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10 Ways Your Small Business May Be Breaking Employment Laws

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10 Ways Your Small Business May Be Breaking Employment Laws

By Caron_Beesley, Contributor
Published: July 25, 2012 Updated: July 25, 2012

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


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


Caron, this is an excellent resource for small business owners that I will be sure to pass along to the ones I know. It's true, good intentions can get you in trouble if you're ignorant of the actual laws concerning your conduct regarding breaks, terminations, etc. It does take a good deal of education and attention to do all this correctly as a small biz owner, but it's necessary if you want to avoid trouble with the law.
It's tempting to be the small business owner who wants to let your new employee's work in a less structured environment. You may allow your employee's to set their own work hours. You may let your employee's borrow a certain amount of cash and then deduct the loan from their payroll. Before you consider going down this road BEWARE! Your relaxed work environment could be violating state and federal labor laws. I know it may be your desire to be flexible, kind, and empathetic employer. You are not running a popularity contest, you are running a business. Get on the right foot before you hire your first employee by creating an employee handbook.
All above Points are very informative. I like entire points which above mentioned.
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Thanks for giving us the idea! Now, businesses can check whether their business is following employment laws!
Very nice article, I have my own small business, but I never thought about those sides of the law, really something to think about, there are so many things to consider when having a company, so thanks for sharing these facts!
God article have never thought about these things, at my company i have 25 employes and there is many thinks you need two think about thank you fore sharing this..
i am glad to read this post, it is great. thank you.
Non-compete agreements seem to be all the rage but, in reality, seem kind of hard to enforce depending upon the situations. It's probably wise to assume that someone leaving your employee may wind up working for a competitor, but, if a non-compete agreement discourages them from doing this and is legal in your state, it probably isn't a bad idea to get employees to sign one.
Employees must be familiar with their rights so that employers would not take advantage on them. Knowledge about laws and others is really a requirement.


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