Costly HR & Employee Benefit Mistakes: Part 3


Mistakes in employee benefits and human resources can be quite costly to employers—in the form of extra benefits, complaints, lawsuits, government-assessed fines and penalties, and attorney fees, to name a few. Don’t learn the hard way what these mistakes are.  Below are some common costly mistakes that employers make.  AUI educates its employer groups on ways they can remain compliant and avoid costly fines and penalties.  Contact us today for a free consultation.

  1. Independent contractor/temporary employee issues. Some employers make the mistake of including independent contractors in health plan coverage and/or excluding temporary employees from benefit plan coverage. If an employer allows independent contractors to participate in its health plan, its health plan is technically a “multiple employer” plan, and an IRS Form M-1 needs to be filed annually. Failure to do so can cause the DOL to levy penalties. If the employer has wrongfully excluded “common law employees” from its benefit plans, those “employees” can seek retroactive reinstatement to the employer’s benefit plans, potentially causing large damages to the employer.
  • Solution: Do not allow independent contractors to participate in your health plan, or file an annual Form M-1. Ask your attorney or financial advisor to assist you if you have never filed a Form M-1 before. To preclude unintentional inclusion of “common law” employees, craft your benefit plan language to specifically exclude individuals not on your payroll.


  1. Misclassifying an individual as an independent contractor. Many employers misclassify individuals as independent contractors when they do not qualify under the law as an independent contractor for unemployment and worker’s compensation purposes. By making such a mistake, employers could owe thousands of dollars in back premiums for worker’s compensation insurance, as well as premiums for unemployment insurance. Worse yet, the employer could be responsible for actual medical costs for an individual not properly covered under your worker’s compensation policy. The employer may also owe income taxes and social security taxes.
  • Solution: Review your independent contractor relationships to ensure consistency with state and federal standards. Make sure your independent contractors have an FEIN and are incorporated. Ask them to form an LLC if they are not. Ask yourself whether they are doing similar work for other companies in the same industry. If the answer is “no,” they may not be treated as an independent contractor in the eyes of the law.


  1. Update your restrictive covenants. Employers spend a lot of time and resources drafting enforceable restrictive covenants. Because the law changes from time to time due to various court decisions, covenants can become outdated and unenforceable. In some states, the law states that if any portion of a restrictive covenant is overbroad, then the entire agreement is unenforceable. For example, a no-hire clause in your agreement could invalidate your entire non-compete as overbroad. If your restrictive covenants are unenforceable, you may not be able to protect your customer base, continuing revenues and/or confidential information if a key employee leaves.
  • Solution: Have your restrictive covenant agreements reviewed annually to make sure that they are consistent with the ever-changing law. Legal counsel experienced in this area should be able to review your restrictive covenants in a cost-efficient manner to determine their enforceability.


  1. Misuse of performance evaluations. Some managers and supervisors make the mistake of not being honest and straightforward when evaluating employees. This mistake often makes it difficult to defend against claims of discrimination and wrongful discharge when managers are less than honest and direct on performance evaluations.
  • Solution: Do not “sugarcoat” criticisms of employee performance. Not only will you not give the troubled employee an opportunity to correct his or her performance problems and become more productive, but you will also not have an appropriate record of performance deficiencies in the event it becomes necessary to defend a termination or disciplinary action.


  1. Contesting unemployment compensation for performance reasons. State laws may differ, but generally employees who are terminated for performance reasons are entitled to unemployment compensation. Employers often waste resources by contesting the unemployment compensation claim. (If an employee has filed a series of claims against the employer and is not represented by an attorney, it may make sense to contest the UC claim, so you can “nail down” the employee’s version of the facts.) Generally, an employee is not entitled to unemployment compensation only if he or she quits or is terminated for misconduct. State laws may differ; check with your legal counsel.
  • Solution: Understand the standards for misconduct under unemployment compensation law and how they differ from performance-related terminations. Update your employee manuals, making sure the policies are accurate and that you can prove the employee received a copy of the manual. Be sure to carefully and thoroughly document any misconduct and disciplinary issues that have led to an employee’s termination.


  1. Recalculating overtime when paying performance-based bonuses. Employers often forget to recalculate overtime previously paid and make additional overtime payments when paying performance-based bonuses over multiple pay periods. State wage and hour laws differ, but generally if a wage claim is brought, an employer could owe not only back pay, but interest, penalties and attorney fees.
  • Solution: Check with your legal counsel to make sure you know whether the bonuses you pay qualify for recalculation of overtime. If so, you need to go back and apply the bonus over the relevant pay periods and determine the appropriate overtime rate and whether additional overtime payments are required.


  1. Failing to clearly define when commissions are payable. Many employers make the mistake of not having a written policy defining when commissions are due to employees. State laws differ, but if an employer does not have an appropriate policy, an employee can leave or be fired and still be due thousands of dollars in commission payments.
  • Solution: Make sure that your commission policy is in writing and clearly defines when employees have earned commissions and how they are handled upon termination.


  1. Other common HR mistakes.
  • Paying severance without a release. By doing so, you are allowing employees to make future claims.
  • Failing to conduct exit interviews. Not only will you gain valuable information to make the workplace more productive, but you may also be alerted to any potential claims.
  • Using outdated employment applications. Make sure your applications are consistent with the nuances of your state and local laws (such as ban-the-box) as well as general anti-discrimination laws.
  • Failing to comply with the requirements of the Fair Credit Reporting Act (FCRA) when utilizing a third-party to conduct background checks, including various disclosures and notices. Many employers fail to provide the written release and disclosure form as a separate, stand-alone document as is required by the FCRA. Class action lawsuits under the FCRA have risen dramatically in recent years.
  • Failing to inform an employee who has complained of harassment of the results of your investigation and remedies and discipline. When an employee complains of harassment, the surest way to invite a complaint with the state or federal government is to not inform the employee about the results of your investigation and any discipline handed out to the alleged harasser. State laws may differ, so it is important to check with your legal counsel.


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