How small teams stay compliant (or not)
- Claire Baker
- Jun 20, 2023
- 14 min read
Updated: Jun 22, 2023
Compliance oversights happen…
… even to good people.
Staying compliant with labor laws and regulations is a challenge for companies of all sizes, especially small teams and startups. There are a few reasons why compliance is uniquely challenging for small teams:
🤹 No full time HR/PeopleOps teams: You may not have anyone whose primary responsibility it is to keep up with regulations and stay ahead of compliance problems. Just because you haven’t detected a problem yet, doesn’t mean it’s not a problem.
🧩 Constant changes: Small businesses grow (proportionally), pivot, and iterate more quickly than larger companies, and you may not be thinking about (or aware of) how decisions affect compliance matters, or when your company becomes responsible for meeting new requirements.
🤝 Personal relationships: When the whole team has 1:1 personal relationships with each other, companies assume that they can talk through any misunderstandings, relying on mutual goodwill to resolve problems. That doesn’t really workin part because of...
🧗🏾♂️ Power gradients: Combining 2 & 3, the individual relationships that a small team offers can give leaders a false sense of camaraderie with their team. Team members don’t always bring their criticisms to the boss, and people in positions of power may get away with tone-deaf behavior beyond the point where it hurts morale and seeds grievances. It takes a great deal of self-awareness for leaders to realize when they are losing the good will of their team, or when team members begin to feel exploited and harbor grievances.
🥅 Ends-means thinking: Leaders can get so wrapped up in the incentives of their business that it can be tempting to cut corners in service of a “greater good.” The problem is that the “greater good” is often subjective, and disproportionately benefits leaders at the cost of disadvantaged team members.
💸 Limited budget: With a smaller team, each employee’s time off or protected benefit comes at a larger proportional cost to the company. When faced with granting long-term leave to a key team member or paying wages for time that an employee didn’t work, employers sometimes rationalize fudging the rules, which effectively makes the employee pay the cost of doing business out of their own pocket. Not cool.
“Team members don’t always bring their criticisms to the boss, and people in positions of power may get away with tone-deaf behavior beyond the point where it hurts morale and seeds grievances.”
You don’t need to live like this…
… help is available. 🛟
Hiring an outside consultant can help you identify the gaps in your company’s operations, then implement processes that your team can manage with very little ongoing work. Coincidentally, that’s what I do! 🙋♀️
Here are 6 real-world examples of how fractional HR support can help:
(Some identifying details have been changed.)
The Mr. Burns Handbook: Sacrificing trust to save your butt
Some business owners want to make sure they’re covered when they need to make difficult decisions. They then stuff their handbooks full of draconian warnings and low-key shady decisions they reserve the right to make someday. While this CYA approach may help in the face of legal action, don’t forget that your company handbook is often an employee’s first encounter with your company’s management culture. An overly prescriptive and legal approach to policies can set the tone for a low-trust culture, where employees and leadership see each other as adversaries. Don’t forget: policy is culture.
Situation: A small, bootstrapped consulting firm wrote a handbook that was essentially a list of all the labor regulations the company was subject to. For example, the Compensation section of the handbook contained the following:
Salary decreases may occur with job restructuring, duty changes, transfers, or adverse business economic conditions.
Effect: Sentences such as the one above inadvertently planted the idea in employees’ heads that if the company fell on hard times, it would first cut their pay. It also did not mention relevant employee protections, such as the required notice period, that pay cuts need apply to all employees of a given class, and the employees’ right as at-will employees to decline the cut and leave without notice. Because there was no mention of the employer’s philosophy around triggering topics, the unintentional implication was that it was the employee’s responsibility not to exercise their rights rather than notifying the employee of their rights to pay, leave, etc. under the circumstances described.
Resolution: The terms of at-will employment cover the situation described above. Since this was an at-will employer, there was no obligation to describe the unlikely and anxiety-producing possibility of pay cuts. Instead, we updated the description of at-will employment in the policy to include possible adjustments to pay, and framed it in a more employee-centric way.
AcmeCo. is an at-will employer, which means that either the Company or employee may decide to terminate the relationship without notice. The Company may change the terms of employment without notice, including organizational structure, job title, compensation, hours of operation, and termination with or without cause. If such changes become necessary, employees will receive at least one week’s notice, during which they may decide to terminate the relationship without penalty if the terms are no longer acceptable to them.
Why Can’t You Just Be Chill: Overdrawing the trust account
Small teams are under a lot of financial pressure. Each employee’s contribution has a meaningful impact on overall productivity, which means that their time off leaves the team disproportionately unstaffed. Furthermore, each individual’s compensation and benefits represent a larger percentage of the company’s total operating budget compared to larger organizations.
Some small business leaders see protected time off and compensation as detrimental to business goals. They then conflate the business’s profit margins with group interest (an especially false equivalency when an employee’s pay doesn’t rise proportionally to profits). Since leaders often have personal relationships with all the members of small teams, they pressure employees not to take rest or compensation that they’re entitled to “for the good of the team,” playing on the employee’s loyalty to their colleagues while avoiding the business owner’s accountability for enabling protected leave.
If it were easy or intuitive for businesses to do right by their employees, we wouldn’t need laws to protect workers’ rights. Instead, consider that when companies ask their employees to ignore regulations, they are in effect asking them to forfeit their rights and protections under the law. Even if you mean well, it’s not a good look. Labor compliance is part of the cost of doing business; a cost that will be paid in poor morale, resentment, and turnover if not paid in wages.
Situation: A Georgia-based tech company with a distributed team of 30 had 2 employees taking parental leave around the same time, one in Massachusetts and one in Georgia. Since Georgia’s paid leave protections were significantly less than those in Massachusetts (3 and 11 weeks respectively), this presented a parity problem. The longer leave requirements in Massachusetts also meant that the Mass-based employee’s leave would cost the company more money, and leave the position uncovered for a longer period of time. The CEO wanted to address the staffing and payroll strain by offering a bonus to employees who came back early from parental leave.
Effect: Had the CEO followed through on this plan, it would have been problematic. The Georgia-based employee would not be paid for their leave, would need to report back to work sooner, and would not be eligible for the same bonus amount that the Massachusetts-based employee would enjoy. It would be nearly impossible to make the terms of the bonus fair without making it also look discriminatory. Offering an incentive to forfeit protected rights (especially rights closely associated with pregnancy, disability, and/or gender), could further expose the company to risk of discrimination claims. Finally, this policy would have sent the clear message to the whole team that the company does not support workers with families.
Resolution: Employers get the most value out of the employees that they retain for a long time, so it pays not to be “penny wise and pound foolish.” Parental leave provides an excellent opportunity to make an investment in the loyalty of your employees by supporting their whole lives. In return, parents whose employers support their families are more likely to stay at that company for a long time. Parents also tend to be more experienced on average, meaning that as loyal employees they will provide a higher level of skill and mentorship to the rest of the team.
“Labor compliance is part of the cost of doing business; a cost that will be paid in poor morale, resentment, and turnover if not paid in wages.”
On the other hand, turnover is quite expensive, especially if you run your team so lean that it can’t operate without a one of its members. Keep in mind that finding coverage during parental leave doesn’t just cover that person’s responsibilities while they’re out, but also provides continuity and coverage during their transition back to work. The sleep deprivation and increased responsibilities (including feeding and lactation) can affect a new parent’s productivity long after the leave has ended. Investing in training solid coverage means that you will have redundancy through the transition when the parent’s attention is divided. Replacing an employee can affect productivity and cost just as much as parental leave. If the new parent does decide to leave shortly after their parental leave, the redundant coverage will reduce the time and cost to replace them.
I helped this company put together a coverage plan that didn’t leave the team short-staffed, and didn’t put pressure on new parents to return to work before they were ready. While the employer could not afford to pay the Georgia employee their full salary through their leave, the tax breaks for paying parental leave consistent with FMLA and state regulations helped offset the costs, taking financial pressure off the employer.
The Reactive Handbook: Setting the wrong precedent
Some leaders respond to every problem by creating rules against it. Not only does this approach lead to a handbook like our Mr. Burns example, it can also lead to unintended compliance violations when those rules are applied in a different context.
Furthermore, since handbook policies often serve as supporting evidence for compliance violations, memorializing poorly-crafted rules could expose businesses to unnecessary liability if they inadvertently contradict a compliance requirement. Handbook policies should be worded with the broadest possible language to ensure compliance, and leave enforcement up to discretion based on the circumstances.
Situation: I once worked with a startup founder who said that they had received feedback that the Unlimited PTO policy didn’t provide enough guidance on when it was okay to take time off. The founder presented a draft of a policy that included the following:
A time off tracking system “to make sure that people were taking advantage of the policy,” of course.
A stipulation that it was up to a manager’s discretion when time off would be refused, and what amount was excessive.
A clause saying that excessive absences were considered underperformance, and would merit disciplinary action up to and including termination at the manager’s discretion.
Effect: This policy had several issues. In McPherson v. EF Intercultural Foundation, Inc. a California appeals court found that an unlimited PTO policy was not in fact unlimited when supervisors put restrictions on when that time off could be taken. Tracking time off also undermined the standing that this policy was in fact “unlimited,” and posed problems with several states’ minimum sick time requirements. For states/municipalities with minimum sick time requirements, tracking time off meant that the company also had to track the balance of accrued sick time, which was something that the Unlimited PTO policy did not cover. Finally, complying with sick time tracking regulations would have also obligated the company to pay out unused time off to their California workers.
The “excessive absences as a performance issue” and setting disciplinary action “at the manager’s discretion” was a discrimination concern that I will discuss more in the next example.
Resolution: The founder was insistent on tracking time off, so the challenge became making the needed adjustments in the written PTO policy and payroll system. To address the sick time minimum, we added a sentence to the policy urging employees to take whatever time off they needed when sick, and providing guidance that they should take “at least” n days per year (a number that met or exceeded all guidelines where the company did business).
We also changed the language that gave managers the authority to deny time off during high-demand periods to, “Your manager may request that you adjust flexible travel plans during high-demand periods if your absence would seriously affect long-term business goals.”
Prior to tracking, the company had met the sick time and unused PTO requirements with a clause in the policy that “Each employee is granted a balance of n sick days each year on their anniversary. Tracking sick time is voluntary, and as it is not formally tracked, AcmeCo. does not pay out unused time off balances at termination.” We deleted this sentence and removed the sick balances from people’s accounts so that each paycheck would read “unlimited” under their sick time balance. This satisfied both minimum sick time requirements, and spared the company from paying unused (and inconsistently tracked) time off at dismissal.
Note: We did all of this after consulting with the company’s attorneys. You should consult an attorney or HR professional to review the specific facts of your situation.
The rules are for thee and not for me: When discretion brings trouble
Businesses often cover their bases with the caveat that deciding when the rules apply or disciplinary action is “at the manager’s discretion.”
The problem with that thinking is that managers are people too, which means that they can be biased, or influenced by pressure and/or incentives that conflict with compliance regulations. Many discrimination claims began “at a manager’s discretion” and were committed “to protect the company’s interest.”
Situation: In the same situation described above, the new time tracking system revealed that the founder was taking more than twice as much time off as anyone else in the company. He was an avid hunter, and would often be completely unreachable for a week or more while he went on back country hunting expeditions several times per year. Worse, these trips often delayed important company-level goals and were holding back the business. The feedback that the PTO policy was unclear was in part the team’s indirect way of pointing out that there was no clear reason for the founder to deny their time off except that the requested time conflicted with his own vacations. Ouch.
Effect: Besides the fact that flexing undermined the founder’s credibility with the team, it was also a discrimination complaint waiting to happen. One employee was made to work US business hours while visiting her family in Korea because she had already taken “too much” time off for a medical condition. Data showed that employees from certain demographic groups took more time off and never had requests denied, while their colleagues frequently had time off requests declined or had to “make up” hours for short absences. One employee who spoke out about regularly having to work more hours than his colleagues was fired “for performance reasons.” The situation was a discrimination suit waiting to happen!
Resolution: In this case, the approach that caused so many problems in the last example (tracking time off) actually helped address discrimination concerns. The founder had not realized that he was applying the time off policy so unevenly. However, when we compared the data from the previous year, the unequal treatment became more clear.
Wherever possible, policies should define bright, quantifiable lines between appropriate and inappropriate behavior and leave as little up to human discretion as possible to avoid bias. Companies should use tracking tools wherever possible and regularly review results to ensure that People systems are fair and don’t reinforce bias. If there is a complaint, data also provides corroboration that the company complies with regulations and applies rules or benefits equitably.
The road to compliance hell is paved with good intentions: When doing right goes wrong
It’s okay to do someone a solid when they’re in need, or put your thumb on the scales to give a deserving person a break. However, problems arise when businesses deny other team members are denied the same benefits or opportunities because their circumstances are less sympathetic.
This puts companies that are committed to fighting systemic inequality in a tough spot. Building a diverse workforce requires deliberately giving opportunities to some people and not others based on demographic factors.
Let’s get one thing clear: We’re not talking about “reverse racism,” whatever that is.
However, reducing an individual to one or two demographic factors ignores many other factors that might have held someone back or given them an unfair advantage. We’re all minorities in some ways, everyone struggles, and even “old white dudes” are a protected class (assuming “old” is over 40). However, when people in positions of power decide to grant opportunity to someone based on demographic factors, it is important to make sure that the person getting the boost meets the qualifications for whatever the opportunity is. They don’t have to be more qualified than the other person, but they do have to be qualified.
Situation: I once worked with a California organization for whom DEI was an important hiring goal. The company included diversity in their company values, and their position on equality was a big part of their branding. A candidate in a politically conservative state applied to an open position. The recruiter declined the resume as a “bad culture fit” based on a college graduation date in the early 90’s and a long tenure at a government defense contractor known for its connections with a political figure. The candidate’s LinkedIn photo that looked like… well… exactly how you probably expect this candidate to look.
Stop! Bad! Stereotyping bad! If you could picture this candidate based on the description, it only underscores how tricky diversity hiring can be.
Effect: Regardless of whether you identify more with the recruiter or candidate, it was clear that the reasons for passing on this candidate were primarily related to age over 40, race, color, gender, and perceived political affiliation; all of which are protected categories in California. The candidate met the qualifications for the role, and there was no way to determine if he would get along with the team without meeting him. Perhaps the company still would have hired someone from their own community, but this guy also could have surprised them and provided a different perspective than they were used to.
Solution: Have clear, objective criteria for jobs and promotions. Evaluate all candidates for the same attributes, using the same method, and where possible have a clear definition of success/failure. Once you have confirmed that a candidate meets the qualifications to be successful at the job, you can award opportunity among candidates however you wish. People will surprise you when you remove bias from your hiring process, Not all diversity is visible or related to demographic factors, and you may find that your best workers exceed your expectations in ways you couldn’t anticipate.
Violà! True diversity.
But I didn’t know: You didn’t really think that would work, did you?
It’s true: labor laws are confusing and not always rational. You can make a perfectly honest mistake that can deprive an employee of time or compensation. Nevertheless, regardless of intentions, the law sets labor regulations that say employees are entitled to certain treatment and compensation in specific situations. If you they are hurt or inadequately compensated, then your business has in some way profited at their personal expense. A good-faith attempt to make it right can go a long way, but it doesn’t absolve the company from liability. It’s much easier and more cost-effective to identify and address compliance gaps before they lead to resentment or (worse) legal action.
Situation: You’ve been focused on growing your team and your business, and you have no idea where your compliance gaps are. You wouldn’t even know where to start, because there’s no central resource. The only way to find out where the problems are is to wait for problems and then respond by covering your butt… right?
Effect: The only way to find out where the problems are is to wait for them to arise as complaints and then respond by covering your butt… right?
Resolution: Not all small teams need a full time HR or PeopleOps specialist to stay compliant. Most of HR lives in a few places: your handbook, your payroll, and your hiring/promotion practices. You may not even know how many of your cultural complaints and employee grievances may be addressed by a few tweaks to your People systems. An consultant (me! I’m one of those!) can review your policies and procedures, identify gaps, help bring you into compliance, and advise on how to address your cultural issues. An HR audit costs a fraction of a full-time specialist’s salary, and once they know your systems, a consultant can provide ongoing support as needed.
They can even help with some of the conversations that give you heartburn and keep you up at night.
There are compliance nerds out there who see labor regulations as an opportunity to find mutual benefits for employer and employee alike. I’m one of those compliance nerds. I see each compliance regulation as a story where employer and employee somehow wound up on opposite sides of a problem that posed an existential threat to each of them. Each of these situations provides an opportunity to use knowledge of compliance regulations to find mutual benefit and create a better quality of life for both sides. This is why I say that “HR isn’t a four-letter word, it’s a love language.”
Imagine running a company where people don’t fear HR, they welcome it! By performing compliance audits and digging into employee complaints, I can help you create the behavioral strategy that will lead to a productive and harmonious work culture. From there, I can help craft policy language that incentivizes the behavior that is best for your company’s mission and values, flag the potential pitfalls a certain approach, and suggest alternatives. I support my clients by continuing to provide guidance and updates as needed so your company can continue to grow and thrive.
Want to fear compliance less? Check out these related articles:
(Coming soon!) Why unlimited PTO isn’t all it’s cracked up to be
(Coming soon!) Are your policies really inclusive?
(Coming soon!) Is your harassment training the wrong kind of cringey?
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