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August 20, 2021 | HR Compliance | Posted by Ascentis Thought Leadership

The Consequences of Non-Compliance

When it comes to financial regulations, the buck stops with an organization’s CFO. Staying compliant with the wide range of legal considerations that touch your finance operations is no easy task, but it’s a must for any conscientious CFO who wants to protect a company from the monetary and reputational fallout that comes from non-compliance. Below, we’ll cover the consequences of non-compliance in the workplace with six key areas of concern that CFOs need to keep an eye on. Read end-to-end for a full understanding of the importance of compliance in business, or use the links below to jump to an area you’re interested in.

What is non-compliance?

In order to understand what non-compliance is, it’s important to understand what the SBA compliance definition is. To stay legally compliant, your business will need to meet both internal and external business compliance requirements. This includes things like filing paperwork, paying taxes, and making sure you’re keeping the right business records.

Non-compliance in business is when you’re failing to meet any of the above requirements. HR compliance software can help you avoid non-compliance, which is important because there can be serious consequences. As a business owner, you need to understand what you need to do to be compliant with local, state, and federal regulations.

Examples of non-compliance

It’s easier to understand non-compliance when you have some examples. Let’s take a construction company, for example. A construction company may be guilty of non-compliance due to an OSHA violation that results in a fine. If a worker isn’t wearing proper safety equipment on the job, your business may face fines as a result of not complying with OSHA regulations.

Another example of non-compliance a company can face is breaking meal break laws, which are laws that give employees time to take breaks and have meals. For example, in California, workers are entitled to an unpaid, uninterrupted 30-minute meal break if they work for a period of more than five hours. If you fail to comply, you must pay the employee for an additional hour of work at their regular pay rate.

Sometimes, non-compliance is a matter of a payroll issue. This is one of the biggest reasons many companies use enterprise time tracking software instead of handling time and attendance manually. Making sure you’re accurately tracking and reporting employee hours, including PTO and overtime, is an important part of being in compliance financially. With the right software, you don’t have to worry about recording and calculating hours worked by hand or facing penalties for non-compliance.

Consequences of non-compliance

As a business owner, you may be wondering about the consequences of non-compliance. Unsurprisingly, there is a cost for non-compliance that business owners must face whether they violate HIPAA rights, OSHA regulations, or make payroll errors, for example. You can learn more about some of the consequences of non-compliance in business below.

Consequences of non-compliance include classification violations, national, state, and local law violations, international law violations, class-action lawsuits, loss of reputation, and employee turnover.

Classification violations 

Whether intentional or accidental, misidentifying independent contractors as employees is a too-common pitfall for businesses that regularly employ contract workers. As noted by Department of Labor guidelines, a misclassified employee may miss out on legally required benefits and protections such as minimum wage, overtime pay, family and medical leave, and more. Improper classification can also result in underpayment of state and federal taxes and lower contributions to unemployment insurance and workers’ compensation funding. Employers who misclassify workers can be subject to heavy fines and penalties, including paying back taxes and distributing unpaid wages. 

National, state, and local law violations 

Violations of national labor laws like the Fair Labor Standards Act (FLSA), involving functions such as minimum wage requirements, overtime pay, and proper recording and reporting of records, are likely on every CFO’s radar already. It’s crucial to remember, though, that every state and municipality has its own labor standards that your finance team can’t afford to overlook. Non-compliance with local laws — not just in your company’s physical location, but often anywhere you do business or anywhere your remote employees are located — can carry hefty financial penalties. Beyond fines and restitution, some violations can also lead to organizational probation that limits the way your company can do business, potentially an even more damaging scenario. 

International law violations 

Even in instances where companies are technically compliant with U.S. financial laws, there may be international consequences. For instance, the European Union’s revolutionary General Data Privacy Regulation (GDPR) sets strict limits on how companies — even those based in the U.S. — that deal with any businesses or individuals in Europe must handle and store personal data. Even though the United States does not currently have a national data privacy standard, these standards are crucial for doing business with countries that do. These fines are more than just a slap on the wrist, as well. Penalties range up to 4% of a company’s annual global revenue, and they’re strictly enforced: the Marriott hotel chain was hit with a GDPR fine of nearly $117 million following a 2018 data breach. 

Class-action lawsuits 

Beyond breaking the law, a company that flouts compliance concerns runs the risk of being sued. A class-action lawsuit — a small group of plaintiffs bringing suit on behalf of a larger group — over issues like discrimination, unpaid wages or overtime pay, or insufficient benefits can be damaging on several fronts. Even if no settlement is made, the legal fees and bad publicity that come along with a class action suit can do plenty of harm, including putting a CFO’s job on the line. Any steps a finance team can take to avoid instigating this kind of legal action are well worth the effort. 

Loss of reputation 

In the era of social media and search engines, the dangers of non-compliance are amplified beyond any previous norms. Considering that 87% of executives consider reputational risk to be the biggest strategic risk facing their companies, that’s no small matter. Word spreads quickly on the internet when a company is found to be out of compliance with financial regulations, and every violation leaves a permanent digital footprint. Financial non-compliance is especially dangerous, as it creates the impression that your company cannot be trusted on monetary issues. That can make potential customers and clients tentative about doing business with your company, as well as making quality employees less likely to apply for jobs. 

87% of executives consider reputational risk to be the biggest strategic risk facing their companies.

Employee turnover 

Attracting and keeping high-quality employees is a perennial challenge for many companies, and compliance violations make it that much more difficult. Studies show that 59% of employees who witness non-compliant practices in the workplace begin actively searching for new jobs. Not only does that impact retention rates, it also potentially facilitates further violations by driving away employees with the ethical standards to blow the whistle on non-compliance. That’s also important because replacing an experienced worker is expensive. Taking into account training and orientation, recruiter fees, and inevitable “rookie mistakes,” experts estimate that the cost of bringing on a new hire can be as much as 33% of the salary of an established worker in the same role.

Benefits of compliance

There are many reasons why you should strive to be compliant in every area of your business. Some benefits of compliance include:

Benefits of compliance include attracting quality employees, preventing legal problems, growing business, improving safety, and retaining employees.
  • Attract quality employees: Quality employees want to work for a reputable company, so you can attract better employees by making sure your business is compliant. A non-compliant business tends to attract employees who are only there for short-term gain and have no loyalty to the company.
  • Prevent legal problems: There are many consequences of non-compliance, from fines and lawsuits to tax problems and more. If you want to avoid legal trouble and keep legal costs at a minimum, maintaining a compliant business is important.
  • Grow your business: If you want to grow your business over time, you’ll need to make sure you’re compliant. Non-compliance will lead to fines and legal problems that make it harder to grow a successful business and attract investors.
  • Improve safety: Safety should be a priority for every business owner, and many compliance issues are focused on safety. By making sure you abide by OSHA regulations, you’re protecting your employees and avoiding non-compliance.
  • Retain employees: Employee turnover is expensive and inconvenient, but you can keep employees on board for longer by making sure your business complies with local, state, and federal regulations.

Compliance solutions

There are several ways to avoid non-compliance. One of the simplest things you can do to avoid non-compliance is to enforce best practices on a daily basis. Make sure employees are working safely and not violating any regulations. You can also outsource compliance obligations to an outside company that handles HR and payroll. Partnering with a company that offers HR management solutions and tools can help you save time and money and ensure you’re in compliance at all times. 

To improve compliance, get multiple audits a year, enforce best practices, and outsource compliance obligations.

Wrapping Up

Ensuring full financial compliance is a complex, multi-pronged effort that requires buy-in from a number of teams within your organization. Open channels of communication and clearly stated policies are an excellent place to start.  Automated HCM software solutions can also help address a number of key compliance issues, including FLSA and FMLA requirements, local and state regulations, union rules, payroll journals, wage rate management, and more. Learn more about how Ascentis software can help keep you compliant, protect your reputation, and improve your bottom line. Additionally, we have an HR ROI calculator and PEO calculator that you can use to determine how financially beneficial investing in HCM software can be for your business.

With more than 35 years of experience in providing Software as a Service (SaaS) solutions, Ascentis thought leaders have become a respected source for insights, tips, and innovations in the Human Capital Management (HCM) space.