4 Overlooked HR Compliance Risks and How to Address Them Effectively
Overlooked HR compliance risks can lead to significant challenges for businesses. In this Q&A session, a Business Owner and a CEO share their perspectives on this crucial topic. The first insight discusses the importance of properly classifying employees and contractors, while the final insight emphasizes the need to avoid misclassifying employees as contractors. Read on to discover all four expert insights and practical recommendations to safeguard your company.
- Properly Classify Employees and Contractors
- Address Invisible Disabilities Proactively
- Ask Key Questions to Avoid Misclassification
- Avoid Misclassifying Employees as Contractors
Properly Classify Employees and Contractors
One HR compliance risk that is often overlooked is the proper classification of employees versus independent contractors. Misclassifications can lead to severe financial penalties and legal complications. In my years of running Ponce Tree Services, I've seen how easy it can be for companies, especially small businesses, to unknowingly misclassify workers when trying to manage fluctuating workloads. Early on, I prioritized educating myself and our management team about employment laws and tax requirements to avoid this pitfall. We implemented a system to regularly review roles and contracts, ensuring that job duties align with the classification criteria set by the IRS and the Department of Labor. This proactive approach saved us from potential audits and financial strain.
A practical recommendation to address this risk is to conduct regular internal audits of your workforce classifications and consult with an HR professional or employment attorney if needed. For example, I once discovered during a review that a seasonal worker we had classified as an independent contractor was actually performing tasks that aligned more closely with an employee role. By rectifying this in real time and properly onboarding the individual as an employee, we avoided potential fines and strengthened trust within our team. This level of diligence not only ensures compliance but also fosters a culture of transparency and fairness, which are essential for long-term success in any business.
Address Invisible Disabilities Proactively
One HR compliance risk that is frequently overlooked is the mishandling of accommodations for employees with disabilities, particularly when it comes to invisible disabilities.
Too often, companies focus on physical modifications... installing ramps or ergonomic chairs... while ignoring the nuanced and legally mandated adjustments that employees with mental health challenges, neurodivergence, or chronic illnesses might need. This oversight is a legal liability and a cultural failure that alienates talent and stifles innovation.
The Americans with Disabilities Act (ADA) requires a level of engagement that many organizations fail to prioritize... a real, two-way conversation with employees about their needs.
It's not enough to simply react to a request; companies need proactive systems to identify, assess, and implement accommodations without making employees feel like they're fighting uphill battles to get what they're legally entitled to. Ignoring this not only increases the risk of lawsuits but also drives away valuable employees who feel unseen and unsupported.
If companies want to address this, they need to start by training their leaders... every single one of them, not just HR... on what accommodations look like in practice and how to approach these conversations with empathy and legal awareness. It also means having clear, well-communicated processes for requesting accommodations, and accountability measures to ensure those processes are followed. HR should regularly audit how these requests are handled and gather anonymous feedback to identify gaps.
Finally, organizations need to stop treating accommodations as "extra favors" and instead bake them into their inclusion strategies.
The future of work is human-centered. Companies that don't adapt will find themselves at a competitive disadvantage... not just legally, but in their ability to attract and retain top-tier talent.
Ask Key Questions to Avoid Misclassification
One of the most common compliance issues I see is misclassification. It typically happens in one of two ways: 1. Incorrectly classifying employees as independent contractors (which means the employer can then avoid taxes and benefits) or 2. Misclassifying non-exempt employees as exempt (which often means failing to pay overtime or adhere to wage/hour laws).
While there is nuance, here are a few questions you can ask yourself to help you classifying correctly regarding contractors:
Does the company dictate how, when, and where the worker performs their tasks? Does the worker rely on company equipment, software, or resources to complete their job? Are they supporting day-to-day operations or fulfilling temporary, specialized work? Can the worker provide similar services to other companies simultaneously? Are they reimbursed for expenses like travel or equipment? Is the worker hired for a specific project with a defined end date, or are they part of ongoing operations?
Here are some additional questions to ask to help you determine if an employee should be classified as exempt or non-exempt:
Is the employee paid a salary equivalent to $35,568 annually for full-time work? Are they paid a fixed salary rather than an hourly wage? Does their role fall under an exemption category, such as:
Executive: Managing a department or supervising at least two full-time employees;
Administrative: Performing office or non-manual work related to business operations, with decision-making authority.;
Professional: Requiring advanced knowledge in a field of science or learning, typically acquired through specialized education (e.g., doctors, lawyers);
Outside Sales: Making sales outside the employer's workplace as the primary duty?
Does the employee have authority to make significant decisions on behalf of the company? Are the employee's primary job responsibilities aligned with exempt-level tasks, such as management, strategy, or advanced knowledge work?
I recommend going through every single job title and deciding, then making appropriate adjustments. Don't attach 'people' to the process, because then we take into account how people feel instead of what the laws state. I have personally been in HR in an organization (early in my career) when they were called into question and saw thousands of dollars paid out because of misclassification. All it takes is one employee or contractor to feel as though you aren't doing it correctly. It's worth your time to get this right.
Avoid Misclassifying Employees as Contractors
One HR compliance risk often overlooked is misclassification of employees as independent contractors. Many businesses cut corners by misclassifying workers to save on payroll taxes, benefits, and overtime, but the consequences of being caught are far costlier than the perceived savings. Regulatory agencies like the IRS and labor boards are cracking down, and penalties can include back wages, taxes, and hefty fines-not to mention the reputational damage.
Companies can address this by conducting a comprehensive audit of their workforce classifications and ensuring roles align with legal definitions of employment status. Practical recommendation? Stop outsourcing compliance to untrained managers or outdated handbooks. Instead, invest in expert HR guidance or legal counsel to set up airtight processes and protect your business. Misclassification isn't a cost-saving strategy; it's a lawsuit waiting to happen.
