10 Ways Your Small Business May Be Breaking Employment Laws

Do you think of yourself as a flexible employer or even just a nice one?

According to a recent report by the California Chamber of Commerce (and covered here by OPEN Forum) – The Top 10 Things Employers Do to Get Sued – many small business owners may unintentionally be violating employment laws even as they are just trying to be flexible or nice. Much of the problem arises from the fact that state laws vary enormously. But some of these mistakes are universal and are often prohibited by federal law.

The report is worth a read, but here’s a summary of the 10 ways your business may be breaking employment laws, plus some resources from the SBA and other government agencies that can help you comply.

1. Classifying all employees as exempt, whether they are or not

An exempt employee is typically someone who is paid a specified amount of money, regardless of the number of hours worked a week. Under both state and federal law, these positions may be exempt from overtime requirements, as well as meal and rest breaks. Other positions may only be exempt from overtime.

Employees who don’t qualify for one of the exemptions are considered nonexempt and subject to overtime and meal breaks.

Problems arise when employers assume it’s easier to pay everyone a salary (or treat them as exempt), rather than dealing with meal and rest breaks, overtime, and time sheets. Many employers are sued for failure to provide meal and rest periods for nonexempt employees improperly classified as exempt. 

Read more about overtime and meal and rest breaks from the Department of Labor, and refer to your State Labor Office for laws on this matter.

2. The flexible lunch break

While federal law doesn’t require employees be given lunch or coffee breaks, certain states require that non-exempt employees get 30-minute lunch breaks, plus breaks for hours worked during the day. Laws even stipulate when the break must be given. In California, a meal break must be provided no later than the end of the employee’s fifth hour of work. So giving employees the option of skipping lunch to get out of work early is a law-breaker. Again, refer to your State Labor Office for more information.

3.  Classifying employees as independent contractors

This is an area of the law ripe for litigation, which can also land you in trouble with the tax man. Your worker may be happy to be considered an independent contractor until money and benefits such as paid leave, workers’ compensation and disability become issues.  For more insight into this thorny topic, as well as the role the IRS plays and why you need to be aware, read Independent Contractors vs. Employees.

4. Not providing harassment and discrimination training to managers and supervisors

State rules vary on whether harassment and discrimination training is required by law. California, Maine and Connecticut mandate it; other states simply advise it. Training first-line supervisors is your best defense against a harassment or discrimination complaint. Refer to State Requirements for Harassment Training (PDF) and check with your State Labor Office about any discrimination training you may need to conduct.  

5. Letting employees decide which hours and how many they want to work each day

State laws restrict the number of hours an employee can work without payment of overtime. If you have a flex-time policy that lets employees work longer days but fewer of them, you’ll need to follow the rules to ensure you don’t incur overtime or back-pay along with penalties. Check what laws apply in your state regarding pay and scheduling.

6.  Terminating employees for taking a leave of absence

The law protects employees from being fired for taking family or medical leave, military leave or serving on jury duty. Read more about firing employees within the law.

7.  Failing to provide a final paycheck to an employee who has not returned company property

Employers are not required by federal law to immediately give former employees their final paycheck. Some states, however, may require immediate payment, regardless of whether laptops, company phones, etc. have been returned – basically as soon as the words “you’re fired” are uttered. Contact your State Labor Office for information on employer requirements in your state.

8. Giving employees loans and deducting repayments from their pay checks

You may think you’re being a generous boss, but most states don’t permit employers to deduct anything other than pay and benefits from employee paychecks. Instead, have the employee sign a promissory note with the oversight of a lawyer and arrange a regular schedule of repayments.

9. Non-compete agreements

Many employers ask their staff to sign non-compete agreements to protect company information and customer lists, and keep employees from working for the competition. However, enforceability of non-compete clauses vary widely by state and some, including California, prohibit them completely (with some exceptions). Consult your lawyer on these agreements and other options for protecting your business information.

10. Having a “use it or lose it” vacation policy but failing to pay back money-owed on termination

Some states, including California, prohibit "use it or lose it" vacation policies by law. In these states, vacation time is considered a form of compensation, and must be paid out when the employee leaves. To find out your state's rules, contact your State Labor Office.

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley