Human resources management: big problem for small business?

Author:Massey, Kelly Brent


Are small business owners comfortable with their level of knowledge in employment legal compliance? Overall, do they have an adequate knowledge of human resources (HR) laws and standards? Do they feel confident when they recruit, interview, hire, motivate, discipline, and even discharge employees? To answer these questions, hundreds of small business owners and managers throughout the southern United States were surveyed.

It is worth noting that small businesses create most of the nation's new jobs, employ about half of the nation's private sector work force, and provide half of the nation's nonfarm, private real gross domestic product (GDP), as well as a significant share of innovations (SBA, 2009).

Small firms also make important contributions to the economy through innovations and the creation of jobs, enterprises, and entire new industries. Small firms are still struggling mightily from the recessionary economy of 2008--and if the past is an indication, they will likely help lead the economic recovery (SBA, 2009). It is widely understood that small firms are a vital part of our nation's economic engine. Therefore it is important that these firms operate their businesses in a legally compliant as well as profitable manner. This will improve their likelihood for success and foster lawsuit avoidance.


The focus of the study includes four parts: (1) Legal Compliance--Fair Labor Standards Act; (2) Recruiting, Screening, and Hiring Employees; (3) Employee Relations, Training, and Documentation; and (4) Miscellaneous HR Questions.

(1) Legal Compliance--Fair Labor Standards Act

Anne Field (1998) reported that from 1971 to 1991, the number of employment law disputes filed in federal court rose by 430%, a larger increase than for all other types of cases, according to a study by the Commission on the Future of Worker-Management Relations, an advisory body appointed by President Clinton. Steven Irwin (2007) explained that far too many small business owners wrongly assume the Fair Labor Standards Act (FLSA) does not apply to them or their employees. This mistake can be costly and often when an employer realizes the error, it is too late to avoid financial liability. Irwin (2007) also reported that the U.S. Department of Labor's Wage and Hour Division recovered more than $212 million in back wages, a 21 percent increase over the record-setting amount in 2002. The Wage and Hour Division undertook an investigation-based compliance survey of identified low-wage industries in fiscal year 2006. The initiative was designed to measure FLSA compliance in those industries most likely to have minimum wage and overtime violations.

Richard Acello (2010) asserted that, in 2008, sales associates sued AT&T Mobility in federal court in New York City for back pay and unpaid overtime spent responding to e-mails after work hours. Acello added, with workers seeking pay for such after-hours work, companies are wrestling with policies for smartphone use. Larger employers are bracing for an onslaught of class action suits.

According to another AT&T overtime class action lawsuit, managers "were illegally and grossly under-compensated for their work" and "routinely and consistently work alongside other employees, similarly situated, who are remunerated on a basis that includes payment for hours worked in excess of 40 hours per week." The AT&T managers are seeking three years of back pay with damages doubling that amount--a figure that could total tens of millions of dollars.

Two additional overtime class action lawsuits are currently pending against AT&T in Georgia and California. The telecom giant has settled eight overtime cases in the last four years for a combined total of $65 million, according to the plaintiff attorneys in the Connecticut case, Sharon L. Perkins, et al. v. Southern New England Telephone Co. (Mirando, 2011)

Although AT&T is obviously a large business, it would be logical that if large corporations with trained human resources professionals can make such errors then perhaps small businesses are making the same errors. These errors certainly could expose even small businesses to lawsuits.

According to the Department of Labor's Bureau of Labor Statistics, approximately 10.3 million workers, representing 7.4 percent of the American workforce, were treated as independent contractors in 2005. Many of these individuals may have been misclassified as independent contractors, either intentionally or as a matter of genuine confusion, by the employer about how to classify the particular worker. The classification issue is important to employers as well as the government, since independent contractors are not entitled to the protection of federal laws such as FLSA or Title VII of the 1964 Civil Rights Act, and other statutes.

(2) Recruiting, Screening, and Hiring Employees

Small businesses continue to face challenges in the current climate, including accessing capital in the midst of financial instability. Over the longer term, small firms face concerns about the cost and availability of health insurance, attracting a quality work force, meeting global competition, and perennial concerns about regulation, taxes, and government procurement opportunities (SBA, 2009). Small businesses must compete effectively for labor with their larger counterparts. This is more difficult in light of the disparity in total compensation, especially benefits. This disparity results in greater employee turnover. Firms that offer benefits have a 26.2 percent lower probability of having an employee leave in a given year (SBA, 2009).

Kotey & Slade (2005) reported that it is expected as firms grow, the skills and abilities required to perform various functions and activities no longer would be available from the familiar and informal recruitment sources preferred by the owner-manager. Thus, a greater variety of formal recruitment sources would be used to attract suitable candidates. As firms grow, multiple selection techniques would be used, in addition to interviews, to reduce errors in selecting employees recruited from sources unfamiliar to the owner-manager.

Heneman and Berkley (1999) studied the application practices and outcomes among small businesses. The content domain of attraction practices included ten areas: (1) methods to establish job requirements; (2) recruitment sources and methods; (3) recruitment communication; (4) selection methods; (5) who takes part in evaluation of applicants; (6) method of making job offers; (7) methods of...

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