HR Compliance Challenges Small Businesses Face Today

HR compliance challenges small businesses face

The financial consequences of getting HR compliance wrong can be steep. In 2024, the U.S. Equal Employment Opportunity Commission (EEOC) recovered nearly $700 million in relief for discrimination victims — the agency’s largest recovery in recent history.

Understanding how these eight HR challenges affect your business is the first step toward staying compliant. 

1. Avoiding discrimination on job applications

Every employer knows discrimination is illegal, but the scope is broader than you might think. The EEOC enforces protections against gender bias and other forms of discrimination, including race, color, religion, national origin, age, disability and genetic information. Its 2024-2028 Strategic Enforcement Plan also highlights new priorities, including discrimination tied to artificial intelligence, pregnancy and Long COVID.

One of the easiest ways to protect yourself is to be thoughtful about job applications and interview questions during the hiring process. Certain questions may seem harmless, but they can put your business at risk of discrimination claims. For example:

• Criminal history: Thirty-seven states and more than 150 cities and counties have adopted “ban the box” or fair-chance hiring laws. These rules require you to evaluate a candidate’s qualifications before asking about arrest or conviction records.
• Salary history: Asking about past earnings can unintentionally perpetuate pay gaps, especially between men and women.
• Age or graduation dates: Under the Age Discrimination in Employment Act, workers 40 and older are protected from age-based bias, so avoid questions that reveal a candidate’s age.
• Citizenship status: Stick to asking whether applicants are authorized to work in the U.S. to avoid claims tied to race or national origin.
• Family and pregnancy: Questions about children, marital status or pregnancy may suggest bias around attendance or caregiving responsibilities.
• Religious practices: Asking about holidays could be viewed as discriminatory, since employers are required to accommodate religious observances.
• Alcohol or tobacco use: You can’t base hiring decisions on these habits. Instead, ask about compliance with past employers’ policies.
• Disabilities: The Americans with Disabilities Act requires reasonable business accommodations, so it’s best not to probe into medical conditions or limitations.

Finally, keep in mind that technology brings new risks. The EEOC is watching closely for algorithmic bias in AI-powered hiring software, and it recently secured a $365,000 settlement against a company whose AI tools unfairly screened out applicants in protected groups. If you’re using AI in the recruitment process, test and monitor these systems to make sure they’re fair.

2. Protecting staff from workplace harassment

Harassment can occur in companies of any size. The #MeToo movement put a spotlight on the issue, and in response, many states have passed laws with tougher penalties, mandatory training and required anti-harassment policies. If you don’t address the issue, you risk damage to your brand reputation and significant financial consequences.

You can reduce those risks by taking a few key steps:

• Adopt and enforce clear policies: Spell out anti-discrimination and anti-harassment rules in your employee handbook, and include specific examples of prohibited conduct. Clarify that complaints will be handled confidentially and investigated promptly, thoroughly and impartially. Finally, confirm that corrective action will follow when it’s warranted.
• Create a safe reporting system: Make sure employees know exactly how and to whom they should report concerns. It’s smart to designate more than one contact person — ideally including both a man and a woman — so employees feel comfortable coming forward, and to protect victims if the primary contact is involved in the complaint.
• Train your team: Don’t assume everyone knows how to recognize harassment or respond to it. Provide regular training so employees understand how to protect themselves, support co-workers and contribute to a respectful, harassment-free environment. (The EEOC’s training tips are a great place to start.)

3. Classifying workers correctly and navigating remote work challenges

The way you handle taxes and paperwork depends on how you classify your workers — whether they’re an employee or an independent contractor. Employees have taxes withheld from their paychecks, and you’ll send them a W-2 at year’s end. Independent contractors, by contrast, pay their own taxes, but you’re still responsible for issuing a 1099-NEC if you pay them above the reporting threshold. Getting the classification right matters, yet it can be confusing because the rules for who counts as a contractor vary and aren’t always clear-cut.

To determine a worker’s status, examine three aspects of your relationship:

• Behavioral control: If you have the right to control your worker’s behavior, they’re likely an employee.
• Financial control: If you pay the person per project and don’t reimburse job-related expenses, they’re probably an independent contractor.
• Type of relationship: If the arrangement is ongoing or you offer employee benefits, you’ll typically treat them as an employee.

Some states are narrowing the definition of “contractor.” For example, in California, you must use the “ABC test” to determine if someone qualifies:

1. The worker must be free from your control and direction in how they perform the work.
2. They must perform tasks outside your usual course of business.
3. They must be engaged in an independently established trade, occupation or business of the same nature as the work they’re doing.

Remote work compliance considerations

With the rise of remote work plans, classification becomes more complex when employees are spread across state lines. You must comply with wage and hour laws, tax rules and workers’ compensation regulations in each state where remote employees live and work. Consider consulting legal counsel to ensure compliance with multi-state workforce requirements.

4. Paying employees at least minimum wage

The current federal minimum wage for covered nonexempt employees is $7.25 per hour. “Nonexempt” means the worker is covered by minimum wage and overtime rules as set by the Fair Labor Standards Act (FLSA). Exempt employees, on the other hand, are not entitled to overtime and may be paid a fixed salary if they meet certain pay and job duty requirements.

A federal rule briefly increased the minimum wage for many contractors to $17.20 an hour in early 2024, but it was rolled back in 2025 and is no longer in effect. Still, paying below the required minimum wage can be costly — employers may have to cover back pay and face civil penalties of up to $1,000 per violation under the FLSA, with some states levying even higher fines.

Although the federal rate has remained unchanged for more than a decade, there’s been a nationwide push to increase it to $15 per hour to help provide a living wage to workers. Today, more than half of U.S. states — and many cities and counties — have set higher minimum wages than the federal standard. If your state’s minimum wage differs from the federal rate, you must pay employees the higher of the two.

5. Knowing when to pay overtime

Under the FLSA, nonexempt employees must generally receive 1.5 times their “regular rate” for any hours worked over 40 in a workweek.

To treat a worker as exempt (i.e., not eligible for overtime), three conditions must be met:

• They must be paid on a salary (or fee) basis.
• They must earn at least the minimum salary threshold required by federal law.
• They must perform exempt duties (e.g., executive, administrative or professional tasks under the relevant regulatory tests).

Although the DOL issued a final rule in 2024 that would have raised the salary threshold to $43,888 (and then $58,656 in 2025), a federal court vacated that rule in late 2024. As a result, the prior salary threshold under the 2019 rule is back in force:

• $684 per week (about $35,568 per year) for most exempt (white-collar) employees.
  

Because the litigation and rulemaking around this continue, employers should monitor developments over time.

If an employee does not satisfy all three conditions (salary basis, salary level and duties), they must be treated as nonexempt and be paid overtime whenever they work more than 40 hours in a workweek (unless state law imposes stricter rules).

Also note that some states or local jurisdictions specify daily overtime (e.g., overtime beyond eight hours in a day) or set higher salary thresholds for exemptions. Be sure to check applicable state and local laws.

To help you comply with overtime rules and changing regulations, use reliable payroll and the best time and attendance software that can capture hours worked and enforce overtime rules correctly.

6. Understanding medical coverage requirements

The federal tax penalty for individuals not having health insurance was eliminated in 2019. Under the Affordable Care Act (ACA), however, employers with 50 or more full-time equivalent employees (FTEs) must provide health insurance or face potential penalties. An FTE is typically someone who works an average of 30 hours or more per week, or 130 hours in a calendar month, when you combine full- and part-time staff.

If you’re subject to the employer mandate and fail to offer coverage when required, you could face penalties. As of 2025, the Section 4980H(a) penalty is $2,900 per full-time employee (minus the first 30 employees, pro-rated monthly). The Section 4980H(b) penalty — which applies if you offer coverage that is unaffordable or does not provide “minimum value” and an employee receives a subsidy — is $4,350 per affected employee in 2025.

Since these penalties are indexed, the amounts change each year.

When your team size is nearing 50 FTEs, it’s smart to review your health coverage options, estimate your potential cost exposure, and prepare compliance strategies such as plan design, contribution levels and eligibility rules.

7. Offering paid sick and parental leave

Federal law doesn’t require private employers to provide paid sick leave or paid parental leave. As a result, many employees face the choice between taking sick days and losing income or working while ill. To address this issue, many states and localities have passed their own paid leave laws that require employers to provide paid time off (PTO) that employees can use if they’re sick or if they need to care for a family member.

For example:

• Minnesota implemented comprehensive earned sick and safe time requirements on January 1, 2024.
• Illinois enacted the Paid Leave for All Workers Act (effective January 1, 2024), which allows nearly all employees to earn up to 40 hours of paid leave annually, which they can use for any reason. (Earlier drafts tied coverage to employer size, but the final law applies broadly to most employers.)
• Other states, including New York, California and Colorado, continue to expand their sick leave and family leave programs.

On the federal level, the Family and Medical Leave Act (FMLA) requires employers with 50 or more employees to provide up to 12 weeks of unpaid, job-protected leave for certain family or medical reasons, such as the birth or adoption of a child or a serious health condition. To qualify, an employee must have worked at least 1,250 hours during the prior 12 months and must work at a location with at least 50 employees within a 75-mile radius.

Because paid leave requirements vary widely by state and locality — and interact with federal FMLA rules — employers should review the laws in every jurisdiction where they operate and adjust policies accordingly.

8. Preparing employees for retirement and pay transparency requirements

Helping employees plan for the future and ensuring fairness in pay are two areas where compliance requirements are growing quickly. Many states now require employers to provide retirement plan access, and a wave of new laws also requires transparency around pay and benefits in job postings.

State retirement mandates

Many states have enacted legislation requiring employers that don’t offer a private retirement plan to provide access to a state-facilitated program. As of 2025, active or pending programs exist in California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, Nevada, New York, Oregon, Vermont, Virginia and Washington. Ohio has also authorized a program, but hasn’t yet launched it.

For small businesses, offering one of the best employee retirement plans can feel daunting due to costs and administrative headaches. State programs are designed to ease that burden by providing a low-cost, automatic enrollment option. For example, Illinois employers can use the Illinois Secure Choice retirement savings program, which requires no employer fees. Businesses simply deduct employee contributions from paychecks and submit them to the program.

Pay transparency laws

In addition to retirement requirements, more states are adopting pay transparency rules that require employers to disclose compensation ranges in job postings. For example, as of January 1, 2025, Illinois employers with 15 or more employees must include pay scale and benefits information in all job postings. Penalties range from $250 for a first violation up to $10,000 for repeated violations.

Other states — including California, Colorado, New York and Washington — already have similar laws in place, and more jurisdictions are expected to follow. Employers hiring across multiple states should review local posting requirements to avoid compliance issues.

HR compliance checklist

Every business faces HR compliance responsibilities, but the exact challenges depend on factors like your company’s size, the HR processes you use and the industry and state you operate in. As your business grows, the federal and state labor laws that apply to you may also change.

That said, most HR compliance issues fall into five core areas:

• Recruiting, hiring and onboarding: Multiple federal, state and local laws ensure equal employment opportunity for job candidates. Stay up to date on these rules to avoid discrimination claims and maintain compliance while you’re recruiting employees and through the onboarding process.
• HR management: Protect employees from harassment and discrimination by establishing clear workplace policies. Include detailed guidance in your employee handbook, review it with your team and have them sign an acknowledgment to confirm they understand the rules.
• Worker classification: Correctly classify workers as employees or independent contractors. For employees, determine whether they’re full-time or part-time and whether they’re exempt or nonexempt under wage and hour laws.
• Payroll and timekeeping: Paying employees properly involves more than issuing a paycheck. Employers must comply with wage and hour rules, including minimum wage, overtime and recordkeeping requirements.
• Employee benefits administration: Some benefits are optional, but others are mandatory. Required programs typically include FICA, unemployment insurance, workers’ compensation insurance and, for applicable employers, health insurance and family and medical leave. Always check both federal and state rules to ensure compliance.