Labor Law Pitfalls: How Small Business Contractors Can Protect Themselves
By Melanie Ivanova
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Ensuring compliance with labor laws is a challenge every small business owner faces, but it’s one you can’t afford to overlook. Failing to adhere to labor laws can lead to hefty fines, lawsuits, or worse—closure of your business. But how do you ensure compliance without becoming overwhelmed by regulations?
Labor laws might feel like a distant concern when you’re focused on day-to-day operations, but they are essential for protecting your business and your employees. Below, we break down what you need to know to stay on the right side of the law, while focusing on building your business.
Why You Can’t Afford to Ignore Labor Laws
Many small business owners are tempted to cut corners when it comes to labor laws, either because they assume they’re too small to be scrutinized or they’re simply overwhelmed by the complexity of regulations. But here’s the reality: government agencies don’t discriminate based on company size when it comes to compliance. Whether you’re a solo operation or employ a team of 20, you’re subject to the same laws as large corporations.
Key Labor Laws You Need to Watch
Not knowing the specifics of labor laws can create blind spots that lead to unintentional violations. Here are some areas small business contractors often overlook:
- Misclassifying Employees as Independent Contractors: Many business owners classify workers as independent contractors to avoid payroll taxes and benefits. But if your workers meet the criteria for employees under the law, you must classify them as such. Failing to do so can result in massive fines.
- Wage and Hour Violations: Did you know that failing to pay overtime to employees who work over 40 hours a week could result in a Department of Labor investigation? Many businesses mistakenly believe that if they pay a “day rate,” they don’t need to calculate overtime. Wrong. Ignorance of the Fair Labor Standards Act (FLSA) can get you into hot water.
- Record-Keeping Requirements: Many businesses don’t keep adequate records of employee hours, pay rates, or work classifications. These records are crucial if a worker files a claim. One home cleaning company owner faced a lawsuit after a former employee sued for unpaid overtime, and because the owner couldn’t provide detailed records, the court ruled in the worker’s favor.
- Hiring Minors: Summer help can be a godsend, but hiring underage workers comes with a new set of rules. You’ll need to comply with child labor laws, which have strict guidelines on the type of work minors can perform and the hours they can work. Failing to follow these can result in heavy penalties.
Compliance Strategies to Safeguard Your Business
Staying compliant doesn’t mean you need a law degree or an HR department. You just need a proactive approach and a commitment to understanding the basics.
- Get Clear on Worker Classification: Review the IRS guidelines for employee vs. independent contractor classifications. If you’re unsure, consult with a small business accountant to avoid misclassification errors.
- Stay on Top of Wage and Hour Laws: Make sure you understand both federal and state wage laws, including minimum wage, overtime, and breaks. Use payroll software that automatically calculates overtime for you.
- Document Everything: Keep accurate records of employee hours, wages, and roles. This doesn’t just protect you in the case of disputes—it also ensures transparency with your team.
- Consult Experts: If you’re feeling overwhelmed, don’t hesitate to consult an employment lawyer or HR consultant. They can help you navigate any tricky areas and ensure you’re fully compliant.
- Use Technology: There are affordable apps and platforms designed to help small business owners manage payroll, employee records, and compliance. Automating these tasks can reduce human error and give you peace of mind.
