5 Common Missteps Small Businesses Tend to Make in Legal Compliance in California

When you are a small business, you can’t afford to make mistakes. You need to make sure that you have everything in place when you start running your business because a penalty or a lawsuit could ruin what you are trying to build. Those of you that are new to California might not be familiar with all of the laws that are in place and may find yourself reeling from the laundry list that you find yourself sorting through as you are starting your business. If you need help in these areas, you might seek out a California PEO.

1. Lack of an In-Depth Employee Handbook

Failing to have an in-depth employee handbook can cause major issues with your business. There are more and more labor law claims and lawsuits as the years go by so having provisions for every situation that you can think of is key. If you skip over important things, you may find yourself in the hot seat in court.

While you may not be an expert at putting together employee handbooks, you need to find someone that is so that you can rest easy knowing that you are protecting yourself to the best of your ability. You can make sure that you have legal justification for termination, as much protection as possible from discrimination lawsuits and also input the criteria for evaluating employee performance.

Any employee handbook is better than none so even if you have to create it on a Word document, but you need to make sure that you get the handbook created. You should ensure that they are written in compliance with local, state and federal laws or otherwise you could be dealing with legal problems.

2. Misclassification of New Hires

If you misclassify a new hire, this can cause legal ripples in your business. One of the biggest issues in California right now is whether a worker is an employee or an independent contractor.

Under the current law, you must have all three of the following factors in play to be able to properly classify a worker as an independent contractor after the California Supreme Court’s recent ruling in Dynamex Operations West v. Superior Court.

1. The worker has to be providing a service that is not part of the employer’s usual business
2. The worker can control how the work is being performed vs. the employer dictating the process
3. The worker has to be engaging in an established business that is not related to the employer’s business

Since classifying a worker as independent contractors allow companies to release themselves from various responsibilities both legally and financially, many companies we have been trying to have more independent contractors and fewer employees. While this may have worked in the past, it no longer works in California.

Unless you know that your workers are independent contractors because they fall under all of those categories, make sure that you are classifying them as employees. Lawsuits can be time-consuming and cost thousands of dollars to defend.

3. Paying Employees Outside of Your Payroll

A payment is a payment, and they should all go through your payroll. Whether you are paying bonuses, commissions or even giving them a gift like concert tickets or a cruise for great performance, you have to pay for it through the payroll. All of the payments above are usually considered taxable income or wages so make sure that you are taking this into account.

You may, however, apply for business reimbursement expenses for some items providing you have supporting receipts. Moreover, keep in mind that the IRS requires employers to withhold the proper payroll taxes from payments to employees accurately.

4. Failing to Revise Forms

There are different standards for forms in California than there are in many other states which is why often, you are not able to use the same forms. These forms include job postings, applications and new-hire forms. Make sure that you review these forms for compliance with the business laws of California. While things like asking about past salary or criminal background may be legal in other states, these questions are not permissible in the state of California.

Anyone that is interviewing and hiring works in California needs to be properly trained to interview in the state, so he or she do not ask improper questions and cause your company legal problems.

5. Improper Maintenance of Employee Records

Failing to keep employee records properly is a major problem with companies due to the high volume of records required. While you non-compliance may be non-unintentional, the law doesn’t care. Make sure you are following the specific time regulations according to the FLSA (The Fair Labor Standards Act) which states:

• Employee payroll records must be stored for at least three years after the last entry date.
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• The IRS requires employee records be held for four years after the employee leaves the workplace.
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• Any workplace that employs 50 or more workers must keep records regarding any employee leave in compliance with the Family and Medical Leave Act (FMLA).

There are different laws that you need to keep in check with through California, and you can read more about time requirements here.

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