Costly Employer Mistakes

Are You Making A Costly Employer Mistake?

by | August 5, 2019

As a business owner, you want to avoid costly employer mistakes. But one of the most complicated challenges you’ll face is successfully managing and leading employees. And it’s rarely the “legal” side of being an employer that poses a problem, but the issues surrounding employee happiness and productivity. These crucial concepts are driven by policies such as compensation, wellness, flexibility, and autonomy — to implement them effectively, though, it’s essential to turn back to the basics of compliance. Unfortunately, there’s often a disconnect between engagement, wellness, and the compliance requirements associated with those policies, which can cause severe issues for employers. Here are a few examples of how well-meaning employers implement benefits to drive engagement and retention and create the opposite effect.

Employer Mistake 1: Policies Inconsistent With Practice

Your business may have an annual set number of days of vacation and sick time set. Still, you may not have policies concerning the accrual rate, carryforward of PTO, or the payment of unused PTO upon an employee’s termination. In practice, though, you may pay employees for unused vacation and sick time when they separate from employment because this seems “fair.” At some point, the vacation accrual policy changed, limiting the amount of time that could be carried forward into a future calendar year. 

However, your business may not have put this policy into practice, allowing employees to carryforward PTO and paying out all accrued PTO upon termination. Then, one employee who had accumulated over 12 weeks of unused PTO separated from the company and expected to have all the unused PTO paid. You were unprepared for this and stated that the policy of limiting carryforward was in effect. They will receive a portion of the unused PTO. The employee cited several instances where the company’s PTO practice was not in line with the policy you are trying to enforce. Due to the misalignment between practice and policy, you had to pay the full amount. Yikes!

Lesson: Be sure your policies make sense for your business and are in compliance with state and federal law. And most importantly, make sure the policies and practices are being applied consistently by all members of your management or leadership team. The potential claims arising from discrimination or failure to comply with state or federal law are significant. Regular meetings, review of policy, and training to your team will help ensure consistency.

Employer Mistake 2: Misclassification of Contractors vs. Employees

Your business wants to hire an individual for their particular skill set. Still, they don’t want to enter into an employment relationship at this time, so you agree the individual is a “contractor.” You don’t see a problem with this situation. It seems better because there’s no employer liability or tax liability for the individual, unlike if they came on as an employee. The individual performs work regularly at your or your leadership’s request. Your business is issuing a regular monthly check to the individual for the services performed. Everything is working out great!

That is until the individual is hurt while performing services for your businesses. The individual states that the injury occurred while working for the company. You state there’s no liability since the individual is a contractor. However, Labor and Industry, Employment Security, Washington Department of Labor, and the IRS all find the opposite to be true. The individual does not satisfy several requirements to qualify as a contractor and is an employee. The tax obligations for back taxes associated with this now-employee are enormous and constitute a personal obligation by you that could potentially bankrupt the business and the owners.

Lesson: For an individual to qualify as a contractor, the individual must operate a business, meaning they have a UBI, and in some cases, insurance. The individual must also meet many qualifying criteria set forth by both the State of Washington and the IRS. The risks associated with improper classification are significant. 

Employer Mistake 3: Granting Comp Time Instead of Pay

Your company has an hourly, non-exempt employee in the accounting department. During a company audit, the employee works approximately 50 hours per week for four weeks in preparation. The employee has a vacation to Europe planned and could use the extra vacation time. You may prefer not to pay out the extra cash as you prepare for the audit result and the possibility of additional tax payments. So the employee and the company agree that the employee will be able to take these extra hours as vacation time instead of receiving overtime pay. Win-win! 

A few months later, the employee leaves the company and demands payment for the unpaid overtime and threatens to file a complaint with the State agencies for unpaid wages. You didn’t even know the company had done something wrong or that your company had violated federal law. 

Lesson: Employers must have a basic knowledge of state and federal wage and hour laws. Staying on top of the ever-changing wage and hour laws, regular review of policy, and proper training are not only key but crucial as an employer. Having an advisor, such as an HR professional or attorney to contact when new issues arise or provide proper training and policy helps elevate the onus of being an employer.

These examples demonstrate how employers intend to make the right business decisions but manage to get into trouble because of a lack of understanding of the complex laws around employment matters. 

Unfortunately, what seems logical in the area of employment law is often not what is legal. It’s imperative to have a professional who is knowledgeable about employment law and to know when to reach out to them for help. Equinox offers tailored General Counsel solutions that make us available to you and your team when you need us to help you avoid these costly mistakes.