5 Common HR Mistakes Small Businesses Make

Running a small business is not easy and there are always multiple things to be thinking about at all times. It can certainly be overwhelming. Between managing customers, operations, and finances, HR often takes a back seat, that is, until something goes wrong. Unfortunately, even small missteps in HR can lead to costly compliance issues, employee turnover, or legal headaches. Let’s look at some of the mistakes we often see happening in small businesses that can be avoided with the right HR partner.

Mistake #1: Paying Someone a Salary to Avoid Overtime

Many business owners assume that paying an employee a salary automatically makes them “exempt” from overtime. Unfortunately, it doesn’t work that way.

Whether someone is eligible for overtime is determined by the Fair Labor Standards Act (FLSA), which looks at how the person’s job functions, not how they’re paid.

To be exempt from overtime, an employee must meet “specific tests” related to their job duties (executive, administrative, or professional roles) and must also meet a “minimum salary threshold”. If they don’t meet all the criteria, they’re non-exempt and eligible for overtime, even if they’re paid a salary.

What to do instead:

·       Review the job descriptions and pay structures for FLSA compliance and

·       Determine which roles qualify as exempt from overtime

·       Ensure your payroll practices align with the law

Mistake #2: Calling People “1099 Employees” to Avoid Payroll Taxes

There’s no such thing as a 1099 employee. There are employees (W-2) or independent contractors (1099) and they are two completely different classifications. They are also treated very differently in the eyes of the IRS and Department of Labor.

Misclassifying employees as contractors to avoid payroll taxes or benefits is a common and costly mistake. Specific criteria such as behavioral control, financial control, and the nature of the relationship is used to determine if they are truly an independent contractor or an employee. Knowing the difference and classifying people correctly is imperative to both the company and the individual.

What to do instead:

• Check with an HR professional or legal advisor

• Understand the difference between the two classifications and how they apply to the role/situation in your small business. The IRS outlines and defines what an independent contractor is.

• If the independent contract definitions are met, it is important to have a clear Independent Contractor agreement in place. If the definitions aren’t met, the person is an employee and should be managed as such

Mistake #3: Saying “It’s Employment at Will” When Firing Someone

It’s true that most states are employment-at-will states, meaning an employer can terminate an employee at any time, for any lawful reason. But that last part is key… for any lawful reason.

“At-will” doesn’t mean “without consequence” and it isn’t a reason or excuse to terminate an employee without any process or documentation. Employee terminations can still lead to claims of discrimination, retaliation, or wrongful termination if not handled properly or documented correctly.

What to do instead:

• Address issues immediately as they happen and make sure that the conversations are documented

• When it comes to time for termination, it should be consistent with company policy and/or practice and the documentation leading to termination will reduce risk for the company

• Have clear policies and objective documentation that protect both your small business and brand reputation. It also shows a level of respect and responsibility to the separating employee

Mistake #4: Asking Candidates for Their Salary History

Many small business owners ask candidate what their previous salary was to gauge what to offer. While this may seem harmless, it’s actually prohibited in many states, and it perpetuates compensation inequities.

More importantly, a candidate’s past salary has nothing to do with your current compensation structure or budget. As the company, you know what you are going to pay the role, the candidate doesn’t know your budget. As a company, if you are not disclosing pay upfront, it’s a peak into the lack of transparency within the company and something candidates take into consideration.

What to do instead:                          

• Decide in advance what you’re willing to pay for the role, based on your company budget, current market rates and how it aligns with other roles in the company

• Post the pay range in the job posting, which is required in a lot of states anyway. It saves everyone time and creates a transparent, professional hiring experience

• Discuss pay throughout the interview process to ensure there is continued alignment
  

Mistake #5: Holding an Employee’s Final Paycheck

We get these calls all the time. An employee quits without notice, they take a tool or don’t return some piece of company equipment, and the employer is really upset and wants to not pay them to justify their anger. No matter how frustrated you might be with an employee’s performance, if they didn’t return a tool or laptop, you cannot withhold their final paycheck.

Federal and state laws require that employees be paid for all hours worked and there are strict timelines for when that final paychecks must be paid to exiting employees.

What to do instead:

• If there is company property to be returned or other unresolved issues at time of separation, handle that separately from the final paycheck

• Make sure that you have policies and processes in place to avoid the issues often seen at time of separation

• Understand and follow your state’s final pay requirements and ensure all hours, commissions, or reimbursements are included

HERE ARE SOME OTHER RELATED QUESIONS WE GET:

Q: What are the most common HR mistakes small businesses make? A: The most common HR mistakes include misclassifying employees, mishandling overtime pay, ignoring documentation during termination, asking for salary history, and withholding final paychecks.

Q: Why do HR mistakes cost small businesses so much? A: HR mistakes can lead to fines, legal claims, and employee turnover—each of which impacts finances, reputation, and productivity.

Q: How can small businesses prevent HR mistakes? A: Partner with an experienced HR consultant, ensure compliance with wage and labor laws, and document all employment decisions consistently.

Q: Can Employers Advantage help my business with HR compliance? A: Yes. Employers Advantage provides small businesses with HR expertise, compliance reviews, and on-demand HR support to help you stay compliant and confident.

The Bottom Line

HR mistakes are easy to make, especially when you’re focused on growing your small business. However, those mistakes can come with big consequences and can’t be ignored. The good news? You don’t have to navigate it alone. That’s what the Employers Advantage team is here for. You have small business dedication and big HR expertise.

Let’s talk about keeping your small business from making these costly mistakes.