You as a small business owner are most likely aware of the federal laws and regulations, and even state laws, you need to follow in order to stay compliant. But how much do you know about what actually happens to employers who violate these rules? What are the labor law consequences?
The US Department of Labor takes employment law enforcement seriously. If regulations regarding areas like safety and health, minimum wage and overtime, child labor laws, and more are violated, employers could face steep “civil money penalties.” And if the offense happens again, the employer could potentially face jail time.
Small businesses who fall out of compliance also put themselves in danger of lawsuits, audits, and a harmed reputation.
It’s not always easy to learn about labor law consequences. However, the government doesn’t always care if you accidentally broke the law or not. It’s important to inform yourself so you can make smarter decisions on how to prevent any unintentional violations from occurring.
Note: This is not official legal advice. If you have specific questions about labor law compliance, it’s best to contact an employment attorney.
What are the labor law consequences if you aren’t compliant?
Employees and former employees can do one of two things if they feel you are out of compliance. They can sue you in civil court, or they can file a claim with the government that triggers an audit.
The biggest trigger for a lawsuit filed by an employee is discrimination. It can come in the form of wrongful termination, pay discrimination, or discrimination on the job. According to a study by Hiscox, a global insurance company, small business owners faced a 10.8% chance of being sued by an employee for discrimination in 2016.
The data also shows that these lawsuits are costly and time-consuming. According to the report, businesses spent an average of 318 days resolving the claims, and 24% of the cases resulted in defense and settlement costs, which equaled an average of $160,000 for businesses who did not have the proper business insurance.
Another popular lawsuit brought on by employees is a wage and hour lawsuit. Employees can sue you in civil court if you fail to pay overtime, minimum wage, or even misclassify them as an independent contractor when they are in fact an employee.
If the employee wins the case, the judge will likely require you to pay unpaid wages, including any overtime premium you owe them, with a certain amount of interest tacked on based on which state you do business in. You’ll also most likely be required to cover the employee’s attorney fees.
On top of all the fees associated with the lawsuit, the government will hit you with financial penalties. More on those later.
Regardless of whether or not the employee’s reasoning for suing you is valid, it’s still going to be a long road to resolving the issue—with a lot of paperwork along the way.
Homebase Head of People Leila Malekottodjary’s advice on how to reduce your chances of this labor law consequence is to be transparent with your team. Make sure everyone who works for you knows about your compliance policies and practices so that they are less inclined to make a claim against you.
The most common way a labor law audit gets triggered is if an employee files a complaint with the Department of Labor, or another organization such as OSHA or the EEOC. The IRS can also audit you if they find employment tax errors or incorrect income reporting.
Note: The Department of Labor has the right to randomly audit employers at any time, but it’s most common for audits to occur in response to a claim. However, companies in the following low-wage industries have the highest chance of being randomly selected by the DOL for an audit:
- Day care
- Food service
- Garment manufacturing
- Guard services
- Health care
- Hotels and motels
- Janitorial services
The DOL will notify you if an audit is coming, but don’t expect much time to prepare. You can ask for time to gather records, but the time allowed will most likely depend on the auditor.
Be sure to ask the auditor for specific information on the issue and prepare to show them any documents related to the matter, or anything else they ask for. However, don’t provide any records other than what they need. And remember, it’s always best to be courteous to the auditor when they are on site and cooperate with them to make things smoother.
If a violation is found, it’s best to consult an employment attorney before doing anything else.
What are the penalties if you violate labor laws?
Wage and hour
If an employee believes an employer is not paying the correct minimum wage rate or providing overtime pay, they may file a complaint with the Wage and Hour Division. This sector of the DOL oversees investigations of labor law violations against the Fair Labor Standards Act (FLSA).
If an employee makes a complaint against your business, the DOL will launch an investigation. The investigators will look into your recordkeeping practices, employee classification, and time and pay records for all employees.
If you are found guilty of breaking any of these laws, you will be subject to fines. Below are the maximum civil money penalties for repeated or willful violations of each rule:
- Minimum wage: $2,074
- Overtime: $2,074
- Employee misclassification: $1,000
- Recordkeeping: $1,084
Remember, these civil penalties are for each instance, so if you are willfully not paying minimum wage to your team you’ll have to pay the fine for each employee. You may be required to pay backpay to employees who have not received what they rightfully earned.
For example, a recent investigation into wage and hour violations at a Florida beauty store resulted in the owner having to pay $53,841 in back wages after it was discovered that overtime laws were broken.
The Wage and Hour Division also has the right to publish its findings to the public and share the outcome of the investigation with the media. You can find articles about all the investigations that resulted in back pay and more on the WHD’s news release page.
Child labor laws
The labor law penalties for child labor violations are much steeper than others. The FLSA also lays out the rules around employing minors. The rules restrict the hours they can work and lists hazardous, prohibited occupations.
Child labor law enforcement is also overseen by the Wage and Hour Division of the DOL. Willful violations of the regulations can result in a fine of up to $13,227 per minor employee. However, if the violation results in serious harm or death of the employee, the maximum civil penalty is $60,115.
Employers who break the law repeatedly face a fine of up to $120,230, as well as imprisonment.
Anti-discrimination laws come with steep penalties. If an employee files a discrimination complaint, the EEOC will determine if discrimination occurred and if the employer is found guilty, they will be required to provide certain “remedies” to the affected employee.
Remedies include compensatory and punitive damages that affected employees may receive. Below are the maximum damages based on the size of the business:
- 15-100 employees: $50,000
- 101-200 employees: $100,000
- 201-500 employees: $200,000
- More than 500 employees: $300,000
The Occupational Safety and Health Act (OSHA) requires all employers to maintain a safe work environment for their staff. The laws under OSHA include restrictions on hazardous equipment and chemicals, as well as unsafe work conditions.
Employee complaints trigger OSHA inspections. The investigator will then come to the location and thoroughly look through the premises for any violations. Note: The investigator will look for signs of any broken labor law, not just the specifics of the employee complaint.
For serious violations, the penalty can reach $13,653 per violation with a minimum of $975. For “other-than-serious violations,” the maximum is the same, but there is no minimum fine. If you willfully committed or repeated the violation, you could face up to $136,532 per instance.
And if you don’t fix the problem, you must pay $13,653 per day until you do so.
Federally mandated leave
The Family and Medical Leave Act (FMLA) requires employers to provide unpaid leave to eligible employees. As with the other buckets of compliance, employee complaints trigger investigations. The investigator will then look through the employer’s records related to the FMLA.
If you simply failed to post the required workplace information on employees’ rights under the FMLA, the fee is $178.
However, if the investigator determines that you wrongfully terminated an employee based on rules laid out in the FMLA, things take a more serious turn. The Equal Employment Opportunity Commission may step in and require you to pay back wages with interest to the employee and give them their job back.
You are required by law to hold on to certain employee documents, namely the Form I-9, for each person you hire for three years after the date of hire, or one year after the date employment ends, whichever is later.
The government does not require you to submit I-9s. But if they audit you and find that you didn’t complete it correctly, you could face the fine mentioned above. Even if the required time to keep a particular incorrect form, the IRS will likely still fine you.
Leila provided a tip on how to avoid unnecessary I-9 fines. Once the required timeframe for keeping them is over, get rid of them. This way your auditor has less chance to catch an error you may have missed, resulting in an unnecessary fine.
There are many state labor laws that come with their own consequences. If you have questions about what the specific penalties are in your area, take a look at your state labor department website to learn more.
What about my business’s reputation?
You’ve most likely seen stories in the news about companies that did not pay employees enough, or discriminated against a certain protected class. Once the information is out there, your customer base, or even partners you work with, could change their opinion about you and your business. And that tarnished reputation can take years to rebuild.
Large companies like Walmart, Google, and Apple have experienced public backlash after violating employment laws. But while these companies will continue to thrive despite the negative attention, it’s small businesses that could face potentially devastating effects of the societal impact that stems from mistreating employees.
Here’s an example: After a large Michigan brewery settled a racial discrimination lawsuit, the trouble continued with bars and stores canceling their orders after a deposition of the case was leaked. And several stores that continued to sell their products noticed a decrease in sales of the beer, proving that your labor law violation could potentially cost you much more than the government fines or hefty legal penalties.
Remember that the above information is not legal advice. When in doubt, always consult an employment attorney with your specific questions about labor law compliance and consequences.
If you are looking for help to stay compliant and follow best practices to protect your business, HR professionals can also help. We know it’s not feasible for many small businesses to have an HR pro on staff, so Homebase can give you live access to certified HR advisors, expert guides and trainings, U.S. state and federal labor law alerts, and more to answer your toughest HR and compliance questions. Sign up today to get started.