6 HR Laws SMBs Might Be Breaking Without Even Realizing It
For small and mid-sized businesses (SMBs), compliance with employment laws can be a minefield. Most business owners don’t intentionally break HR laws—they’re often just unaware of how complex and nuanced federal and state requirements can be. Unfortunately, even small missteps can result in fines, lawsuits, or reputational damage.
Here are six of the most common HR laws SMBs may be breaking without realizing it—and practical ways to correct these issues before they become costly.
1. Misclassifying Employees as Independent Contractors
The Issue:
Many SMBs mistakenly classify workers as independent contractors to reduce payroll taxes or avoid offering benefits. However, the IRS and Department of Labor (DOL) have strict guidelines that determine whether someone is truly an independent contractor.
Why It Matters:
Misclassification can result in back wages, unpaid overtime, and penalties for failing to provide benefits or pay employment taxes.
Example:
A marketing agency hires a designer, dictates their schedule, and provides the equipment for work. Even if the worker is labeled as a “contractor,” the level of control indicates they’re actually an employee.
How to Correct It:
Review the IRS’s “Common Law Rules” and the DOL’s new 2024 Independent Contractor Rule (DOL, 2024). If workers look more like employees, classify them properly and adjust payroll systems accordingly.
2. Failing to Pay Overtime Correctly
The Issue:
Under the Fair Labor Standards Act (FLSA), employees must receive overtime pay (time and a half) for hours worked over 40 in a workweek—unless they qualify as exempt. Many SMBs wrongly assume that paying someone a salary automatically makes them exempt.
Why It Matters:
Misclassifying exempt vs. non-exempt workers can lead to wage claims, back pay, and legal action.
Example:
A small IT firm pays a “project manager” a salary of $45,000 but doesn’t realize the role doesn’t meet the DOL’s exemption criteria for duties or salary thresholds. That employee may legally be entitled to overtime pay.
How to Correct It:
Regularly review job descriptions against FLSA exemption criteria. When in doubt, consult the DOL’s Wage and Hour Division resources or work with HR professionals to ensure compliance.
3. Overlooking Family and Medical Leave Act (FMLA) Requirements
The Issue:
Employers with 50 or more employees must comply with FMLA, which provides eligible employees up to 12 weeks of unpaid leave for specific family and medical reasons. Many SMBs either don’t know they’re covered or mishandle leave requests.
Why It Matters:
Failing to grant FMLA leave—or retaliating against employees who request it—can lead to lawsuits and fines.
Example:
An employee at a 60-person company requests time off to care for a sick parent. The employer denies it, unaware that FMLA applies.
How to Correct It:
Determine if your business meets the FMLA threshold. If so, create clear leave policies, train managers on compliance, and ensure proper documentation when employees request FMLA leave (U.S. Department of Labor, FMLA Employer Guide).
4. Asking Prohibited Interview Questions
The Issue:
During interviews, well-meaning business owners sometimes ask questions about age, marital status, religion, or disabilities. These can violate Equal Employment Opportunity Commission (EEOC) rules, even if asked casually.
Why It Matters:
Illegal interview questions can open the door to discrimination claims, even if no bias was intended.
Example:
A restaurant owner asks a candidate, “Do you have kids? We need someone who can work late nights.” While meant to assess scheduling, it can be seen as discriminatory based on family status.
How to Correct It:
Train hiring managers to stick to job-related questions. Instead of asking about children, ask: “This role requires occasional evening shifts—are you available to work those hours?” (EEOC Guidelines).
5. Neglecting Workplace Posting Requirements
The Issue:
The DOL and state agencies require businesses to display posters about employee rights (like minimum wage, OSHA safety rules, and anti-discrimination laws). Many SMBs don’t post them or fail to keep them updated.
Why It Matters:
Failing to display required posters can result in fines and employee complaints.
Example:
A small construction company hasn’t updated its OSHA poster since 2014. During an inspection, the outdated posting is flagged as a violation.
How to Correct It:
Download free, up-to-date posters from the DOL and your state labor department’s websites. Post them in visible areas where employees gather, such as break rooms or near time clocks.
6. Not Keeping Proper Employee Records
The Issue:
Federal law requires employers to maintain accurate records of wages, hours, and other employment documents for set periods of time (29 CFR Part 516). Many SMBs either don’t keep records consistently or store them improperly.
Why It Matters:
Poor recordkeeping makes it harder to defend against wage claims, audits, or lawsuits.
Example:
A retail business tracks employee hours informally on a whiteboard instead of through timesheets or payroll software. When a dispute arises, they have no accurate records to support their case.
How to Correct It:
Use payroll software or HR systems to store records electronically. Ensure you’re following federal and state requirements for retention (e.g., payroll records must typically be kept for at least three years).
Most SMBs don’t intentionally break HR laws—but ignorance of the rules is not a defense. Common issues like employee misclassification, improper overtime pay, and illegal interview practices can quickly escalate into costly legal challenges.
By staying informed, training managers, and investing in HR expertise—either internally or through outsourcing—businesses can ensure compliance, protect their employees, and avoid unnecessary risks.
When in doubt, consult resources from the U.S. Department of Labor (dol.gov), the Equal Employment Opportunity Commission (eeoc.gov), and state labor agencies to verify that your practices align with current laws.