Running a business means managing many types of risk, and one of the more challenging risk management responsibilities is navigating the increasingly complex regulatory environment surrounding HR compliance.
Failure to comply with human resource regulations can result in costly fines, legal judgments, damage to the company’s reputation or even all three of these effects at once. In this article, we will review the common risks of HR compliance and suggest how a business can mitigate risks through best practices for helping ensure lawful compliance.
The Risk Can Be Great
Although it may seem that employment law violations would only occur in marginal operations, even the largest and most experienced enterprises are vulnerable to risks arising from regulatory compliance.
For example, in 2000, Coca-Cola faced allegations from a group of black salaried employees who claimed the company discriminated against them in matters of pay, promotions and performance evaluations. Coca-Cola contested these claims. Ultimately, a court ruled in favor of the employees.
Coca-Cola was ordered to pay a $113 million settlement and to allocate an additional $43.5 million toward salary adjustments and $36 million to improve company practices. On its own initiative, Coca-Cola also donated $50 million toward charities focused on improving the lives of members of minority groups.
Total financial impact: over $240 million.
While this is an exceptional example, the EEOC reported that in 2020, there were over 470,000 calls to its toll-free number and 187,000 inquiries to field offices. During that year, 70,804 charges were resolved with non-compliant employers, with an average settlement of $40,000.
EEOC complaints in 2020 were based on many forms of discrimination, including disability, race, gender, age, national origin and religion. Notably, a majority of the complaints (more than 55 percent) involved some form of retaliation directed at the employee who filed the complaint.
HR Compliance is Necessary as Risk Can Arise from Many Directions
HR compliance encompasses a wide range of federal, state and local labor laws and regulations that govern the employer-employee relationship. The company’s legal risk may arise from regulations governing many different areas of human resources practice, including:
- Equal Employment Opportunity (EEO)
- Wage and Hour Laws
- Family and Medical Leave
- Health Care Reform
- Workplace Safety
- Employee Benefits
- Labor Relations
- Employee Classification
A Closer Look at the Risks
Let’s look at each of these areas of employee regulations, along with links to more examples. Then, we’ll outline the steps to developing an effective risk management strategy for helping ensure HR compliance.
Equal Employment Opportunity Commission (EEOC): This includes employment laws prohibiting discrimination based on race, color, religion, sex, national origin, age or disability. The primary federal law governing EEO is Title VII of the Civil Rights Act of 1964. In 2022, the EEOC resolved over 65,000 charges of discrimination, obtaining more than $513 million in monetary benefits for the victims.
Wage and Hour Laws: The Fair Labor Standards Act (FLSA) sets standards for minimum wage, overtime pay and child labor. State laws may impose additional requirements. The Society for Human Resource Management (SHRM) published the details of the Top 10 Wage and Hour Settlements in 2020, which totaled almost $500 million.
Family and Medical Leave: The Family and Medical Leave Act (FMLA) requires eligible employers to provide unpaid leave for certain family and medical reasons. This worksheet from the U.S. Department of Labor explains the benefits and protections provided by the FMLA.
Health Care Reform: The Affordable Care Act (ACA) mandates that employers with a certain number of employees provide affordable health insurance coverage. For businesses, not adhering to the ACA’s regulations can be costly. For example, in August 2023, the Department of Justice reported that Lompoc Valley Medical Center agreed to pay $5 million to resolve charges of false Medicaid and ACA claims.
Workplace Safety: The Occupational Safety and Health Act (OSHA) sets safety and health standards for workplaces to protect employees from hazards. Many adults remember the explosion of BP’s Deepwater Horizon oil rig, but many don’t know that, with more than 250 safety violations, BP was issued $81,340,000 in penalties, the largest OSHA fine to date.
Employee Benefits: Regulations around retirement plans and health care benefits are governed by laws like the Employee Retirement Income Security Act (ERISA). The top 10 ERISA settlements in 2022 totaled over $837 million. The largest was a $21.2 million payout by WAWA to resolve claims that the company breached its fiduciary duty in managing retirement benefits.
Privacy: Laws like the Health Insurance Portability and Accountability Act (HIPAA) and the European Union’s General Data Protection Regulation (GDPR) govern the protection of employee and customer data. Among a record number of HIPAA violations in 2018, the Department of Health and Human Services reported that Anthem, Inc. agreed to pay $16 million in restitution for a cyberattack that caused what was (at the time) the largest health care data breach in history.
Immigration: Employers must comply with immigration laws, including verifying the eligibility of employees to work in the U.S. In a case that originated with a lawsuit brought by an internal whistleblower, the India-based IT firm Infosys reached a $34 million settlement with the U.S. Attorney for Eastern Texas over visa fraud and abuse.
Labor Relations: The National Labor Relations Act (NLRA) governs the rights of employees to engage in collective bargaining and union activities. In the largest monetary remedy in the history of the National Labor Relations Board, the cable news network CNN was required to give employees $76 million in back pay after the company was found to have unlawfully terminated union employees and replaced them with non-union employees.
Employee Classification: Properly classifying employees as exempt or non-exempt under the FLSA and distinguishing between employees and independent contractors is crucial. The Department of Labor found that the oil-field services company Halliburton had misclassified over 1,000 employees to make them exempt from overtime pay requirements. Halliburton had to pay $18.3 million to settle the charges.
Recordkeeping: Employers are required to maintain various records related to employment, including payroll records and employee files. Under various state and federal employment laws, it is the responsibility of every employer to maintain accurate records and to safeguard employee privacy.
Multiple Consequences of HR Regulation Non-Compliance
Failing to comply with HR regulations can have more than one set of consequences for a non-compliant business. These consequences can include:
Financial Penalties: Government agencies can impose substantial fines for non-compliance with employment law. These fines can range from hundreds to thousands of dollars per violation.
Lawsuits: Employees or former employees may sue the company for alleged violations of their rights. Even if the company prevails, a legal battle is always costly and time-consuming.
Reputation Damage: News of non-compliance can spread quickly, damaging the company’s brand and having negative effects on customer loyalty, talent acquisition and employee retention.
Loss of Productivity: HR compliance issues can be distracting and time-consuming, diverting management’s attention from core operations and new plans for growing the business.
Given the severity of the potential consequences, HR compliance should be a top priority for all businesses, regardless of size or industry.
How to Navigate HR Compliance Challenges
Navigating HR compliance can be daunting, but it is essential for long-term success and sustainability. Here are some best practices through which HR professionals can help a business develop an effective compliance strategy.
1. Stay Informed
Because HR compliance regulations are subject to constant change, compliance departments must stay informed about the latest updates and changes in labor laws. Subscribing to HR newsletters, attending classroom or online seminars and engaging with human resource associations can help HR professionals stay up to date.
2. Conduct Regular Audits
Every business must regularly review its HR policies, procedures and records to identify and correct any compliance issues. HR audits, whether done internally or by a third party, can help to identify areas of non-compliance before they lead to a lawsuit or government intervention.
3. Create Compliant HR Policies
Develop compliant HR policies and procedures that align with federal, state and local anti-discrimination laws. Ensure that both employees and managers are aware of these policies and provide training as needed. Clear communication, starting with upper management, reinforces the message that lawful compliance is a priority of the organization.
4. Invest in HR Technology
Leverage HR technology solutions to streamline compliance processes. HR software can assist with recordkeeping, time and attendance tracking, payroll and benefits administration, reducing the risk of recordkeeping errors, misclassification and other forms of non-compliance.
5. Seek Legal Counsel
Consult with legal counsel or HR consultants to address specific compliance concerns or complex issues. HR leaders outside of your company can provide guidance on compliance matters and can help the HR team develop effective strategies for mitigating risk.
6. Train Employees and Managers
HR professionals must train employees and managers on compliance matters. This includes training on anti-discrimination, workplace safety and data privacy. Well-trained employees are far less likely to either accidentally or intentionally engage in behaviors that might lead to non-compliance.
7. Implement Whistleblower Protection
Encourage employees to know that they can report compliance concerns or violations without fear of retaliation and with the full support of senior management. Establish a clear process for reporting and addressing such concerns.
8. Stay Committed to Diversity and Inclusion
Promote diversity and inclusion in the workplace. Creating a culture of inclusivity not only fosters HR compliance but also enhances the company’s brand reputation and competitive advantage.
9. Outsource HR Functions
Consider outsourcing certain HR functions, such as payroll and benefits administration, to professional HR service providers. These providers have expertise in compliance and can help verify that your HR processes adhere to compliance standards.
10. Document Everything
Maintain thorough and accurate records of all HR-related activities, including hiring, firing, promotions and disciplinary actions. Good documentation can be invaluable in case of legal disputes or regulatory claims.
11. Regularly Review and Update Policies
Review and update HR policies and procedures as laws change or the business evolves. HR professionals must ensure that policies remain in compliance with the latest federal laws in the aftermath of a merger or other significant change in the workforce.
12. Prepare for Audits
Be prepared for government audits. Keep all necessary records readily accessible and ensure that the HR team understands how to observe regulatory guidelines, meet legal obligations and respond to government inquiries. Of primary importance are records related to hiring, work hours, promotion, termination, payroll, health care and retirement benefits.
Not Just a Legal Requirement
Maintaining HR compliance is a multifaceted challenge that requires constant attention and dedication. Navigating the complex regulatory environment demands a proactive approach that includes staying informed, conducting regular audits and seeking guidance as needed. By investing in compliance, HR teams can not only protect the business from legal and financial risks but also create a more ethical, inclusive and productive workplace.
Remember that compliance is not just a legal requirement; it is a fundamental aspect of responsible business management. By prioritizing HR compliance, company leaders are building a strong foundation for the success of the organization in an increasingly challenging and complex regulatory landscape.
Need help getting HR right?
From onboarding to payroll to employee handbooks, your HR team is responsible for the first and the last impression that your business makes on employees. Those impressions have a direct impact on your company’s ability to recruit, retain and grow.
Higginbotham’s Human Resources Services is here to help turn your uncertainties into opportunities. From a-la-carte HR consulting and audits to fully-stacked outsourced solutions, our team is ready to help grow your business’s capabilities.