HR Compliance Challenges Small Businesses Face Today

HR compliance challenges small businesses face

The financial consequences of getting HR compliance wrong can add up quickly. In fiscal year 2025, the U.S. Equal Employment Opportunity Commission (EEOC) recovered nearly $660 million for workers who faced workplace discrimination, including $528 million secured through the agency’s pre-litigation enforcement process — a reminder that many employment disputes are resolved long before they ever reach court.

Understanding how these eight HR compliance challenges can 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 sex discrimination, including many forms of workplace gender bias, along with other forms of discrimination based on race, color, religion, national origin, age, disability and genetic information. Its 2024-2028 Strategic Enforcement Plan also reflects how hiring risks are changing, with attention to AI screening tools, pay practices, pregnancy protections and other policies that may unfairly shut qualified candidates out of the process.

One of the easiest ways to protect your business 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: More than 37 states and over 150 cities and counties have adopted “ban the box” or fair-chance hiring laws. These rules require employers 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 could 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 or worship schedules could be viewed as discriminatory, since employers may be required to accommodate religious observances.
• Tobacco or other lawful off-duty conduct: In some places, workers have protections around lawful off-duty activities, including tobacco use. (Note that state laws vary.) Rather than asking about personal habits, focus on whether candidates can follow workplace policies and meet the requirements of the job.
• Disabilities: The Americans with Disabilities Act requires employers to provide reasonable business accommodations, so it’s best not to probe into medical conditions or physical limitations.

Finally, keep in mind that technology brings new risks. In 2023, the EEOC secured a $365,000 settlement against a company whose AI screening tools unfairly filtered out older applicants during employee recruitment. Since then, the legal stakes have only grown. For example, a high-profile class action against Workday alleges its AI-driven hiring tools systematically discriminated against Black applicants, older workers and people with disabilities. If you’re using AI in the hiring process, test these systems regularly, review the results and make sure human oversight is still part of the process.

2. Protecting staff from workplace harassment

Harassment can happen in businesses of any size, and employers are under more pressure than ever to respond quickly and document how complaints are handled. In recent years, many states have strengthened workplace harassment laws with tougher penalties, mandatory training requirements and clearer policy expectations. If you don’t address the issue, the fallout can affect both your brand reputation and your bottom line.

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. Make it clear that complaints will be handled confidentially and investigated promptly, thoroughly and impartially. Just as important, explain what corrective action may follow when it’s warranted.
• Create a safe reporting system: Make sure employees know exactly how and where to report concerns. It’s smart to offer more than one reporting channel — whether that’s multiple managers, HR contacts or anonymous reporting options — so employees feel comfortable speaking up, especially if one 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 workplace. (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, benefits and year-end paperwork depends on how you classify your workers — whether they’re employees or independent contractors. Employees have taxes withheld from their paychecks, and you’ll send them a W-2 at year’s end. Independent contractors, by contrast, handle their own tax payments, though you’re still responsible for issuing a 1099-NEC once payments cross the reporting threshold. 

Getting the classification right matters, but it isn’t always as clear-cut as it sounds. Federal and state agencies don’t always use the same tests, and the answer can change depending on where your workers live, what kind of work they do and how the relationship is structured.

That hasn’t gotten any easier. In 2024, the U.S. Department of Labor adopted a six-factor test that looks at the full working relationship when determining whether someone qualifies as an employee or independent contractor under the Fair Labor Standards Act. Then, in February 2026, the department proposed scrapping that standard in favor of a new framework — another reminder that worker classification rules at the federal level are still very much in flux.

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

• Behavioral control: If you control how, when or where someone performs their work, they’re more likely to be considered an employee.
• Financial control: If the person is paid by project, supplies their own tools and covers their own business expenses, they’re more likely to be viewed as an independent contractor.
• Type of relationship: If the arrangement is ongoing or includes employee benefits, the worker will usually be treated as an employee.

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

• The worker must be free from your control and direction in how they perform the work.
• They must perform tasks outside your usual course of business.
• 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

Remote work plans can add another layer of complexity, especially when employees are spread across multiple states. Wage and hour laws, payroll taxes, paid leave rules and workers’ compensation requirements may all vary depending on where employees live and work. If your team is spread across state lines, it’s worth checking in with legal or HR counsel before problems surface.

4. Paying employees at least minimum wage

Paying employees correctly starts with knowing whether they’re classified as exempt or nonexempt under the Fair Labor Standards Act (FLSA). Nonexempt employees are generally entitled to minimum wage and overtime pay, while exempt employees may be paid a fixed salary if they meet certain pay and job duty requirements.

For covered nonexempt employees, the current federal minimum wage remains $7.25 per hour — the same rate that’s been in place since 2009. But in practice, many employers pay more. More than half of U.S. states, along with countless cities and counties, now require higher minimum wages. If your state or local rate is higher than the federal standard, you must pay the higher amount.

And the rules don’t always stay put. In early 2025, a federal rule that had raised the minimum wage for many federal contractors to $17.75 per hour was rescinded by executive order. It’s another reminder that wage requirements can shift quickly depending on your industry, location and government contracts.

Getting minimum wage wrong can be expensive. Employers may have to pay back wages, and those who willfully or repeatedly violate minimum wage or overtime rules may face civil penalties of up to $2,515 per violation under the FLSA, with some states imposing even steeper fines.

5. Knowing when to pay overtime

Under the FLSA, nonexempt employees generally must receive 1.5 times their regular rate of pay for any hours worked beyond 40 in a workweek.

To treat a worker as exempt (meaning they aren’t entitled to overtime pay), three conditions typically must be met:

• Salary basis: The employee must be paid on a salary (or fee) basis.
• Salary level: They must earn at least the minimum salary threshold required under federal law.
• Job duties: They must perform exempt duties, such as executive, administrative or professional work under the applicable regulatory tests.

And like many employment rules, this one hasn’t stood still. The U.S. Department of Labor issued a final rule in 2024 that would have raised the salary threshold to $43,888, followed by another increase to $58,656 in 2025. But a federal court vacated that rule in late 2024, putting the prior 2019 standard back in place.

For now, most exempt white-collar employees must earn at least $684 per week (about $35,568 annually).

Miss any one of those three tests — salary basis, salary level or job duties — and the employee will usually need to be treated as nonexempt, meaning overtime pay applies once they work more than 40 hours in a workweek (unless state law is stricter).

And federal law isn’t always the last word. Some states and local jurisdictions impose daily overtime rules (such as overtime after eight hours in a day) or set higher salary thresholds for exemptions.

6. Understanding medical coverage requirements

The federal tax penalty for individuals who go without health insurance was eliminated in 2019. Under the Affordable Care Act (ACA), however, employers with 50 or more full-time equivalent employees (FTEs) may be required to offer health coverage or face potential penalties.

For ACA purposes, a full-time employee generally works an average of 30 hours or more per week or 130 hours in a calendar month, with part-time hours combined to help determine your total FTE count.

Once your business crosses that 50-FTE threshold, the stakes go up. If you’re subject to the employer mandate and fail to offer coverage when required, the penalties can add up quickly.

For 2026, the IRS set:

• Section 4980H(a): $3,340 per full-time employee (minus the first 30 employees, calculated monthly)
• Section 4980H(b): $5,010 per affected employee if the coverage offered is unaffordable or doesn’t provide minimum value, and an employee qualifies for a premium tax credit.

And these numbers don’t stay put, as the IRS adjusts them annually for inflation.

If your headcount is creeping toward 50 FTEs, now is a good time to review your health coverage options, run the numbers and think through plan design, employee contributions and eligibility rules before you’re forced to make decisions under pressure.

7. Offering paid sick and parental leave

Federal law still doesn’t require private employers to offer paid sick days or paid parental leave. So for a lot of business owners, the bigger question isn’t what Washington requires — it’s what applies where your employees actually live and work.

And that answer keeps changing. In recent years, states and local governments have expanded paid leave laws, rolled out new paid family and medical leave programs and, in some cases, rewritten the rules for multistate employers altogether.

For example:

• Minnesota has become one of the biggest paid-leave stories in the country. After launching earned sick and safe time protections in 2024, the state’s Paid Leave program began providing benefits in 2026, covering family and medical leave for workers across nearly all industries.
• Illinois enacted the Paid Leave for All Workers Act in 2024, allowing most employees to earn up to 40 hours of paid leave each year that can be used for virtually any reason.
• States including New York, California and Colorado continue to expand paid sick leave and family leave programs. In California, for example, paid family leave now replaces 70 to 90 percent of wages, depending on income level.

At 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 qualifying family or medical reasons, including the birth or adoption of a child or a serious health condition. To qualify, employees generally must have worked at least 1,250 hours during the prior 12 months and work at a location with 50 employees within a 75-mile radius.

Leave rules rarely stay simple for long, especially when your team is spread across multiple states. If you operate in more than one jurisdiction, review your policies regularly and make sure your handbook, payroll setup and leave tracking systems all line up.

8. Preparing employees for retirement and pay transparency requirements

Helping employees plan for the future — and making sure pay practices hold up to scrutiny — are two areas where compliance expectations are changing fast. More states now require employers to provide retirement plan access, and salary transparency is quickly becoming standard practice in job postings across the country.

State retirement mandates

If your business doesn’t offer a private retirement plan, state law may still require you to give employees access to one. State auto-IRA programs have expanded quickly. As of early 2026, 17 states had adopted auto-IRA programs, with 15 already enrolling workers.

That growth is showing up across the country. Programs are now operating in states including California, Colorado, Illinois, Nevada, Virginia and Minnesota, where the Minnesota Secure Choice program opened to eligible employers and workers in 2026.

For small businesses, offering one of the best employee retirement plans can feel like a big lift, especially when costs and paperwork start piling up. State-sponsored programs are designed to ease some of that burden by offering low-cost, automatic-enrollment options. In Illinois, for example, employers can use the Illinois Secure Choice retirement savings program without paying employer fees. Businesses simply deduct employee contributions from paychecks and send them to the program.

Pay transparency laws

Pay transparency rules are spreading just as quickly. A growing number of states now require employers to disclose salary ranges — and in some cases benefits information — when advertising open roles.

Beginning in 2025, employers in Illinois with 15 or more employees must include pay scale and benefits information in job postings.

States including California, Colorado, New York, Washington, Minnesota and many others now have similar disclosure laws on the books, making pay transparency less of a trend and more of a new hiring reality.

If you’re hiring across multiple states, don’t assume one job posting works everywhere. Review each location’s pay transparency rules before a role goes live.

HR compliance checklist

Every business has HR compliance responsibilities, but the rules don’t look exactly the same for everyone. Your obligations can shift based on your company’s size, where you operate, how you hire and manage employees, and even the industry you’re in. And as your business grows, the labor laws that apply to you may grow with it.

Most HR compliance issues fall into five core areas every small business owner should keep on their radar:

• Recruiting, hiring and onboarding: Federal, state and local laws help protect job candidates from discrimination throughout the hiring process. Keep an eye on these rules from the moment you post a job to the day a new hire completes 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: Classify workers correctly as employees or independent contractors. For employees, you’ll also need to determine whether they’re full-time or part-time and whether they qualify as exempt or nonexempt under wage and hour laws.
• Payroll and timekeeping: Paying employees properly involves more than cutting 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.