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Thorny HR compliance concerns for startups: Hiring, pay and benefits, oh my

Posted by Kanika Sinha

January 20, 2015

The last several years has seen a surge in innovation and venture funding for startups. Last year alone, a whopping $48.3 billion has poured into US startups. This swell is mostly due to investors who realize the power of technology to disrupt and replace older industries. While these are positive developments, new concerns for exist for those running startups and small businesses.

While it may seem like a startup might not need an HR department, forgoing particular HR tasks can frequently lead to multifarious problems. By definition, small businesses and startups have relatively few employees, so there is a tendency to under-appreciate the importance of Human Resources in their companies.

While HR may seem like a fairly simple set of activities, it is as multi-faceted and complex as any other department necessary for operating a successful business. Without HR specialists, HR policies can be haphazardly implemented. This leaves many loopholes that can open the business up to legal trouble. These include:

State and federal hiring laws

The founders and management in a small company often have little or no experience with recruiting and managing. They are unaware of the many laws and regulations created by federal and state governments with which they need to comply.  Hiring practices have plenty of common pitfalls. The founders of startups frequently participate in much of the hiring process without much consideration for compliance. Yet, something as simple as asking inappropriate interview questions or how to do background checks can spell legal trouble.

Wage law compliance

One of the most common violations in HR compliance involves failing to pay the correct minimum wage. A basic Google search states that the federal minimum wage is $7.25 per hour. However, what most people miss is that federal, state, and local minimum wage laws differ. For example, while the federal minimum wage is $7.25 per hour, the state of Washington has a minimum wage of $9.32 per hour. At the same time, the city of Seattle recently voted to start increasing the minimum wage to $15 over the next three years. Whether an employee is qualified to receive overtime pay is another sticky compliance issue many companies get wrong. Most employees are entitled to overtime pay unless they are exempt according to relevant state laws. Without HR compliance advice, it’s easy for a startup to misclassify the pay of an employee. This can go on for years until an individual, or a group of employees decide to take legal action.

The benefits mosaic

The Affordable Care Act is presenting huge compliance challenges for HR departments of all sizes across the country. In fact, the ADP Research InstituteSM found that a huge percentage of HR departments are not ready to comply with the act. For example, their study found that “more than 60% of human resources and employee benefits decision makers in small and mid-sized companies are unaware” of the requirement to notify employees about public health insurance exchanges.  With new regulations such as the Affordable Care Act continually on the rise, many start-ups and small companies rely on outside expert help rather than adding hires to their payrolls.

Contractor or employee rules

Another all too common mistake is how employees can be misclassified for benefits, wages, and work rules. A familiar example is whether an individual hired by a company is technically an employee or an independent contractor. While it may seem like an easy task to determine if a company’s workers are employees or not, this has led to litigation for many small businesses who haven’t properly determined this according to corresponding laws. This issue has also led to workers compensation lawsuits for numerous companies.  Many times, even the employee may be unaware of the confusing rules due to the misconception that simply signing a contract which states that the worker is a contractor is enough to legally signify that they are not an employee.

Whether it is wage regulations or dealing with routine HR activities, startups and small businesses need to be diligent about current and upcoming compliance legislation. Even HR departments filled with experienced staff are having trouble staying compliant with these new regulations─it’s scary to think about how startups without HR experts are going to keep up.

As federal and state governments add regulations and laws for HR compliance, it is crucial for companies to invest the time and capital to understand what they need to do to protect themselves as well as their employees. If hiring an HR employee or department is too expensive for your company, consider outsourcing the services you need, such as those offered by Escalon. The value you will receive for this expertise outweighs the cost to keep your company compliant. With Escalon, you get the benefit of an entire HR department at a fraction of the cost─and with zero worries or headaches.


Kanika Sinha
Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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