August 4, 2020 | HR Compliance | Posted by Ascentis
The Cost of Non-Compliance
Classification violationsWhether 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 payment of back taxes and distribution of unpaid wages.
National, state, and local law violationsViolations 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. Noncompliance 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 violationsEven 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.
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 reputationIn 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 noncompliance 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.
Employee turnoverAttracting 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 noncompliant 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 noncompliance. 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.
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 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.