What does "compliance" mean for small business? What do I risk by skipping over this?

A question submitted to our Ask Me Anything sessions.

Barak: Let’s talk about the broader regulatory environment. This one comes from, presumably, a small business leader asking: "Do small companies really need to worry about compliance? What does that even mean? And what do I risk by skipping over this?" Elena: Yeah, don't skim over it. Barak: First, what are we talking about when we talk about compliance? Elena: Compliance covers all of an employer's employees and work location. So we're talking about laws and regulations covering your employees' pay, regulations, their safety while they're at work, privacy, data security…everything from A to Z that an employee touches, does, or says or hears, is covered by some sort of law or regulation. That sounds really big and scary, but it's not that big and scary. It's just a bit of a pain in the butt.

You know, compliance is not the most exciting thing. When we're thinking of human resources and employees, we're thinking about getting the work done. But compliance is important for a couple of reasons. One, because the law says so and the government doesn't care too much about what we think, they're just applying these one-size-fits-all laws to everybody. Starting early really helps you build a solid foundation for your company. Two, it helps you establish the correct cost of doing business, especially with regards to how much your labor costs. Barak: It sounds like it'll catch up with you later, if not sooner. Elena: Yeah, being in HR, we like to be business partners and strategic, but sometimes we come with bad news. And in this case, the bad news would be, it's not a matter of if you will get caught, it's a matter of when. There are some really big topics out there that are pretty likely to get you on the government's radar. Categorization of your employees is a big one. Overtime is another big one. We're also getting a lot more claims that are tied to discrimination and discriminatory practices–sexual harassment or gender discrimination.

Marta: Yeah. I also want to say that, I know the compliance topic is not fun, but, as an HR professional, I want to keep my employees and the company safe and avoid any liability. So that's also another way to look at it.

Depending on your size, things are going to change. The leadership have a lot on their plate to have to worry about this. So it's good to have an HR person that can handle these things. Because this topic will be overwhelming for people, I like to explain that it is building blocks. The first thing is the federal law. The federal law is across the whole country. So those are laws that we all need to follow. Those are the first laws we need to take into place. What Elena was saying about building the foundation: It's good to start because more laws are going to apply to you as you grow in size. When you are up to 15 employees, you have to be worried about certain things. When you are at 50, you have other things. So this is why if you start even now, it's not as much because you are doing it little by little.

Then in addition to the federal law, obviously, you have to consider the state laws. States like California, New York, Colorado are going to have a lot of state laws. You're going to have to get familiar with those or partner with somebody who can help you. And then even city laws like we were saying. Different cities are creating their own laws as well. So those are different things to keep in mind as you build your compliance. And I guess another thing, because I am an HR nerd, is even if you are little, create an employee handbook. It will be a great tool to guide you in knowing that you have the basic laws in place and, as you grow as a company, you can continue to add additional policies that apply to you. It will be a living, evolving document. If you have employees in different states, you can create addendums to cover those states. Barak: You mentioned a second ago, Elena, that being non-compliant can actually mess with your cost structure. I mean, it can essentially lead you to charge the wrong prices for things. Can you say more about that? Because I think speaking to people's money always helps them pay attention. Elena: Yeah. There's quite a few, as you can imagine, but one example is overtime. So if you classify an employee as someone who is not eligible to earn overtime, you're using their salary as a cost of labor. But a couple of years down the line, you find out, or you acknowledge, that they should have been earning overtime this entire time. Now your costs are going to incrementally increase. If the person is working 10 hour days, 60 hour weeks, or what have you, you're going to have to pay for those hours over 40. That can become quite costly. If you're remedying that a couple of years down the line, now you've got to take into consideration the statute of limitations. So now you're going to the employee and saying, "I'm going to pay you overtime now," and they're going to ask "Why?" And you're going to say, "Because it's the law," and they're going to say, "What about the other two years?" And then, technically speaking, you owe them those two years, too, or whatever your state statute of limitations is. As you grow, and there are more employees, you only need two employees to create a class. And there you have it. You have a class action lawsuit of five people or hundreds, depending on your company. So it can be really expensive. The final caveat here is that employees' claims can be made directly to the government or directly to an attorney, and they don't have to be valid. So you can have an upset employee go make a complaint against your company and it exposes you. They'll see whatever else is going on in the company. So it can end up costing you a lot of money and really harm your reputation, too. Barak: Well, that last part is a good note. This is a pretty accessible lever for someone to essentially get you to pop the hood on your business. Even if this isn't the area where you're being non-compliant and everyone was classified correctly, if there's other malfeasance going on in the business where you're not totally buttoned up, all of a sudden they've got a clear look at how the business operates. So it's a pretty easy way to get caught, maybe for something else. Elena: Right. One more interesting thing to note is that if you are being audited by the state, whatever their results are, they share it with the federal government and vice versa. So if you get audited by one, they're going to share the information with the other. Barak: Yeah. To your point about, essentially, how a business leader thinks about their cost of doing business. You want to start from a correct assessment of your true labor costs. You have these high profile lawsuits around worker classification at places like Uber and FedEx. These businesses have been figuring they can deploy a massive workforce for only so much money per entity, but if you’re fundamentally incorrect in your assessment of how that person ought to be classified, well, you've been charging essentially too little money for their services the whole time. Elena: Your prices are lower because your model is incorrect. Barak: Right. There are ways to do that in other parts of the business, too. You can bring in the wrong experience level to do a job. And that leads you to think your cost of doing business is less than it is. So it just benefits business leaders to be proactive at thinking about this stuff early, so that they're not surprised to find out later that their margins aren't what they thought. It could be a difference in profitability by a couple of percentage points or could be the reverse, where you're actually unprofitable and didn't know it.

Elena: Well, and another thing to think about, too, is in the event a company finds themself in a lawsuit and they end up owing money in the form of a settlement or they were found guilty of whatever the complaint was, the company insurance policies don't always cover it if it's considered negligent. Also, deductibles are really high. So, no matter which way you spin it, it costs a lot of money. And sometimes you're not covered.

But let's do the right thing for employees. These things are here to do the right thing. Let's try and do the right thing as much as we can. It's not always hard. Start early.

Barak: Yeah, that's right. The incentives are in the favor of people who are doing the right thing. Marta: I just want to say that Chambers of Commerce have good resources for free, just to have a basic understanding. The Small Business Administration, also, is another good tool for a small employer. So there are free resources out there just to get your basic plan. Luckily not all of these things need to end up in lawsuit or liability, if you do your homework. Barak: Right. And I mean, this is a good plug for involving a human resource consultant such as yourselves, too. Sometimes the fact that you can do it yourself… there's a downside to that. Then you have to, you know, do it yourself. Sometimes it's actually more direct, and can save you time and mitigate risk by going straight to a professional. Marta: Yes. I didn't say that right. I always recommend going to a professional. What I meant to say is, if a business leader wants to get educated on some of these things, there are resources that can get there.

Barak: Great notes.

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