Navigating Employment Law for Small Business Owners

Employment law can be a murky issue for small business owners, many of whom can’t afford an attorney to consult them on the specifics. But it is crucial for small companies to be compliant with such regulations to avoid lawsuits and audits.

Elizabeth Milito, senior executive counsel for the National Federation of Independent Business, said small business owners often get stumped on employment law because it is not intuitive or easily understood.

"Most [small businesses] don't have a dedicated human resources department, so they're trying to figure it out on their own," Milito said. "They don't want to pay an attorney and they're not trained in law either. Employment laws are complicated."

Here are the three areas of employment law small businesses need to be conscious of, according to Milito and the NFIB:

No. 1: Employees vs. Contractors. In both federal and state laws, employers face issues regarding 1099 filing. Make sure that the classification you are giving to employers is correct and in accordance with Department of Labor and Internal Revenue Service regulations, Milito said.

"If somebody is working part time for you, you may say they're a contractor or consultant so you don't have to put them on your payroll or withhold taxes," she said. "As a matter of paperwork, it's easier to have them classified this way."

However, while it may be easier, it might not be legal. You may misclassify someone as a contractor, and not file the proper 1099 paperwork, which can result in fines and consequences for your business.

No. 2: Overtime regulations. In tough economic times, employers may be looking to cut expenses, Milito said, and may offer comp time instead of paid overtime. Although this may be fine with your employee, it may not be OK with the Department of Labor.

"You can't agree to break the law," she said. "It says that non-exempt employees are entitled to time and a half pay for all hours worked over 40. You can't agree to waive requirements." Check to see what classification your employee has before making any decisions on overtime, she said.

No. 3: Worker leave. Medical leave, Americans With Disabilities Act and the Family and Medical Leave Act are what Milito refers to as the "Bermuda Triangle," of employment laws. Be sure to review the guidelines under these regulations before you stop compensation or fire any employee. This goes for worker's compensation law too, she said.

"You don't want to run afoul under these laws," Milito said. "You may have obligations under these acts—it depends on state law and the size of your business. I would say it’s a good idea to consult with an employment lawyer."

The NFIB recently hosted a Webinar entitle "Hot Topics in Employment Law for Small Business." For more information on the session, click here.