Cutting corners not worth it in the long run

A well-established family practice physician called me in a panic. He received notice from the Colorado Department of Labor informing him that his practice was being audited because of alleged overtime violations.

He knew he had a disgruntled employee asking to be paid overtime for extra hours she said she had worked. He could not prove whether or not she had in fact worked overtime. Reviewing his payroll records proved to be a challenge.

The physician is in the same situation as most small businesses that routinely classify their employees incorrectly or don’t fill out the proper employee forms. Today, small business owners have a bulls-eye target on their backs. Because of the recession, state and federal government officials are seeking revenue wherever they can find it. Governmental agencies are focusing on collecting back taxes and fines.

In the physician’s case, all of the staff positions should have been classified as non-exempt and eligible for overtime. The time sheets were overly simplistic and did not accurately reflect hours worked. Employees wrote down the number of hours they worked each day. Even though the time sheets were approved by a supervisor there was no way she could easily monitor when the employees arrived and left each day or how much time they took for lunch.

As a result, the employees wrote down whatever hours they wanted to whether they worked those hours or not. The employees were paid for the hours they stated they worked, but any time over 40 hours was not paid at a rate of time and a half, which is illegal for non-exempt employees. He ended up paying $6,500 in back pay and taxes and his valuable time was consumed by dealing with the government.

It is critical that employers understand how to classify their jobs. To avoid paying overtime small employers regularly misclassify jobs as exempt and pay a straight salary when in fact the jobs are non-exempt. Other employers designate employees as contract workers to avoid paying taxes and overtime altogether. These practices have caught the attention of the IRS, the Department of Labor and the state government. If an employer is caught misclassifying contract workers, the fine for the first offense is $5,000 and $25,000 for subsequent offenses.

Small business owners unknowingly violate employment laws and compliance requirements every day. For example, an employer who incorrectly completes I-9 forms (Form I-9, Employment Eligibility Verification) could face an average of a $699 fine per violation. If an employer incorrectly completes 40 I-9 forms, they could face nearly $28,000 in fines. Almost every federal and state agency enforcing compliance related laws from OSHA to OFCCP, the Department of Labor to the IRS, are all seeking higher fines for violations and enforcing stricter penalties for employers who are out of compliance.

It is all too easy to cut a corner here and save a dollar there in these trying times. The small business owner who is tempted to do so should realize that in the long run, it’s not worth it.
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