HR Risk Management: Four Common Mistakes & How to Avoid Them

Key Takeaways:

• Misclassifying workers as independent contractors instead of employees can trigger IRS penalties of up to 20% of wages, 100% of FICA taxes, and potential criminal charges.
• Wage and hour compliance errors, including incorrect overtime calculations and missed break requirements, can result in lawsuits, fines, and reputational damage.
• Incomplete workplace documentation, including missing onboarding records, performance reviews, and leave documentation, exposes organizations to compliance risks during audits and legal disputes.
• Employers with even one employee working in a state must register with that state and file applicable taxes, including unemployment, disability, and income tax withholding.
• Proactive HR risk management, including regular classification reviews, reliable timekeeping systems, and consistent recordkeeping policies, prevents the most common and costly compliance failures.

In today’s fast-paced business environment, HR risks can often be overlooked, especially by employers without a dedicated staff or those with an overworked HR team. Here are four common mistakes that HR leaders can easily avoid with the proper HR risk management knowledge and resources.

1. Employee Misclassification

Misclassifying workers (employee vs. independent contractor; exempt vs. non-exempt) is a common mistake that can lead to serious legal and financial consequences such as penalties, back wages, and legal fees.

For instance, independent contractors do not receive the same benefits and protections as employees, including overtime pay and health benefits. Misclassifying an employee as an independent contractor can lead to significant liabilities if the individual is later deemed to be an employee by regulatory authorities.

To avoid misclassifying workers, regularly review job classifications to maintain compliance with federal and state laws. Additionally, train managers and HR staff on the criteria for classifying employees correctly and, when in doubt, consult with legal experts on proper classification.

2. Failing to Comply with Wage and Hour Laws

Small wage and hour compliance errors can result in significant liabilities, such as incorrectly calculating overtime or failing to adhere to break requirements. These issues are rarely intentional and often go unnoticed until it's too late, and non-compliance can lead to lawsuits, fines, and damage to the company's reputation.

Use reliable timekeeping systems to accurately track hours worked and breaks taken. Keep abreast of wage and hour law changes at the federal and state levels, and train HR staff and managers regularly on wage and hour compliance.

3. Inadequate Workplace Documentation and Recordkeeping

It’s essential for HR professionals to maintain accurate, consistent, and organized workplace documentation to keep their organization in compliance and protect themselves from potential lawsuits. This documentation includes employee onboarding documents, performance reviews, time and attendance, and any personal records HR must keep for legal compliance, such as documentation submitted for sick leave or an extended leave of absence.

Inadequate records can expose companies to compliance risks, especially during audits and legal disputes, and make it difficult to prepare a data room for venture-backed funding. HR professionals should develop and enforce clear policies for recordkeeping to maintain consistency and accuracy across the organization.

Startups are especially vulnerable to these gaps; learn about the most common startup HR mistakes and how to prevent them.

4. Forgetting to Complete State Registration

If an employer doesn’t register their organization in a state where they have employees, they may face legal issues like fines, penalties, and tax obligations. Having even one employee working in a state will require the employer to register and pay state taxes such as unemployment, state disability, and income tax withholding. Though payroll platforms support tax filings for companies, they do not always send reminders or warnings to do so. It is the employer's responsibility to maintain continuous and timely filing with state agencies.

Compensation Resources, an EisnerAmper company, has a proprietary tool, StateCheck, for HR leaders to safeguard multi-state compliance.

Our HR Advisory and Outsourcing team has the professionals and resources to help avoid these risks and keep you in compliance, potentially preventing costly mistakes down the road. If you have any questions or need assistance, please contact us using the form.