The CPA in Industry

December 1999


By Gerald E. Calvasina, Richard V. Calvasina, and Eugene J. Calvasina

It is the accountant who, by default, is frequently assigned the task of ensuring that a small business is complying with the various state and Federal laws that impact human resources decisions. The responsibility covers a wide range of activities, including checking references, communicating and reporting requirements, processing and responding to benefits claims, classifying workers properly, and resolving record-keeping issues that go well beyond the basic payroll and tax information requirements.

Federal Laws that Apply to Small Business Human Resources Decision Making

The key variable determining application of Federal regulations to human resources (HR) decision making is the number of employees employed by the firm. Most state laws mirror Federal statutes and extend coverage to those employers that do not meet the Federal limits.

At first glance, determination of liability would appear to be a relatively simple calculation. For example, Title VII of the 1964 Civil Rights Act applies to all firms that have 15 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year. However, prior to the 1997 U.S. Supreme Court decision in Walters v. Metropolitan Educational Enterprises, Inc., applicability would vary depending upon the Federal appellate district in which a business was located. Some districts used the "compensation method" and some the "payroll method."

In Waters, the Supreme Court upheld the payroll method. Under this method, an employee is counted on the employer's payroll for each working day in a given week, whether or not she shows up for work. It requires an employer to determine whether an employee started or ended employment during a given year and if so, when. The individual is counted as an employee for each working day after arrival and before departure.

The accompanying Table lists 10 Federal statutes and orders that HR decision makers frequently encounter and the number of employees required before each statute applies.

Title VII of the 1964 Civil Rights Act 15 or more employees for each working day in 20 or more calendar weeks in the current or preceding calendar year
Americans with Disabilities Act 15 or more employees for each working day in 20 or more calendar weeks in the current or preceding calendar year
Immigration Reform and Control Act Four or more employees
Family Medical Leave Act 50 or more employees at a worksite or worksites within a 75-mile radius
Age Discrimination in Employment Act and Older Workers Benefit Protection Act 20 or more employees
Occupational Safety and Health Act Employers that affect interstate commerce; if more than 10 employees, reporting and inspection regulations apply
COBRA 20 or more employees and employer offers a group healthcare plan
Amendments to Fair Credit Reporting Act 1996, 1998 If information covered by the act is used in decisions to hire, promote, reassign, or terminate employees
Fair Labor Standards Act and Equal Pay Act Employers engaged in interstate commerce
Personal Responsibility and Work Opportunity Reconciliation Act of 1996 All employers

Record Keeping Effective record keeping is necessary not only to efficiently and effectively manage human resources but also to promote legal compliance. Typically, employers are advised to keep the following basic information about each employee in a personnel file:

* Employment application and resume
* Reference checks
* College transcripts
* Job descriptions
* Records relating to hiring, promotion, demotion, transfer, layoff, rates of pay, other forms of compensation, and education and training records
* Records relating to other employment practices
* Letters of recognition
* Disciplinary notices or documents
* Performance evaluations
* Tests used by an employer to make employment decisions
* Exit interviews
* Termination records.

Most Federal anti-discrimination statutes and the agencies created to enforce those statutes impose specific record-keeping requirements. For example, the Uniform Guidelines on Employee Selection Procedures (UGESP) provides guidance for employers subject to Title VII. The general rule followed by the Equal Employment Opportunity Commission (EEOC), the Federal agency that enforces Title VII, the Americans with Disability Act (ADA), and the Age Discrimination in Employment Act (ADEA), is that employers must keep all personnel or employment records for one year. When a discrimination claim is filed, all relevant personnel records must be retained until final disposition of the claim. Under the ADEA, employers must keep all payroll records for three years. In addition the employer must retain on file records relating to any employee benefits plan, for example, any insurance or pension plan, and any written seniority or merit system for the full period the plan or system is in effect or at least one year after its termination.

Reducing an organization's exposure to litigation under the ADA and the Family Medical Leave Act (FMLA) necessitates even more specific record-keeping requirements. This is especially true when addressing absenteeism. Most courts recognize that regular attendance at work is an essential job function for most if not all positions. Under the ADA, it is important to maintain accurate records of all absences, including a separate and confidential file of any medical certifications or medical information relating to an employee's absences. And the FMLA, in order to effectively control its guaranteed 12 weeks of unpaid leave per year, sets certain paperwork requirements that employers must follow:

* Post the Department of Labor (DOL) notice.
* Issue each employee a description of FMLA benefits and document it.
* Give the employee a DOL-required written advisory each time he or she asks for FMLA leave, and document it.
* Keep an accurate log of all FMLA leave (not mandatory, but practical).
* Define the year as a rolling 365-day period.

The basic record-keeping requirement of the Fair Labor Standards Act (FLSA) involves maintaining payroll records for at least three years. Specifically, when employers are confronted with FLSA violation investigations, they must be able to provide documentation about the number of hours worked, particularly in cases where workers are not properly classified for pay and benefit purposes (independent contractor status) and overtime status (exempt/nonexempt).

Employers covered by the Equal Pay Act (EPA) are required to keep for two years all records (including wage rates, job evaluations, seniority and merit systems, and collective bargaining agreements) that explain the basis for paying different wages to employees of opposite sex.

The DOL and the courts deem the employer responsible for keeping these kinds of records and in the absence of proper records will accept the employee's best recollections.

The Immigration Reform and Control Act (IRCA) requires that employees complete their part of Form I-9 when they start work; employers must retain the form for a minimum of three years and for one year after the person leaves employment. These forms must be available for inspection by an Immigration and Nationalization Service or DOL officer upon request. Fines up to $1,000 can be imposed for each employee whose form was not completed, retained, or presented.

The Department of Justice (DOJ) is also in the process of increasing the penalty imposed on employers that fail to properly document and verify employee eligibility. Interim regulations published in the Federal Register on February 12, 1999, detail changes in the rules for administrative hearings involving employers that fail to properly verify immigration documents. Employers could face civil penalties of $5001,000 per violation and be forced to participate in one of three pilot programs established by the DOJ to verify eligibility.

Federal Occupational Safety and Health Act (OSHA) record-keeping requirements generally apply to businesses with 10 or more employees. Exceptions include businesses engaged in retail trade, except for those selling general merchandise, building materials, and garden supplies; real estate, insurance, and financial services; and service businesses, except for hotels, repair facilities, amusement and recreational facilities, and health services. Unless exempt, businesses must keep records of the following:

* Injury and Illness. A log (OSHA Form 200) of all workplace injuries and illnesses, except minor injuries requiring only first aid
* Medical History. Up-to-date medical records and records of employee exposure to hazardous substances or harmful physical agents
* Training History. Records of safety training sessions.

The violations most frequently cited by OSHA have had to do with record-keeping and notification requirements under the act. For example, in 1993, failure to have a written hazardous commodities program under 29 C.F.R. 1910.1200(e)(1) totaled 4,988 alleged violations. Additionally, there were more than 4,000 citations for violations of the OSHA log requirements. Record-keeping violations may result in multiple citations for each affected employee, thus increasing employers' penalties substantially.

Twenty-three states have occupational safety and health laws that may meet or exceed Federal OSHA standards.

Practical Record-Keeping Suggestions

The first step in effective record keeping is development of a policy and procedures for the making, storing, and releasing of information in personnel files. A general piece of advice that many attorneys give is that anything that can't legally be the basis for a personnel decision should not be near the personnel files.

Thus, the first step should include developing knowledge of which documents are legally required to be generated and how long they are required to be kept. The following records should be kept separately from the primary payroll records:

* Medical records (under lock and key)
* EEO records that can identify employees by race, sex, marital status, national origin, and so on
* Form I-9
* Garnishment orders
* Safety training records.

Audit procedures should also be documented with responsibility assigned to keep track of what and when documents in personnel files should be purged. Consistency is key in this area. If sensitive documents turn up missing during the discovery process of litigation, an employer's case may be prejudiced; if the destruction is termed willful, it could result in severe legal sanctions. The policy and procedures should clearly demonstrate that documents are consistently created, consistently retained for the statutory required time, and consistently destroyed.

Cleansing personnel files can also help avoid "smoking-gun" evidence. For example, notations made on application forms can be very damaging. When the notation "cute legs, but too old" was discovered on an application form in an age discrimination case, the employer quietly settled out of court. Employers should remember that each document in a personnel file is a potential court exhibit.

Reporting and Notification

The EEOC requires that large employers file an annual EEO-1 report, which provides a breakdown of the employer's workforce by race, sex, and national origin. Employers with fewer than 100 employees, Federal contractors with fewer than 50 employees, and contracts under $50,000 are exempt from this requirement.

All Federal and some state regulations require proper posting of notices as to employee rights under the various statutes. OSHA, for example, requires a notice called Job Safety and Health Protection. The FLSA requires that employers prominently display the Federal minimum wage poster. The notices and posters can generally be obtained from the enforcement agency. In some cases, state labor departments will also issue posters.

Specific notification requirements have increased in recent years. COBRA regulations are a prime example. If you employ 20 or more individuals and offer a group healthcare plan, you must comply with COBRA notification requirements. Group healthcare plan administrators subject to COBRA must provide written notice of rights to certain individuals on two separate occasions:

* Initial Notice. A notice must be sent to all plan participants and their spouses when the plan first becomes subject to COBRA or, if later, to an employee and spouse when that employee first becomes eligible for coverage under the plan.
* Qualifying Event Notice. The employer has 30 days after a qualifying event to notify the plan administrator of the event; if the event is divorce, legal separation, or loss of dependency status, the qualified beneficiary has 60 days from the date of the event or the date coverage would otherwise be lost, whichever is later, to notify the administrator of the event. Once an employer is notified, it has 14 days to send a notice to all qualified beneficiaries affected by the event. This notice will consist of a letter explaining the beneficiary's COBRA rights and the rules that apply if coverage is elected, including the monthly premium amount and due date and a form that the qualified beneficiary may use to elect coverage.

The DOL has provided model language that a plan may use to comply with COBRA's qualifying event notice requirements. Sending COBRA notices through first-class mail to the intended recipient's last known address will be deemed a good faith effort to comply with the notice requirements. Small employers that offer group healthcare plans not large enough for Federal coverage must be aware of state laws that may apply to them. Many states have passed "little COBRA" laws that apply to employers not subject to COBRA.

A more recent notification issue that Congress has imposed on employers stems from recent amendments to the Fair Credit Reporting Act (FCRA). The amendments are designed primarily to protect the privacy of an employee's credit report information and ensure its accuracy. The act has also had broad implications for employers that attempt to utilize information covered by the act in their decisions to hire, promote, reassign, or terminate employees.

One final important reporting area involves sexual harassment in the workplace. In light of the Supreme Court's 1998 decisions in Faragher vs. City of Boca Raton and Burlington Industries vs. Ellerth, employers must take reasonable care to prevent sexual harassment and remedy any harassment that does occur if they are to be shielded from liability under Title VII of the 1964 Civil Rights Act. The keys to reducing an employer's exposure to litigation are the wide distribution of the employer's policy against harassment and a procedure that employees can utilize to report violations. Additionally, employees should be required to sign an acknowledgment that they have received and read the policy, and the acknowledgment should become a permanent part of the individual's personnel file.

There Is More to Learn

There are a multitude of record-keeping and notification issues with which the de facto human resources manager will be confronted. Technology can help to some extent, but each employer must decide where to allocate resources. Too often the small employer concentrating on growth does not focus on these issues until a process server requests the records.

Increased Federal and state regulation of human resources management continues. Passage of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 is a prime example. PRWORA requires that all employers report information on new hires within 20 days of their start date. The reports must contain each employee's name, address, and Social Security number, along with the employer's name, address, and Federal identification number. PRWORA is intended to assist states with the collection of child support payments and prevention of fraudulent unemployment and workers' compensation claims.

Federal agencies are required by law to provide technical assistance when it is requested by employers. In December of 1998, the newly appointed EEOC chair pledged to do more in this area, especially for small businesses. Nevertheless, the agency will not provide assistance unless you ask for it. After a charge is filed is a bit late. *

Gerald E. Calvasina is an associate professor at the University of North Carolina at Charlotte,
Richard V. Calvasina is a professor at the University of West Florida, and
Eugene J. Calvasina is a professor at Southern University.

James L. Craig, Jr., CPA
The CPA Journal

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