Consequences and Financial Penalties: The Hidden Cost of Non-Compliance for Your Business

Regulatory compliance in business is critical in every industry. Failure to comply with regulatory standards and legal requirements can result in costly fines, loss of customer and employee trust, and business disruption. As you work to resolve these issues, you may experience associated costs like lost productivity and impacts on growth and business goals.

However, staying up to date on relevant policies, procedures, and laws gets complicated quickly, especially as industry regulations and standards evolve. That's why you need a proactive plan to protect your business reputation, employees, and assets from the risks of non-compliance.

What Is Compliance in Business?

Business compliance means that your business adheres to all applicable laws, rules, and regulations established by local, state, and federal government entities and agencies. Understanding non-compliance and what it means for your business goals, HR policies, and hiring practices can help you avoid associated risks and penalties.

Staying on top of these many ever-changing regulations can be difficult, however. To ensure you meet your employer responsibilities, implement processes and systems to manage your workplace compliance efforts. These systems will help you monitor adherence to stated policies, keep track of documents and forms, and mitigate non-compliance risks.

You can also get additional support from experts in human resources, taxes, safety, and financial reporting. These specialists can help you stay up to date on current requirements for compliance with statutory, regulatory, contractual, and union law.

Benefits of Compliance in Business

Proactively maintaining compliance isn't just about avoiding fines and penalties. It also sets your business up for long-term success by building efficiency, safety, and trust into your business model. Key benefits of compliance in business include:

• Legal Protection: Staying compliant with federal, state, and local laws and regulations helps prevent costly legal disputes. Businesses can also avoid fines, sanctions, and even criminal charges that result from non-compliance. For example, failure to comply with data protection laws can result in legal repercussions based on privacy violations.
• Enhanced Reputation: Companies known for their commitment to compliance gain the trust of customers, employees, and investors. A strong reputation for ethical operations can create a competitive advantage by attracting higher-quality talent, building credibility, and increasing customer loyalty.
• Operational Efficiency: Compliance requirements often encourage businesses to improve internal processes and streamline operations. These improvements can increase productivity by reducing errors and minimizing operational bottlenecks.
• Financial Savings: Compliance often leads to reduced insurance premiums and tax benefits. For example, healthcare organizations that comply with HIPAA avoid penalties may benefit from lower liability insurance premiums.

What Does Non-Compliance in the Workplace Look Like?

Among other possible factors, the size of your business, your location, and your industry will determine the specific compliance regulations and penalties you may be subject to. Examples of non-compliance in the workplace that could lead to penalties include:

• Failure to pay covered employees at least the correct minimum wage
• Improper employee classification that results in wage and hour violations like unpaid overtime
• Violations of anti-discrimination laws and harassment policies
• Ignoring Occupational Safety and Health Administration (OSHA) regulations
• Failure to provide job-protected leave to eligible employees under applicable laws, including the Family and Medical Leave Act

These are just a few examples of areas where non-compliance can lead to penalties, litigation, business disruptions, and damage to your reputation.

Key Areas and Types of Compliance in Business

While compliance issues can affect all areas of your company, the following functions are standard across most businesses:

Human Resources Compliance

Compliance in the Human Resources department involves developing and implementing company policies based on applicable requirements for recruitment, hiring, termination, and employee management. For example, verifying eligibility to work in the U.S. for all new hires is an essential compliance-related task. Failure to do so may result in fines and other penalties.

When crafting your HR compliance program for recruiting and hiring, you must follow applicable laws that protect candidates and employees from discrimination based on race, ethnicity, gender, disability, and other protected characteristics. Violating these laws may incur steep penalties. In some cases, the fallout could also damage your company's reputation and cost your business.

One way to help keep compliance is to create and maintain an employee handbook. The handbook should include all relevant compliance information for employees and be updated regularly.

Employee Rights and Employment Laws

Employment compliance includes laws that protect employee rights and regulate employer/employee interactions. For example, the Fair Labor Standards Act (FLSA) of 1938 established the following federal standards:

• Minimum wage
• Overtime pay
• Recordkeeping requirements
• Child labor rules

These standards are designed to improve working conditions and ensure fair, equitable treatment in the workplace.

Health and Safety Compliance

More than 2 million injuries occur in the workplace each year, and many of these can be preventable. The Occupational Health and Safety Administration (OSHA) sets and enforces standards to ensure safe and healthy working conditions for employees. Following these regulations can help reduce your risk of an employee injury or illness, which can lead to potential fines or lawsuits.

OSHA inspectors review health and safety compliance within a company during an inspection. These inspectors include trained industrial hygienists and safety professionals who help companies maintain workplace health and safety standards to minimize on-the job hazards, workplace injury, illness and death. OSHA can issue citations and impose monetary penalties for violations of OSHA safety and health standards. In addition, OSHA enforces anti-retaliation provisions of the OSH Act and other federal whistleblower laws for employees who wish to report unsafe working conditions.

Financial Compliance

Every business—from sole proprietors to multinational corporations—must follow laws governing finance and taxes. For example, each state has its own rules, regulations, and tax rates for conducting business in that state. Because payroll taxes and sales taxes vary from state to state, it's important to note these differences when conducting business across state lines to avoid non-compliance.

Data Security Compliance

As business is increasingly conducted online, the potential for becoming the victim of a cyber-attack has escalated. Data breaches can cost millions, and they may put the personal information of your employees and customers at risk. Regulations like the California Consumer Protection Act (CCPA) amended by the California Privacy Rights Act (CPRA) and the Health Insurance Portability and Accountability Act (HIPAA) in the healthcare industry have established guidelines to minimize risk and protect personal information.

Data security compliance requirements include taking steps to encrypt sensitive data, prevent unauthorized access, implement reliable backup, and prevent data misuse.

What Are the Consequences and Penalties of Non-Compliance in Business?

Non-compliance in business can lead to severe consequences, from hefty fines and legal actions to operational disruptions, loss of customer trust, and declining market value. The consequences you face for a violation may depend upon:

• The area of business in which you are non-compliant
• The type of non-compliance (does it pertain to an internal process or procedure, or does it involve compliance with a federal or state rule?)
• The severity and frequency of your company's non-compliance
• Whether it is your company's first instance of non-compliance

In addition, your business could also be subject to:

• A warning: For first-time violations, you may be issued a warning with a directive to fix the problem within a certain time frame.
• Penalties, fees, or fines: Monetary penalties and fines are the most common consequences of non-compliance in business.
• Ceasing business operation: In extreme cases (often related to unsafe working conditions or violating environmental rules) your business could be forced to shut down some or all of its operations.
• Criminal penalties: Activities such as fraud, theft, or environmental violations may result in criminal charges. These penalties have far-reaching effects, even for those not party to the crime, and may include business disruption or closure, loss of work, and much more.
• Damage to business reputation: In some cases, failure to comply with regulations can harm a company's reputation, impacting customer trust and long-term sustainability.

How To Avoid Non-Compliance in the Workplace

A perfect compliance record is a noble goal, but it's easy to fall short. Here are some steps your organization can take to help minimize the risk of non-compliance.

Establish New Policies or Procedures

One of the best ways to remain compliant is to implement policies and procedures that ensure tasks are completed the same way each time. As part of this process, you may want to include regular process reviews and audits in areas like hiring practices, sales tax collection, HIPAA compliance (for healthcare and related organizations), finance and accounting processes, and other routine business transactions and tasks.

Enforce Workplace Policies

Enforcing workplace policies is essential for minimizing compliance violations and maintaining a productive environment. Clear and consistent policies help employees understand their responsibilities and keep the organization within legal boundaries. Consequences for violations should be communicated clearly to ensure everyone is on the same page. Policy enforcement may also protect your business reputation and promote productivity by helping employees align around common goals and minimizing distractions or disruptions.

Conduct an Internal Audit

Internal audits and reviews minimize risk in areas like finance, internal accounting, environmental compliance, and facility safety. Before conducting a review or an internal audit, consider whether the audit should involve legal counsel. You'll also want to become familiar with industry best practices for the function under review.

Compliance Monitoring and Auditing

Ensuring business compliance across all departments can be challenging, but it's critical for effective risk mitigation and workplace safety. Regular compliance monitoring and audits keep everyone on the same page and provide documentation that all requirements have been met.

To better assess your risk of non-compliance and to assist with the internal audit process, here are some questions to consider:

• Does your company have written job descriptions, including identified essential functions for every position?
• Do you understand your responsibilities surrounding the prevention of violence in the workplace, and do you have effective processes in place?
• Are you aware of all OSHA regulations that apply to your business?
• Do you have an up-to-date written safety manual for the company as a whole and for all divisions and departments? Are all managers trained to implement these measures?
• Have you filed all applicable financial statements and reports at the federal and state levels?
• Do your financial statements accurately reflect the company's financial position?
• If needed, do you have regular audits by an independent outside firm?
• Are all financial statements in connection with any bank loans or other debt accurate and current?
• Do you have an emergency action plan in case of an emergency in one of your facilities?
• Do you have a process in place to manage hazardous materials?
• Do you have a plan to deal with any workplace injuries that may occur?
• Do you have a preventative action plan to help ensure that all workplace safety protocols are reviewed and followed by all employees?

How Do You Handle Compliance in the Workplace?

The best way to bring employees on board with your compliance strategy is to make compliance a part of your cultural identity. This includes clear policies and procedures, regular compliance training and communication for all employees, and monitoring and auditing systems to detect and address compliance issues promptly.

Developing a Compliance Culture

A culture of compliance starts with investing consistent, proactive effort to align with applicable laws, company procedures, and policies outlined in your employee handbook. Here are a few of our recommendations for creating an effective compliance strategy:

• Establish and regularly review policies in alignment with federal, state, and local requirements
• Conduct business compliance training for managers and employees
• Implement a system for documentation and recordkeeping
• Stay informed about changes to employment laws and regulations and update policies accordingly
• Conduct audits to identify and address issues before they escalate
• Foster a culture of compliance through transparent communication and proactive resolution of concerns
• Enforce policies by applying them equally to every employee, outlining consequences for failure to follow stated policies, and tracking compliance tasks in your HR platform

Protecting Your Business and Your Bottom Line

Protecting your bottom line goes beyond reviewing financial statements. It also requires identifying vulnerabilities — such as non-compliance — and implementing creative solutions to minimize risk to the business. This includes staying on top of the many new regulatory and compliance challenges that may impact your business, such as changing health and safety requirements, updated internet security requirements, and more. By implementing a detailed compliance strategy, you can help empower team members, minimize risk, and build a trusted brand reputation.

Fortunately, with Paychex HR Services, clients can access OSHA and safety programs. Let Paychex's HR professionals, supported by a robust team of compliance specialists who understand legislative and regulatory guidelines that may impact your business, guide you through your HR challenges.