Noncompliance: 3 Big Risks Could Cost Your Business Dearly

May 8, 2020・5 mins read
Noncompliance: 3 Big Risks Could Cost Your Business Dearly

Any noncompliance with HR laws can put your business at risk. Government agencies are cracking down on widespread noncompliance. Your company could incur big penalties, reputational damage, and/or legal action. Handling compliance tasks can be time-consuming, and it can feel burdensome. Business owners and HR professionals, however, should make it a priority to stay in compliance. If you’re the go-to HR person for a small business, you’re probably already facing a number of challenges:

  • Limited resources.
    Your small- and medium-sized business HR department might be short-staffed, and you may be working with limited resources. If you don’t have an HR department, you may be the one responsible for taking care of:
    • Maintaining compliance
    • Managing payroll
    • Managing employee benefits
    • Tracking timesheets
    • Fostering an attractive company culture and creating recruiting strategies for top talent
  • Managing compliance.
    Compliance is a dense forest of regulation that changes often. HR team members are in charge of staying on top of workforce laws and organizing required training. They must also handle the necessary reporting to keep the business compliant.
  • Building out an HR strategy.
    To get the best people in the door, you need a strong and smart recruiting effort from your HR team. This may be an afterthought for many smaller businesses that lack HR teams and that focus more on managing labor-intensive, everyday tasks. Many small business owners must take care of responsibilities like paying employees on time, PTO requests, and remaining in compliance.

Despite the dynamic needs of HR teams and owners at small and midsize businesses, compliance remains at the top of the list. It’s the foundation of successful and ethical businesses, and it helps you mitigate your company’s risk.

Risks of noncompliance

1. Hefty fines and penalties

Businesses that are out of compliance face fines and penalties from a number of regulations. Some of the most common are:

  • GDPR, or General Data Protection Regulation: Businesses that have or hold data belonging to any EU citizen are subject to GDPR data protection requirements. The maximum penalties are 4% of worldwide revenue or €20 million, whichever is greater.
  • I-9 form: Employers must verify employee eligibility verification forms and keep them on record in case of an audit. Businesses that knowingly break these laws may face substantial fines.
  • Affordable Care Act: If you have 50 or more full-time or full-time equivalent employees, you’re considered an applicable large employer. You have to offer healthcare to your employees or face IRS penalties.
  • Fair Labor Standards Act: You’re legally obligated to pay federal minimum wage and overtime pay to nonexempt employees. Failure to do so may mean that you will have to pay back pay and penalties for each violation.

2. Reputation damage

Fines and penalties aren’t the only damage you might incur from noncompliance. Your business reputation is always on the line as well. Compliant and ethical businesses reap both external benefits from their consumer brand reputation and internal benefits from their employer brand. An Accenture study found that many consumers support brands that care about social issues. More than 40% of respondents were willing to walk away from companies that aren't in alignment with their beliefs. At the same time, job candidates are spending significant time and energy researching potential employers; integrity matters. Problems such as wage issues or allegations of discrimination are major red flags for top talent.

3. Legal action

Compliance is based on best practices and rules and regulations. As complex and difficult to comply with as they may be, rules and regs exist to:

  • Keep people safe
  • Protect personal information
  • Ensure fair labor practices.

When businesses don’t remain compliant, they risk class action lawsuits or criminal charges. And it’s not only small businesses (without the resources and legal expertise of larger companies) that may be sued. Target settled a large class action lawsuit for breaking ERISA laws. The lawsuit alleged that Target provided insufficient notice and instructions regarding COBRA offerings after a qualifying event. More than 92,000 individuals were eligible to receive payment from Target under the settlement agreement.

Common reasons for noncompliance

As a business owner or an HR professional, you should be aware of the most common reasons for noncompliance. These include:

  • Policies and procedures that are hard for employees to understand
  • Employee manuals that are difficult to access
  • Insufficient employee training
  • Failure to notify employees when regulations change
  • Lack of enforcement when employees don't use the correct process
  • Not leading by example

Recommended solutions

How can businesses protect themselves? We wish the answer was as simple as “stay compliant.” But the overlapping, piecemeal, oft-changing landscape of compliance makes it tricky. Automating HR tasks with the right HR tech is a great place to start. An HR tech provider like TriNet can help your HR team stay on top of payroll, benefits, onboarding, and recordkeeping.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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