5 Employee Compliance Pitfalls and How to Avoid Them

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The employee lifecycle is rife with potential compliance pitfalls. Here are the five most commons and how to avoid them.

From the moment applicants submit their resume to the day you issue their final paycheck, the employee lifecycle is rife with potential compliance pitfalls. Are your interviewers asking unlawful questions? Are you properly classifying your workers? Is John making more than Linda despite having the same title, experience, and seniority?

Thanks to ever-shifting laws and regulations, keeping up with compliance issues requires more attention than ever. Let it lapse, and it could cost you: 40% of mid-size business owners have suffered unintended expenses as a result of non-compliance with government regulations, according to an ADP Research Institute® study. Other times, non-compliance could mean missing out on revenue that's rightfully yours.

Here are five common employee compliance pitfalls and how to avoid them.

1. Misclassifying employees

Many employers prefer to classify their workers as independent contractors to save on overhead. But there are strict guidelines defining the independent contractor relationship, and breaking them can result in legal trouble and penalties. For example, if you require people to perform their work during certain hours, they should not be classified as independent contractors.

Recommendation: If you are unsure of an employee's proper classification, consult the Internal Revenue Service's Common Law Test. The Department of Labor, the Equal Employment Opportunity Commission, and several states also have independent contractor tests. If you still have questions, consult a compliance professional.

2. Asking for social media passwords

In recent years, it has become common for some employers to ask applicants or new hires for their passwords to social media sites, either to protect trade secrets or shield the company from legal liability. But starting in 2012, states began passing laws that make it illegal to require an applicant or employee to share their passwords. Today, more than 25 states have such laws.

Recommendation: Never ask an applicant or an employee to share their social media password. See here for a list of states with laws banning the practice.

3. Missing out on tax credit

The Work Opportunity Tax Credit (WOTC) and other hiring credits help benefit companies that employ people from certain target groups who have historically struggled to find jobs, like veterans and ex-felons. For a compliant WOTC process, the challenge for companies is screening all employees for eligibility during the application process, prior to making a job offer, without negatively impacting the application process flow.

Recommendation: Consider a web-based WOTC screening solution that is integrated with your applicant tracking system or that provides easy web and mobile access. ADP SmartCompliance lets employees enter their information online via desktop or mobile device, eliminating the need for paperwork and reducing the likelihood that eligible employees will be overlooked.

Read how ADP SmartCompliance helped Southern Healthcare Management simplify its WOTC screening process.

4. Overlooking accidental pay inequity

Most companies strive to create a fair and equitable workplace. Yet studies repeatedly show that underrepresented groups earn less than their white, male counterparts. Even if your intention is to pay everyone equitably, years of recruiting, transferring, promoting, and terminating workers can sometimes allow pay gaps to creep in.

Recommendation: Run regular internal pay audits to uncover disparities. For greater insight into your payroll and other HR data, consider investing in an HR analytics solution.

5. Consistently generating inaccurate paychecks

There's nothing more important a company does than pay its staff. But when dealing with hourly workers, overtime, and bonuses, it's easy for mistakes to creep in—especially if your time and attendance system isn't integrated with your payroll. Producing inaccurate paychecks does more than inconvenience your employees; it can result in lost time and money calculating backpay and even legal fees if employees file wage claims.

Recommendation: A time-and-attendance system that is integrated with your payroll solution minimizes errors by removing the need to transfer data by hand.

For more insights into compliance throughout the employee lifecycle, see ADP's Guide to Investing in Compliance.