Running a small business or nonprofit is no small feat. Between managing operations, finances, and employees, HR compliance often takes a back seat—until it becomes a costly problem. Many businesses unknowingly make compliance mistakes that can lead to fines, lawsuits, or operational disruptions.

Here are four of the most common HR compliance issues small businesses face and how to fix them before they become liabilities.

1. The I-9 Form: More Than Just Paperwork

Every employer must complete Form I-9 to verify an employee’s identity and work authorization. Yet, many businesses fail to properly fill out, store, or update these forms, which can result in large fines.

Common Mistakes:

• Failing to complete Section 2 within three business days of hire

• Accepting incorrect or expired documents

• Forgetting to reverify work authorizations when required

How to Stay Compliant:

✔ Ensure all new hires complete Section 1 on their first day
✔ Verify documents and complete Section 2 within three business days
✔ Store I-9s separately from personnel files and keep them for three years after hire or one year after termination (whichever is later)
✔ Conduct an annual I-9 audit to catch errors

2. Missing or Disorganized Personnel Files

Many small businesses don’t maintain proper personnel files—or worse, they mix confidential documents together. Having well-organized files ensures compliance with record-keeping laws and protects against legal disputes.

What You Should Keep in a Personnel File:

• Offer letters and job descriptions

• Performance evaluations and disciplinary actions

• Signed policies (e.g., handbook acknowledgments, harassment training)

Best Practices:

✔ Keep personnel files separate from medical and payroll records
✔ Restrict access to HR or designated personnel
✔ Store files securely (digital or physical) and retain records as required by law

3. Employee Classification: Are You Violating FLSA?

Misclassifying employees under the Fair Labor Standards Act (FLSA) is a common mistake that can result in unpaid overtime claims and penalties.

The Two Most Common Misclassifications:

🔹 Exempt vs. Non-Exempt Employees – Exempt employees do not qualify for overtime, while non-exempt employees must be paid overtime (1.5x regular pay) for hours worked over 40 per week.
🔹 Independent Contractor vs. Employee – Misclassifying employees as independent contractors to avoid taxes and benefits can lead to IRS audits and back payments.

How to Avoid Issues:

✔ Review job duties (not just salary) to determine exemption status
✔ Track all employee hours properly to avoid wage violations
✔ Use the IRS 1099 vs. W-2 checklist to classify workers correctly

4. The Employee Handbook: Your First Line of Protection

A well-drafted employee handbook helps businesses set clear expectations, maintain consistency, and protect against legal claims.

Must-Have Policies in Your Handbook:

✔ Anti-harassment and discrimination policies
✔ Code of conduct and workplace behavior expectations
✔ Leave policies (e.g., FMLA, PTO, sick leave)
✔ Overtime and wage payment policies

If you don’t have a handbook yet, it’s time to create one! An outdated or poorly written handbook can be as risky as not having one at all.