Outsourcing HR Compliance: The Best Way to Avoid Penalties

Outsourcing HR Compliance: The Best Way to Avoid Penalties

by on 19 Oct, 2021

In the U.S., many businesses regularly outsource their HR compliance functions. The outsourcing partner keeps abreast of regulatory changes, saving in-house staff research time it can better use for what it does best: grow the company. 

Moreover, employment law compliance violations often lead to business disruptions, revenue losses, and decreased employee productivity.  The various laws affect HR department activities, and outsourcing HR tasks to a third-party provider may help avoid penalties.

Legislative and Regulatory Requirements 

The following are some of the major legislative and regulatory guidance's that benefit from HR outsourcing: 

ACA Penalties 

Congress passed the Affordable Care Act (ACA) in March 2010. The ACA (more popularly known as Obamacare) made crucial changes in the way insurance companies provide access to healthcare for millions of uninsured Americans. 

The ACA required businesses to apply eligibility rules to all full-time and full-time equivalent employees who meet the IRS definition (30 hours a week). As a result, employers had to reclassify some part-time employees as full-time employees, making them eligible for the employer's health coverage. 

The reporting penalties for failure to comply with ACA are $270 for each form due in 2020 up to a $3.3 million annual maximum. Significant penalties incur to employers who fail to provide health coverage as required by the ACA if the employee obtains health coverage from the Health Insurance Marketplace. The penalty is $2,570 per full-time employee (excluding the first 30 employees). 

Comprehensive HR outsourcing provides access to the third-party provider's masterplan of employee benefits. The HR outsourcing partner has experts that negotiate their benefits at scale. In practical terms, outsourcing means that health benefits otherwise available only at Fortune 500 companies become available to small and medium-sized companies at affordable rates. 

FLSA Penalties 

The Fair Labor Standards Act (FLSA) established minimum wage requirements, overtime pay, and employment recordkeeping requirements.  FLSA also set the standard for the definition of "hours worked," and some child labor laws. 

Common mistakes by employers include:

  • Improperly classifying employees as exempt (non-hourly workers), 

  • Docking hours of exempt (salaried) employees, 

  • Misclassification of employees as independent contractors, and

  • Neglecting recordkeeping requirements.

The FLSA provides for the recovery of unpaid minimum wages and overtime pay. Employers who repeatedly violate the minimum wage and overtime rules invite imposition of a civil penalty of up to $1,000 per vilolation. In addition, willful violations may face criminal penalties and a $10,000 fine. If convicted a second time, the employer may face imprisonment. 

An HR outsourcing solution will perform an FLSA audit to ensure the right employee classifications and prepare the appropriate recordkeeping reports for your business. 

Title VII Penalties  

Title VII is a provision of the Civil Rights Act of 1964 that prohibits discrimination based on race, color, religion, gender, and national origin in any term, condition, or privilege of employment. Title VII applies to employers affecting commerce with 15 or more employees and to state, federal, and local governments. The law does not apply to independent contractors. 

Intentional violations provide employees the right to a jury trial, seeking compensatory and punitive damages against the employer up to the maximums provided by law. The penalties for non-compliance with Title VII are:

  • For employers of 15-100 employees, the maximum penalty is $50,000; 

  • For employers of 101-200 employees, the maximum penalty is $100,000;

  • For employers of 201-500 employees, the maximum penalty is $200,000;

  • For employers of more than 500 employees, the maximum penalty is $300,000;

The law also provides remedies for back pay, reinstatement, and retroactive seniority regardless of whether the discrimination is intentional.

A worthwhile HR outsourcing solution staffs experts in employment law. HR outsourcing partners help ensure that you follow best practices for hiring, terminations, and employee relations.  

OSHA Penalties  

Employers violate the Occupational Safety and Health Administration (OSHA) when they intentionally or unknowingly disregard potential or real safety hazards. OSHA may become aware of the violations through on-site inspections or when safety incidents occur. 

Each type of OSHA violation merits its own penalty. For example, an employer incurs a Serious Violation when the employer knows of a safety hazard and does nothing to fix it. Fines range up to $13,653 per violation.

Gravity-based violations have three categories of penalties, as shown below:

  • High gravity faces a penalty of up to $13,653 per violation; 

  • Moderate ranges from $7,802 to $11,703 per violation;

  • Low gravity are $5,851 per violation;

Other-than-Serious Violations have a maximum penalty that is the same as a Serious Violation, but OSHA has the choice of a citation or reducing the fine by 95%.

Willful or repeated violations within three years may incur penalties as high as $136,532 per violation. 

An effective HR outsourcing solution performs safety audits to ensure compliance with OSHA regulatory guidance. 

Workers' Comp Penalties  

Almost every state mandates Workers' Compensation coverage once a business employs a certain number of employees. States regulate Workers' Compensation at the state level. Consequently, penalties vary depending on the state where your employees conduct your business. 

For example, in New Jersey, the failure to provide Workers' Compensation coverage is a criminal offense resulting in a $10,000 fine and up to 18 months in prison. 

On the other hand, in Illinois, the failure to provide Workers' Compensation coverage is a misdemeanor and willfully failing to buy Workers' Compensation insurance is a felony. 

One of the advantages of a comprehensive HR outsourcing solution is that the HR outsourcing partner may provide the employer access to their experience rate, resulting in lower premiums. In addition, the HR outsourcing partner will pay the initial deposit of 25% of the total premium so that the employer only has to make premium payments on a monthly basis. 

Payroll Penalties   

HR's payroll responsibility extends beyond cutting checks. The IRS assesses penalties against employers who do not collect payroll taxes. The employer also must send reports to the federal government regarding the payroll taxes collected. Unpaid payroll taxes may result in personal liability for business owners. 

Failure to file Form 941 results in a 2% penalty if the form is 5 days late, a 5% penalty for days 6-15, and a 10% penalty if more than 15 days late. The maximum penalty is 15%. 

Penalties also apply if the employer reports W-2s and 1099s late. The size of the penalty depends on the size of the company. 

A tax called the trust fund recovery penalty (TFRP) applies if the employer willfully withholds Medicare, social security, or income taxes but does not submit them to the U.S. government. The TFRP penalty is equal to the amount of unpaid tax plus interest. Employers face penalties for non-willful neglect of these taxes, too. 

A simple HR outsourcing solution handles your payroll processing. Conversely, a comprehensive HR outsourcing partner doesn't just process the payroll, they also file the payroll taxes due on time. 

Comprehensive HR Outsourcing Required  

Outsourcing HR responsibilities eliminates the employer's need to handle compliance duties applicable to the administration of health benefits, disability benefits, family and medical leave, and other complexities of the employer-employee relationship. The HR outsourcing partner gives you all the strategic HR and business solutions that you need to satisfy both the administration and reporting requirements. 

According to the National Association of Professional Employer Organizations, outsourcing saves an average of $450 per employee when compared to the cost of a traditional HR team. 

Some employers outsource individual processes and that may help compliance in particular segments, such as payroll processing.  The practice of outsourcing only payroll services may prevent some HR penalties, but not others. Only a comprehensive HR outsourcing solution can prevent all HR-related compliance penalties.

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Disclaimer: this article does not represent expert advice and is provided for informational purposes. Please get in touch if you would like expert HR advice.

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