As a veteran entrepreneur and small-business owner, I know how hard it is to keep your operation lean and profitable. Often small-business owners are striving to make their businesses less complicated so they can keep more of their time and money. However, the measures taken to streamline a small business can unintentionally lead to costly mistakes, like breaking employment laws.
Here are five employment laws that you might inadvertently be breaking.
Do not label independent contractors as employees.
It can be tempting to designate workers as independent contractors. After all, you don’t pay contractors overtime wages or benefits, nor do you have to remit payroll taxes on their earnings as you would for an employee. All of these extra things are very expensive for employers and eliminating them simplifies your payroll and thickens your margins. Unfortunately, small-business owners do not get to choose if a worker is truly an employee or a contractor -- that privilege belongs to the government.
What are the costs if you label a worker as a contractor when they are really an employee? You could owe back wages, penalties, and back taxes. The government (both state and federal) takes worker misclassification very seriously. Don’t risk it.
Correctly classifying a worker can be complicated. Here’s a tip -- use the DOL independent contractor test to help you correctly classify a worker. If you are still unsure about a worker’s status, don’t hesitate to request an IRS determination by filling out Form SS-8.
Don't use exempt classification to avoid overtime.
Exempt employees are usually paid a salary and don’t receive extra pay for working overtime hours. Employing only salaried workers and automatically classifying them as exempt might sound nice. Doing so would definitely simplify your payroll. However, just because an employee is being paid a salary, s/he is not automatically exempt from overtime wages. According to government regulations, you are required to give overtime pay to some salaried employees under certain circumstances.
The government says that exempt employee qualifications must be met in order for correct classifications to be made. If you accidentally exempt employees from overtime wages when they should receive them, your employees can sue you.
An employee must meet the federal salary and job duties requirements in order to be exempt from overtime wages. Employees who don’t meet these requirements are designated nonexempt. For nonexempt employees, you must pay overtime wages when they work overtime hours.
You may not subtract loan payments from pay.
The great thing about being a small-business owner is that you get to know your employees very well. If you’re anything like I am, you also want to take good care of them. There may be an occasion when an employee needs a small loan during a tough time, and you want to, or need to, help them out. So, you decide that you’ll simply deduct a few payments from their paycheck to repay the loan.
Whoops. As it turns out, you can’t do that. Your honest attempt to be a caring employer and friend can get you into hot water. Most states will not allow employers to deduct anything from employee paychecks other than taxes and benefits. This doesn’t mean you can’t give your employee a loan, however. It simply means that, when you give a loan to an employee, you’ll want to have them sign a promissory note. In other words, you’ll want to structure the loan like you would any other loan and treat their pay separate from the loan arrangement. You can ask a lawyer to create the promissory note and you’ll need to create a payment schedule with the employee.
Do not fire an employee for taking leave.
Consider the following scenario:
A doctor prescribes bed rest to one of your employees for a length of time. To accommodate this need, the employee must take leave, but that leave is disruptive to business operations and costs you productivity. So, you fire the employee as a cost-savings measure. Sorry, but you just broke an employment law.
58003 But, employment laws prevent you from firing employees who take time off per the Family Medical Leave Act (FMLA), use military leave or take time off to vote or serve on a jury.
5. Do not refuse to pay employees for rest breaks.
A funny thing happens when you become an employer, you really start to notice when people aren’t working. I know what you’re thinking, “when my employees are on a break, they aren’t working. So, why should I pay them?”
Simple answer: Because federal law says you have to. Let’s break down employee meal and rest breaks so you don’t end up in hot water.
If you offer meal breaks, you don’t have to pay employees for that time away from the job. You also do not have to include meal breaks in the employee’s cumulative time worked. Meal breaks are generally longer than the aforementioned “short breaks” and are at least 30 minutes long.
On the other hand, you must compensate employees for short breaks. Short breaks are factored into total time worked, and employees are entitled to take them. You also have to include short break minutes in your overtime calculations. Typically short breaks last about five to 20 minutes.
So, have you broken any employment laws?
Alright, now that you’ve been briefed on commonly broken employment laws, take a moment to consider whether or not you’ve broken any of them.
Remember, employees can sue you and the government may punish you for your error, so you will need to correct these mishaps as soon as possible. If you have misclassified employees, reclassify them correctly. If you are underpaying your employees, adjust your payroll. In some cases, you might need to give employees back pay to make up for your error. 58003 If you do, make sure employees understand any changes that have been put in place.
Document, document, document! Always document your employment decisions. 58003 And If you discipline or fire an employee, be sure to write down your reasons.
As a small-business owner, it is OK to try to make things easier for you and your employees. But, you must always abide by employment laws in the process.