Compliance Navigator

Non-Compliance Carries a High Price Tag for Employers

May 1, 2020

Paul Kramer

Director of Compliance

All businesses have expenses such as payroll, equipment, supplies, insurance, maintenance, utilities, and taxes, to name a few. But a cost many businesses seem to overlook is the high price of non-compliance with employment laws. Failing to comply with often confusing federal, state, and local employment regulations can cost employers millions, and in many cases a company has no idea a compliance problem exists until it is too late. But why is workplace non-compliance so costly? Here are a few reasons:

Class actions

A class action is a procedural legal device allowing one or a small group of plaintiffs to file and prosecute a lawsuit on behalf of a much larger group, often resulting in big settlements or verdicts for the complaining parties. Disputes with employees are custom-made for class action lawsuits because employers that violate an employment law, such as failing to properly pay overtime, usually violate it as to many employees, not just to a single worker. The monetary value of class action settlements has been escalating in recent years and will likely continue to rise into the foreseeable future.

State/local law violations

Not only are employers exposed to liability under the federal Fair Labor Standards Act (FLSA) when they violate wage and hour laws, but there is potential liability under state and local laws as well. State and local wage and hour laws may even provide broader protections than the FLSA which can lead to larger recoveries for employees.

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Misclassifying employees as independent contractors

A big problem today is that many companies misclassify employees as independent contractors, usually unintentionally. Misclassified employees are commonly denied benefits and protections to which they are legally entitled, such as the minimum wage, overtime pay, family and medical leave, and unemployment compensation. The risks of worker misclassification are substantial because employers may face expensive lawsuits resulting in damages, attorney’s fees, and other penalties.

Loss of brand equity

Brand equity is the added value a product receives due to brand awareness often brought about by a seller’s or manufacturer’s favorable reputation. It is a competitive advantage often leading to significantly higher sales and revenues. Nevertheless, this reputational advantage can be easily lost if it becomes known that the manufacturer or seller does not comply with laws protecting its workers.

Low employee morale

Employee morale is a top concern for organizations when it comes to non-compliance. Workers who do not believe their employers comply with regulations protecting them—such as wage and hour laws or scheduling laws—are often unhappy, leading to diminished productivity, high employee turnover, and absenteeism.

Reactive leave management

Reactive leave management is when employers grant time off under a leave law even if they are unsure an employee is entitled to it. In other words, unearned leave is granted to workers simply to avoid possible compliance issues. Reactive leave management is a big hit to the employer’s bottom line because employees on leave often are replaced by less qualified or less experienced workers.

Avoid cutting corners around compliance

As businesses grow, their compliance obligations grow with them. Gone are the days when employers can try to improve their bottom line by cutting corners around compliance. It simply does not work. More and more high-profile lawsuits and agency charges are being filed by employees to protect their rights. Companies should make whatever changes are necessary to comply with employment laws to protect themselves from becoming the next legal case other organizations read about. Be compliant!