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Surprising Laws That May Apply to Your Small Business

Adam Uzialko
Adam Uzialko
Editor
Business News Daily Staff
Updated Jun 29, 2022

These surprising laws may apply to your small business. Are you in compliance with these regulations?

  • There are laws governing almost every aspect of business, and some of them might surprise you. From hiring to compensation to finance, small business managers need to be careful to avoid violating any laws or regulations.
  • Small businesses might be violating the law by not providing things like workers’ compensation or family leave.
  • Stay on top of regulatory changes to protect yourself and your business by working with trusted professionals such as attorneys and HR managers.
  • This article is for small business owners who want to know how to remain compliant with federal and state laws.

Staying up to date on the ever-changing rules and regulations that apply to businesses can be challenging. Small business owners are often acutely aware of the laws and regulations facing their businesses. However, these laws are constantly being updated, and with the constant demands of day-to-day business operation, it can be easy to overlook them.

Unfortunately, small mistakes can have huge consequences for a small business. Fines and lawsuits can arise if applicable laws are not followed carefully by business owners. Ignorance of the law does not absolve those who break it, so it’s important to stay informed. Here are some of the laws that most often catch small business owners off guard.

1. Freelancer classification can cause confusion.

Many small businesses hire freelancers instead of full-time employees because it’s a more flexible and cost-effective way to outsource work. Unfortunately, the way your small business employs a freelancer could require you to classify the worker as an employee rather than an independent contractor. Failure to do so could result in significant penalties from the government.

“I have consulted with many other small business owners over the years and have found that many of them do not realize there is a legal distinction between independent contractors and employees,” said Lauren Milligan, career advancement coach and CEO at ResuMAYDAY. “Most were classifying and paying their people as independent contractors when, in actuality, they were making requirements of their people that would classify them as employees. When a business owner makes this mistake, they are exposing the company to fines, tax problems and labor violations.”

Independent contractors must meet several criteria; otherwise, the freelancer must be classified as an employee. These are the main criteria for an independent contractor:

  • The individual has influence over what work they complete and how they complete it.
  • Payment, reimbursement and provision of supplies is controlled by the individual.
  • There are no ongoing agreements for typical employee benefits, such as a pension plan, insurance or paid time off.

If a freelancer doesn’t meet these criteria, they might need to be classified and paid as an employee. Failure to do so means the business owner could be liable for employment taxes for that worker, including Social Security and Medicare taxes. It’s also worth noting that some states, such as California, have even stricter guidelines on independent contractor classification.

2. Sexual harassment laws are becoming more specific.

In the wake of the #MeToo movement, many states and cities are tightening existing sexual harassment regulations. New York state, for example, requires all businesses with any number of employees to abide by a new set of training standards.

“According to the amended labor law, any employer with an employee working in New York state must either adopt the state’s model sexual harassment prevention training or create their own version which meets or exceeds the state’s minimum standards,” said Tammy Tyler, senior compliance analyst at Paychex. “All employers must provide interactive anti-sexual harassment training for all employees regardless of classification – full-time, part-time, seasonal and temporary – by Oct. 1, 2019, and annually thereafter.”

New York is not alone in strengthening sexual harassment protections in the workplace. States such as California, Connecticut, Maryland, Delaware, Colorado, Arizona, Tennessee, Vermont and Washington have all passed or are considering passing laws governing sexual harassment training and prevention in the workplace.

Editor’s note: Looking for information about workers’ compensation for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

3. Antitrust regulations impact small businesses too.

You might think of antitrust laws as something that impacts large corporations, or rules that hearken back to the age of Theodore Roosevelt’s trust-busting administration. However, these laws also impact small businesses. Anytime price fixing, collusion or monopolization occurs, antitrust laws come into play. It doesn’t matter how big or small the company responsible might be.

“Antitrust is an area of law that we normally associate with giant, Fortune 500 firms, but federal antitrust laws can and have affected small businesses,” said Priyanka Prakash, senior staff writer at Fundera and former attorney. “Antitrust laws come into play when a business, no matter how large or small, fixes prices with competitors, uses unfair methods of competition or monopolizes the market. And the market can be defined as a very small geographic area, so small businesses can be affected.”

Antitrust law violations include both civil and criminal penalties under the Sherman Act and are punishable by a fine up to $350,000 and a three-year prison sentence. So, naturally, antitrust laws are nothing to mess around with.

4. Workers’ compensation insurance might be legally mandated.

Many small business owners don’t realize that, in many states, workers’ compensation insurance is as much a requirement as auto insurance is for drivers. It is sometimes illegal not to have it, yet 26% of small businesses owners operate without it, according to a survey of 900 small business owners conducted by Manta. 

[Want to learn more about workers’ compensation insurance? Check out our primer for more information you need to know.] 

In states where workers’ compensation insurance is required, penalties can be rather steep for violations. In New York, for example, failure to secure workers’ compensation insurance for all employees (including part-time workers) could result in a $2,000 fine per 10-day period of noncompliance, plus any workers’ compensation costs incurred in the event the uninsured employee is injured on the job. 

In New Jersey, failure to carry workers’ compensation insurance is punishable by a fine of up to $10,000 and up to 18 months in prison. In Pennsylvania, the consequences are even steeper, carrying the threat of a $15,000 fine and seven years in prison.

Considering it’s not just your business’s profitability on the line, but also your freedom, understanding your state’s workers’ compensation insurance laws is critical.

5. ‘Ban the box’ laws are gaining popularity.

“Ban the box” refers to the practice of outlawing the checkbox on application forms that requires applicants to disclose whether they have been convicted of a felony. The rationale is that the box allows employers to discriminate against people who have been convicted of a felony and already served their time.

“Several states have banned the box from all private employers of any size, including Connecticut, Hawaii, Massachusetts, Minnesota, Oregon, Vermont and Washington,” said Rebecca Weiser, compliance manager for Verified First. “Some states have banned the box for companies with four or more employees, including California, District of Columbia, Illinois, New Jersey and Rhode Island. There are also local ‘ban the box’ laws in a lot of major metropolitan areas.”

Penalties vary by jurisdiction, but they typically require violators to pay a fine and might even include the threat of jail time. Massachusetts, for example, charges a fine of up to $5,000 for an individual who violates the law, and $50,000 for an organization. The law also stipulates that violations could result in up to one year of imprisonment.

6. Small businesses may have to grant family leave.

Many small businesses are exempt from providing time off to employees under the Family and Medical Leave Act (FMLA). 

However, small businesses with under 50 employees may still be required to grant leave under state family leave programs. Currently, California, Colorado, Connecticut, Massachusetts, New Jersey, New York, Oregon, Rhode Island, Washington and the District of Columbia have their own paid family and medical leave laws in place. 

Eligibility varies based on individual state laws, but in most cases, the laws will apply to small businesses that may not be covered by the FMLA. Many of these are job-protected leaves, which require the employer to allow employees to take their legally allowed time off and return to their job or an equivalent job within the organization. 

Did you know?Did you know? You may be required to grant leave to your employees even if you do not meet the 50-employee threshold set by the FMLA. Check your state and local laws to see what is required of you as an employer.

7. Unpaid internships are often illegal.

Labor costs are a huge expense for small businesses. Often, small businesses want to expand their team but do not have the funds available to add another employee to their payroll. Offering unpaid internships sounds like an ideal solution, right? 

However, the criteria for legally providing an unpaid internship is much stricter than most business owners realize. Unpaid internships are legal only if the intern is the “primary beneficiary” of the arrangement. Business owners should refer to the primary beneficiary test to determine whether the internship that they plan to offer meets the Department of Labor (DOL) requirements for an unpaid internship.

If a business does hire an unpaid intern and it is determined that the internship does not meet the primary beneficiary test, the business can be ordered to provide back pay to the intern at minimum wage. The DOL can levy additional fines if a business repeatedly or willfully violates unpaid internship regulations.

Key TakeawayKey takeaway: Unpaid internships should be for the primary benefit of the intern, not the business. If an internship does not pass the DOL’s primary beneficiary test, then the intern is entitled to payment of at least the local minimum wage.

Tips for staying on top of regulatory changes

New laws are constantly being passed, and existing laws are frequently updated or amended. Here are some ways to stay on top of relevant regulatory changes to ensure that your business is compliant with all relevant laws:

  • Retain counsel and regularly meet with attorneys. Making sense of complicated business laws and dissecting how they may apply to a particular business is not an easy task. Small business owners should find an attorney or firm that they trust and meet with them regularly to clarify any legal obligations of the business. Legal counsel can help small businesses meet industry regulatory requirements, understand tax law and filing requirements, and advise on labor law concerns.

  • Hire a dedicated HR manager or work with a HR consultant. Small business owners have a lot to manage, and unfortunately, that often results in the development of clear HR policies and procedures being overlooked. An HR manager can stay on top of regulatory changes and labor laws, and adjust your company’s internal policy documentation and training materials accordingly. If you are not sure if it’s time to hire a full-time HR manager, you can engage an HR consultant to track legal changes and update your employee handbook annually.

  • Join state and local associations. One way to stay up to date is to become more active within your community and industry. Join industry professional associations, local chambers of commerce and other groups designed for business owners in your field or region. Many professional organizations provide training for members on regulatory updates and laws that apply to small businesses.

Protect yourself by staying on top of regulatory changes

These are far from the only laws that often take small business owners by surprise, but they are some of the big ones to keep an eye on. If you’re uncertain whether your business is abiding by municipal, state or federal laws, you should always consult with an attorney. Paying for a professional to help you review operations is always a more cost-effective option than running afoul of the government.

Kaylyn McKenna contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

Image Credit:

boggy22 / Getty Images

Adam Uzialko
Adam Uzialko
Business News Daily Staff
Adam Uzialko is a writer and editor at business.com and Business News Daily. He has 7 years of professional experience with a focus on small businesses and startups. He has covered topics including digital marketing, SEO, business communications, and public policy. He has also written about emerging technologies and their intersection with business, including artificial intelligence, the Internet of Things, and blockchain.