5 Common HR Compliance Mistakes for Startups and How to Avoid Them

In many startups, HR priorities start and end with getting the right people on board. Once critical positions are filled, other aspects are either completely ignored or delegated to people with little experience. Therefore, it is unsurprising that startups are susceptible to severe HR compliance mistakes.

HR compliance errors can be detrimental to a startup in several ways:

• Substantial litigation costs if the startup is not in compliance with federal and state labor laws or fails to ensure data security and privacy.
• Serious reputational damage if the startup is found to have engaged in discriminatory hiring practices or allowed a hostile work environment.
• Severe fines from regulatory agencies if the company violates wage and hour laws or does not maintain accurate employee records.
• Termination of critical operating licenses and permits if the startup is found to not be in compliance with industry-specific regulations.
• Loss of funding from investors if the startup is perceived as careless with its employee data or failing to follow regulatory HR practices.

So, if you are running a startup, you must devote the appropriate time and effort to ensuring compliance with HR-related laws and regulations. Read on for 5 critical HR compliance mistakes that startups make and how you can avoid them.

1. Failing to establish clear policies and procedures from the start

The root cause of many HR compliance problems is not establishing clear HR policies and procedures. When starting, many founders think they can wing it and figure compliance aspects out as they go. However, this approach is often a recipe for disaster.

Nonexistent or poorly defined HR policies and procedures typically lead to disorganization and inefficiency in performing HR-related tasks.

Moreover, startups with unclear HR policies are more likely to run afoul of the law, either through ignorance or because they have not taken the time to ensure compliance with relevant regulations.

The best way to avoid this compliance mistake is to work with an experienced HR consultant or lawyer to develop comprehensive policies and procedures for your startup.

Clearly define critical elements such as:

• The hiring process to ensure compliance with anti-discrimination laws
• Wage and hour policies to avoid violating overtime pay rules
• Data security and privacy protocols to protect employee information
• Leaves of absence and other time-off policies
• Employee discipline and termination procedures

Also, consider creating an employee handbook that outlines your HR processes for current and future employees.

An HR handbook must be a living document that you regularly update as your company grows and changes. Putting everything in writing will help address possible confusion or misunderstanding and make it easier to take corrective action if an employee violates a policy.

2. Hiring without conducting background checks

Another damaging compliance mistake that startups often make is hiring employees without conducting adequate background checks. Startups are usually eager to get new hires on board as quickly as possible and may forego necessary screening measures to save time.

However, failing to conduct proper background checks can land you an incompetent employee at a time when competence is critical. Combine this with the risk of litigation for negligent hiring, fraud, or embezzlement, and background checks become crucial for protecting your startup during its initial years.

A robust background check policy is essential for any startup. At a minimum, your background-checking process must include the following:

• Identity verification
• Criminal record checks
• Employment history checks
• Education verification
• Reference checks
• Drug testing
• Motor vehicle records

You can also consider using social media screening to understand a job candidate’s character and suitability for your company. Just use the same screening criteria for all applicants to avoid potential discrimination claims.

3. Not tracking employee hours

Overtime pay violations are among the most common types of wage and hour lawsuits. According to the Economic Policy Institute, the U.S. Department of Labor, state agencies, and class action litigation recover around $1 billion in stolen wages annually.

To avoid this compliance mistake, your startup must have a proper way of tracking employee hours worked.

One of the primary reasons that employers get hit with overtime pay lawsuits is not tracking employee hours worked. This lack of oversight often leads to employees working long hours without being adequately compensated for their time.

To avoid this compliance mistake, your startup must have a proper way of tracking employee hours worked. Consider the effective, cost-friendly options below to keep track of overtime.

• An automated timekeeping platform can enable employees to clock in and out electronically, making it easy to track their hours and identify potential overtime violations.
• Employee scheduling software can help you create schedules that comply with overtime rules. You can also use it to track hours worked and prevent employees from working excessive hours.
• Time cards can be a simple yet effective way to track employee hours, especially with a few employees. Just make sure to have employees sign and date their time cards to ensure accuracy.

4. Not having written data security and privacy policies

Data security is a top concern for all businesses, but it is especially critical for startups. Startups are often targets for hackers because they usually have fewer resources and less experience in data security than established businesses.

Additionally, many startups handle sensitive employee information, such as Social Security numbers and bank account details, which makes them an attractive target for cybercrime.

Data breaches can be extremely costly. IBM’s “The Cost of a Data Breach Report” reveals that the global average cost of a breach stands at $4.35 million in 2022, a 2.6% increase from 2021.

This amount can be devastating for a startup. Unsurprisingly, 60% of all small businesses that fall victim to a data breach shut down permanently within 6 months of the attack.

Despite the dangers posed by cyberattacks, many startups take a lackluster approach to data security and end up paying the price. Keep your data safe by implementing the measures below.

• Encrypting data both in transit and at rest
• Using strong passwords and multi-factor authentication
• Restricting access to data on a need-to-know basis
• Backing up data regularly
• Conducting regular security audits

Besides data security measures, your startup must also create a data privacy policy outlining your steps for collecting, using, and protecting personal data.

5. Not having a clear social media policy

Social media plays an important role in today’s business world. It can be a valuable marketing and branding tool, but it can also pose serious compliance risks for your startup.

Several factors, including poor planning, controls, and training, compounded by the unpredictability of online behavior, can lead to significant compliance issues.

For example, derogatory posts from an employee on social media could damage your reputation, trigger investigations from regulatory agencies, and even lead to litigation.

Additionally, staff members may inadvertently disclose confidential information or trade secrets on social media, which could put your business at risk.

A study by the MIT Sloan School of Management reveals that company managers do not have sufficient awareness of social media risks.

To protect your startup from these risks, you need a foolproof social media policy that outlines what is and is not acceptable for employees to post on social media.

Consider these 4 tips when formulating a social media policy:

• Be clear and concise: Employees should be able to understand your social media policy without any ambiguity.
• Focus on the company’s reputation: Highlight how employee posts can impact the company’s reputation and what type of content is deemed inappropriate.
• Include consequences for policy violations: Make it clear that employees who violate the social media policy will have inevitable consequences.
• Provide training and guidance: Educate employees on the social media policy and offer advice on how they can use social media in a way that complies with the rules.

Secure your startup’s future with the right HR compliance measures

Startups are often lauded for their innovation, creativity, and risk-taking. However, they are also often the target of compliance issues, which can be costly and damaging.

Often, these problems stem from avoidable mistakes. Those mistakes can include failing to establish proper HR policies and ignoring background checks when hiring. They can also include having an ineffective data security plan.

An awareness of the most common HR compliance mistakes and how to avoid them can help you create a robust foundation for your startup. Many companies opt for HR software to help them ensure compliance and make these processes simpler. Follow the tips above to ensure compliance and set your business up for success.