The Cost of Noncompliance

What are the potential consequences of noncompliance?

Noncompliance with labor laws and HR regulations puts your business at risk. For example, if an employee feels their rights have been violated or they have faced unfair treatment, they can take legal action. This can result in costly legal fees, settlements, or judgments—and it can also pull managers and employees into a stressful process that disrupts morale and productivity.

Employees can file claims with agencies like the Equal Employment Opportunity Commission (EEOC) or the Department of Labor (DOL) over wage or workplace issues. These agencies don't just investigate claims – they can impose fines and require back pay. Repeat violations can lead to even steeper penalties, as agencies often increase penalties and fines when they see a pattern of noncompliance.

Investigations can also uncover additional HR compliance issues, resulting in even more penalties. For example, if an agency visits your worksite for a wage claim, they may spot outdated safety posters and issue a separate noncompliance citation.

Noncompliance can also negatively impact your company culture by making employees feel undervalued or unsafe, which erodes trust and can lead to higher turnover. In addition, if you have a reputation as a company with consistent HR compliance issues, it can hurt your recruiting efforts – making it harder to attract top talent. Prioritizing compliance protects your employees and strengthens the long-term health of your business.

What are the costs of noncompliance?

The cost of noncompliance can quickly add up, leading to significant financial and operational consequences for your business. Common compliance cost examples include government fines, legal fees, and mandatory employee compensation for issues like unpaid wages or mistreatment. And these direct costs are only part of the picture. As discussed above, noncompliance can also harm employee morale and brand reputation, leading to higher turnover and recruitment challenges.

Additionally, HR compliance issues can worsen over time as repeated infractions increase penalties. Investing in compliance protects against these costs, helping to ensure financial stability, a positive workplace reputation, and more.

Below are some common compliance violation examples and the potential consequences of each:

Age Discrimination

Under new leadership, a medical devices manufacturing company replaces management and sales employees. The current human resources director observes the new CEO making discriminatory, age-related comments about current and potential employees. Additionally, the director notes that employees being replaced are older and those replacing them are significantly younger. The director who questions these actions is fired and also replaced by a substantially younger worker.

• Potential noncompliance consequence: The HR director files a claim with the Equal Employment Opportunity Commission (EEOC) and a lawsuit against the manufacturing company. The company eventually agreed to settle the lawsuit and paid the former HR director $460,000 in monetary damages. Additionally, the company must provide training on the Age Discrimination in Employment Act and distribute ADEA policies to its staff.
• Potential cost of noncompliance: $460,000 plus legal fees
• How G&A Partners can help: At G&A, our HR experts will help your team understand the EEOC's role in protecting employees from discrimination, harassment, bullying, and other forms of victimization. Online training programs about harassment and discrimination are also available for managers in G&A's learning management system, where it's easy for your employees to complete required training and for you to track your staff's progress.

Wage Payment Violations

A small marketing firm owner works her hourly, nonexempt employees nearly 50 hours each week but only pays them for 40 hours. A competing marketing firm also has its employees working 50 hours a week. While they pay for all 50 hours, employees are compensated at their regular hourly rate, without any overtime pay.

• Potential noncompliance consequences: In both cases, the business owners violated the Fair Labor Standards Act (FLSA). Several employees at both marketing firms file "Wage and Hour" charges to the Wage and Hour Division of the Department of Labor, which in turn leads to an audit of all payroll records. The verdict renders both employers noncompliant. One firm must repay two years of back pay, while the other must repay three years because the audits found they knowingly and willfully committed the violations.
• Potential cost of noncompliance: Approximately $30,000-$52,000 in back pay per employee, based on an hourly rate of $32 per employee.
• How G&A Partners can help: Our HR compliance experts will assist in reviewing your employee classifications (exempt vs. nonexempt) and keep you informed on applicable federal or state wage and overtime standards. We'll also help you maintain accurate records and put procedures in place to avoid mistakes.

Employee Misconduct and Company Policies

An engineering company terminates an employee for work-related misconduct. However, the company didn't provide the employee with an employee handbook, so he never signed a form acknowledging that he read and understood the company policies and procedures. In addition, the company neglected to maintain a written file of the employee's misconduct.

• Potential noncompliance consequences: The employee files an unemployment claim against the company. Since the company didn't document the employee's misconduct and cannot clearly demonstrate that the employee was aware of the company policy, the company will have difficulty disputing the claim.
• Potential cost of noncompliance: Each awarded unemployment claim can affect three years of UI (unemployment insurance) tax rates. Employers often don't realize the real cost of a claim because it is spread out over a long period. The average claim can increase an employer's state tax premium by $4,000 to $7,000 or higher over the course of three years.
• How G&A Partners can help: Our team of HR professionals can partner with company management on disciplinary and termination matters. Our experts will review your current workplace policies and procedures and help establish best practices for addressing employee behavior and performance issues. Through this guidance, G&A will help implement systems – such as defining how managers document misconduct and requiring employees to acknowledge policies – to safeguard employers when misconduct occurs.

Potential Discrimination During Hiring Process

During a job interview, the owner of a plastic surgery clinic casually asks the applicant if she has children. The employer does not hire the applicant, and the candidate assumes it is because she mentioned having three young children.

• Potential noncompliance consequence: The applicant files a discrimination claim with the EEOC and, ultimately, a suit against the clinic. The company then must pay extensive legal fees to defend against the suit.
• Potential cost of noncompliance: Settlement averages for discrimination claims are approximately $40,000, but litigated cases are typically six-figure payouts and may go as high as seven figures, including damages.
• How G&A Partners can help: G&A's HR advisors can conduct in-depth training to improve your team's interviewing skills. As a premium service, G&A also offers structured interview guides, which can reduce unconscious bias and help ensure you're asking the same questions as well as the right questions during the interview process.

Preventing Access to Company Retirement Plans

The owner of a local architecture firm prohibits part-time employees from participating in the company's 401(k) plan.

• Potential noncompliance consequences: Excluding certain classes of employees may be considered discriminatory. In this case, the owner was unable to demonstrate that these part-time employees were part of a qualifying exclusion group, and this failure to comply resulted in a failed compliance test and penalties.
• Potential cost of noncompliance: Failure to correct nondiscrimination testing failures in a timely manner may result in mandatory IRS filing and a 10% excise tax.
• How G&A can help: 401(k) retirement plans are subject to Internal Revenue Service (IRS) and U.S. Department of Labor regulations. G&A's benefits experts consult with companies to assess current benefits plans and recommend compliance improvements and enhancements.

Workplace Safety – OSHA

A plant manager’s flippant attitude toward safety encourages roughhousing in the shop and much-needed repairs end up being neglected. As a result, workers are exposed to unsafe working conditions.

• Potential noncompliance consequence: During an unexpected OSHA inspection, the plant is cited for violating safety codes and given three months to correct the condition. However, after three months, the plant manager still has not corrected the problems, so OSHA fines the company $10,000.
• Potential cost of noncompliance: $10,000
• How G&A can help: G&A’s team of workplace health and safety experts can help you design and administer a program focused on accident prevention and employee training, and ensure your program is compliant with OSHA and other federal and state safety regulations. Our safety team can also help you prepare for OSHA inspections by studying your job and office sites and identifying potential compliance concerns.