Small business and nonprofit leaders often wear multiple hats, making decisions beyond their expertise. This is particularly true regarding human resources and compliance areas where decisions can have long-lasting legal, workplace cultural, and compliance impacts.

Non-HR leaders must recognize that workplace compliance and culture are two sides of the same coin. A perfect example of the intersection of compliance and culture is in employee classification.

Proper classification safeguards against legal risks and creates transparency and an equitable work environment, enhancing employee engagement and morale. On the other hand, misclassification can undermine trust, lead to disengagement, and erode organizational culture.

The Real-World Consequences of Employee Misclassification

A small nonprofit in California annually hired temporary, seasonal teachers to conduct classes ranging from 3 weeks to a few months. These classes were integral to the organization’s mission to provide diverse educational experiences.

The Challenge

The organization classified these temporary teachers as independent contractors based on advice from other nonprofit leaders and non-employment law professionals. Often, the same teachers returned year after year to teach the same classes. The assumption was that this classification was compliant because the teachers were temporary, had other jobs, and the arrangement provided flexibility for both the organization and the teachers.

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Turning Point: Recognizing the Need for Expertise

The classification issue came to light when one of the teachers, who lost her primary job, applied for unemployment benefits and listed the nonprofit as a previous employer, which triggered an investigation by the Employment Development Department (EDD) into the organization’s employee classification practices.

The Findings

The EDD’s investigation concluded that the nonprofit had misclassified the temporary teachers as independent contractors or exempt employees instead of non-exempt employees. EDD identified the misclassifications as willful non-compliance, prompting a three-year lookback investigation.

California’s standard EDD audit period increased from a three-year look back to eight years if the auditor finds “bad conduct” under Unemployment Insurance Code Section 1132.

Major Consequences

The organization faced significant repercussions, including:

  • Reclassifying  Employees: The EDD mandated the reclassification of all affected temporary teachers to reflect their employment status as non-exempt employees.
  • Back Payroll Taxes and Penalties: The nonprofit was liable for back payroll taxes due to misclassification and penalties for non-compliance. Initial assessments amounted to $300,000, later negotiated to a lesser amount.
  • Increased Compliance Obligations: With the reclassification of the teachers, the organization’s staff grew from 12 to over 50 employees. This expansion brought about increased compliance requirements and administrative responsibilities.

Resolution and Growth

Post-investigation, Leadership took several steps to rectify the situation and prevent future occurrences:

  • Legal and HR Consultation: The organization sought expert advice from employment law specialists and HR professionals to ensure compliance with state and federal employment laws.
  • Internal Policy Review: Hiring, classification, and payroll policies were revised to align with legal standards.
  • Employee Education: The organization implemented training sessions for current and future staff to educate them on their rights and employment policies.
  • Compliance Systems: New systems and processes were established to monitor and ensure ongoing compliance with employment laws.

Deep Impact

Despite the initial financial and reputational setbacks, the organization turned the situation into an opportunity for growth and improvement. By embracing the change and adapting to compliance standards, the nonprofit resolved its classification issues and strengthened its operational foundation. This transition allowed the organization to expand its mission and reach, benefiting more individuals through its educational programs.

This case study underscores a critical lesson for non-HR leaders: Recognize when to seek professional help from an HR consulting firm. But how do you know when you’ve hit that point? Let’s explore the red flags that signal it’s time to call in the experts.

Signs You Need Professional Help: The Red Flags in HR Management

Red Flag 1: Determining Employee Classification

Do you have workers classified as independent contractors? Our case study illustrates that misclassifying employees as independent contractors or exempt/non-exempt can have substantial legal and financial repercussions. If you’re unsure about the nuances of employee classification or relying on outdated or second-hand legal advice, it’s time to seek professional guidance. An HR consulting firm can provide clarity, ensuring that your classifications align with current labor laws and protect your organization from potential liabilities.

Red Flag 2: The Compliance Conundrum

With regulations continually evolving, especially in California and other states known for strict labor laws, staying compliant can feel like moving through a maze. The introduction of laws like Bulletin 2020-5 by the Department of Labor, emphasizing the need for accurate tracking of compensable time, adds compliance responsibilities for businesses, especially those with remote workers. If keeping up with these changes feels overwhelming or you’re confused about how new laws apply to your business, it’s time to engage an HR expert.

Red Flag 3: Cultural Impact

Decisions around HR and compliance don’t just impact the legal standing of your organization; they shape the culture. Suppose you find that HR decisions are inadvertently eroding trust, undermining morale, or leading to disengagement on your team. Be proactive and reassess your approach with the help of HR professionals. We can help realign your HR practices with cultural values, ensuring a respectful and compliant workplace.

Red Flag 4: The Burden of Administrative Overload

For many non-HR leaders, the administrative burden of HR tasks, from employee relations to payroll, can be overwhelming. This is particularly true for growing organizations where HR demands can scale rapidly. If HR tasks are consuming a disproportionate amount of your time or if errors are becoming more frequent, it’s a clear indicator that professional assistance is needed.

Red Flag 5: When HR Issues Begin to Eclipse Core Business Functions

Ultimately, the primary goal of any leader is to drive the organization forward, focusing on core business functions that promote growth and sustainability. If HR issues consistently take center stage and detract from strategic business objectives, it’s a critical sign that an HR consulting firm’s expertise is needed. We can take the reins on complex HR issues, allowing you to refocus on driving your business forward.

Embracing Expertise for Organizational Health

For non-HR leaders making significant HR and compliance decisions, recognizing Red Flags and seeking professional help is vital. Our case study serves as a poignant reminder of the potential consequences of navigating these waters without the required expertise.

Engaging with HR expertise isn’t just about mitigating risks; it’s a strategic decision that can enhance operational efficiency, cultural alignment, and long-term sustainability. If you see any of these red flags in your organization, it might be time to make that call.

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Written by,

Bernadette Jones, SHRM-SCP, SPHR, CEO

Respect in the Workplace Starts With Me™ | Culture-First HR Solutions WBENC & WOSB Certified | Accredited Leadership Coach | DEIB Trainer – San Francisco – Oakland Bay Area