
✔ Do you audit payroll at least quarterly to confirm proper classification, wage calculations, and deductions?
✔ Are managers trained on how to approve timecards, authorize overtime, and avoid wage theft risks?
Step 3: Workplace Policies & Employee Handbook
Why It Matters
Clear HR policies are your first line of defense against liability. Inconsistent discipline, unclear PTO rules, or missing anti-discrimination language can result in claims or morale issues. A 2023 SHRM study found that companies with employee handbooks are 25% less likely to face internal complaints or legal action.
Your policies should reflect local labor laws, your unique workplace culture, and your behavior, communication, and safety expectations.
What to Audit
✔ Do you have an employee handbook that outlines expectations, discipline, benefits, and conduct?
✔ Are your anti-harassment and anti-discrimination policies compliant with state and federal laws?
✔ If you offer remote or hybrid work, do you have a written policy outlining expectations, reimbursement rules, and time tracking?
✔ Are workplace safety guidelines documented, even in office or customer-facing environments?
✔ Are your PTO, holiday, and sick leave policies clearly defined, tracked, and compliant with local laws?
✔ Do employees receive and sign a copy of the handbook upon hire and during any major policy updates?
Step 4: Employee Benefits & Workforce Retention
Why It Matters
Offering competitive benefits—even modest ones—can make or break your ability to retain talent. Many small businesses assume they can’t compete with large firms on perks, but today’s employees prioritize flexibility, communication, and professional growth just as much as pay.
Legally, you must also meet requirements for paid sick leave, health insurance (if you cross ACA thresholds), workers’ compensation, and family leave and retirement plan access in some states.
What to Audit
✔ Are your PTO, sick leave, and holiday policies compliant with your state’s employment law?
✔ If you have 50+ full-time equivalents, are you ACA-compliant and offering affordable health insurance?
✔ Do you provide workers’ compensation coverage with correct job classifications and limits?
✔ Have you evaluated your retirement options or implemented a state-mandated IRA plan, if required?
✔ Do you offer flexible schedules, learning opportunities, or recognition programs to improve retention?
✔ Are performance reviews conducted regularly and tied to training, compensation, or growth plans?
Step 5: HR Record-Keeping & Compliance Documentation
Why It Matters
Your records protect your business during audits, disputes, or employee claims. Even a missing I-9 or misfiled timecard can expose you to compliance risk. For small businesses, the best protection is a simple, consistent documentation system that evolves as your team grows.
From tax forms and offer letters to evaluations and termination records, everything should be organized, secure, and accessible when needed.
What to Audit
✔ Are all personnel files stored securely and separately from sensitive forms like I-9s or medical documents?
✔ Do you retain payroll records, tax filings, and timesheets for the required 3–7 years, depending on jurisdiction?
✔ Are employee evaluations, promotions, and disciplinary actions documented and signed?
✔ Do you track employee acknowledgments of policies, training, and handbook updates?
✔ Is there a clear system for onboarding, storing, and off-boarding employee files?
✔ Do you conduct an annual review of your HR documentation to ensure compliance and organization?
Conclusion
HR compliance isn’t just for large companies—it’s essential for every small business that wants to grow sustainably. Reviewing and updating your hiring practices, payroll processes, policies, benefits, and documentation reduces risk and creates a foundation for your team to thrive.
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