Running a small business or nonprofit? Then HR is probably just one of many hats you wear. It’s easy to think you’re doing just fine until a misstep costs you thousands in penalties, back pay, or worse.
These are some of the most common legal mistakes I see when helping small employers clean up their HR. Here’s what to watch out for and what to do instead.
1. Misclassifying Contractors and Employees
Think you’re saving money by calling someone a contractor to skip payroll taxes, insurance, and benefits?
Sure, it might look like savings now. But if that person should have been classified as an employee, the lawsuit or audit waiting on the other side will erase every penny you saved and then some.
If they have an office, work set hours, and answer to your leadership, they are not a contractor.
If they regularly work overtime, that generous flat salary no longer covers you.
If they do not control how and when they work, they are an employee under the law.
And if they are an employee, they are entitled to protections under the FLSA. That means overtime pay and payroll tax contributions. Misclassify them, and you could be on the hook for back pay, unpaid overtime, and back taxes. That cost-saving move just became a financial disaster.
2. Outdated or Missing Employee Handbook
If your employee handbook is still in a three-ring binder collecting dust since Obama’s first term, we need to talk.
Too many small businesses overlook the handbook or use a decade-old version full of outdated references to fax machines, office phones, or benefits that no longer exist.
The problem is that a handbook is not just for show. It is your first line of legal defense.
If you issue a corrective action or terminate someone based on policy, you need to be able to point to where that policy lives and prove it was shared with staff.
Announcing a new benefit verbally is not enough. If it is not in writing, it does not exist legally.
Make sure your handbook is updated annually, distributed to all employees, and includes a signed acknowledgment form. Include legally required benefits even if they are mandated by law. You still need to show you communicated them clearly.
3. Skipping Overtime Laws and Misusing Salaries
Remember that misclassification issue in number one? Let’s double down.
Many small employers assume they can pay someone a flat thirty-seven thousand dollar salary and avoid tracking hours even if that person is working fifty-hour weeks. Not so fast.
Not all salaried employees are exempt from overtime.
In states like Illinois, non-exempt employees must receive overtime after forty hours per week, even if salaried.
You also need to meet minimum salary thresholds and job duty tests to consider someone exempt.
You are not saving time by ignoring this. You are risking FLSA violations, back wages, and serious penalties.
4. Failing to Document Employee Issues
A conversation with an employee means nothing if it lives only in your memory.
If you are not documenting performance discussions, coaching conversations, or any incidents, you are setting yourself up for trouble.
Documentation matters because it creates a clear record of what was said, when, and by whom. It protects you if an employee later claims they were never warned. It gives you a consistent paper trail if you ever need to escalate.
You do not need fancy software. Just write it down. The date, who was present, what was discussed, and the employee’s response. It is a five-minute habit that can save your business.
5. Rushing or Botching the Hiring and Onboarding Process
If you want to lose good people fast, a sloppy onboarding process will do the trick.
According to Zippia’s 2023 research:
- 20 percent of employees leave within the first 45 days
- 30 percent leave within the first 90 days
Early turnover like this can cost you up to 50 to 60 percent of the employee’s annual salary in lost productivity and re-hiring efforts.
But beyond culture, there are legal risks here:
Are you asking illegal interview questions about marital status, age, religion, or gender identity?
Are you collecting the required I-9 and tax forms?
Are you properly explaining workplace rights and policies?
You only get one chance to make a compliant and welcoming first impression. Do not waste it.
6. Skipping Required Labor Law Posters
You have probably heard this one: “Nobody ever reads those posters.” And that is usually true until someone does.
Labor law posters are like an insurance policy. Most employees may never glance at them. But the one person who does and realizes theirs are missing could kick off a chain reaction.
By law, both federal and state workplace rights must be posted clearly and visibly in workspaces. That includes information on wages, anti-discrimination laws, OSHA rights, and more.
If your posters are missing, out of date, or in a binder somewhere, that is a compliance violation. It can trigger fines, penalties, and even employee claims.
The fix is easy. Services like JJ Keller offer all-in-one poster kits and automatic updates for under one hundred to two hundred dollars per year. It is one of the lowest-cost HR protections you can have and it keeps you compliant without thinking twice.
7. Ignoring Harassment or Discrimination Claims
Did an employee tell you Bill in Accounting grabbed their butt? Or that Suzy made a suggestive comment about Jon in Production?
Maybe someone less experienced got promoted over a senior team favorite who just so happens to be Black, gay, or part of another protected group.
These are not just crude jokes. It is not men being men. And no, it is not just her time of the month.
You cannot afford to dismiss harassment or discrimination claims.
Not just because of legal risk, though that is huge, but because people’s dignity is on the line.
Yes, not every claim is valid. People mishear things. Some may even stretch the truth. But most complaints come from employees who genuinely care about their own safety, about fairness, or about the culture around them.
If you ignore someone’s concern, if you do not listen, investigate, and respond, what message are you sending?
Would you want your kid to work somewhere like that?
You do not need to become a private investigator overnight. But you do need a clear policy, a consistent response, and a commitment to listen every time.
HR mistakes are rarely made out of bad intent. Most small business owners are just overwhelmed, stretched thin, and trying to get through the day.
But when HR issues are ignored, delayed, or handled informally, they become legal liabilities. They also damage trust. Your team notices when things are handled poorly, and so do future hires.
You do not need a massive HR department or expensive consultants to protect your business. You need clear policies, consistent practices, and the willingness to take people seriously.
If you are unsure where to start, that is where I come in. At Renwick Solutions, I help small businesses and nonprofits get compliant and build workplaces where people actually want to stay.
Whether you need a policy review, a fresh handbook, or help sorting out what qualifies as overtime, I am here to help.
Let’s make sure your business is protected and your people feel valued.