Think HR compliance only applies to big companies with in-house legal teams and HR departments? Give it a thought again. Small businesses are just as accountable under employment law—and often more vulnerable to costly mistakes.
The reality is straightforward: even unintentional missteps in areas like employee classification, documentation, or workplace conduct can lead to serious consequences: fines, legal action, and damage to your business reputation. In an environment where regulations are frequently updated and enforced more rigorously, staying compliant is not just a best practice—it’s a critical part of running a responsible, sustainable business. We, at Central HR, provide trusted, practical solutions through our HR compliance and investigation services to help businesses like yours stay aligned with current regulations—without the complexity.
This post will walk you through some of the most common HR issues in small businesses and, more importantly, how to steer clear of them. Ready to find out where businesses go wrong—and how you can get it right? Let’s begin.
7 HR Compliance Mistakes Small Businesses Often Make And How To Avoid Them:
1. Misclassifying Employees as Contractors
- The Mistake
It’s surprisingly easy to blur the lines between an employee and an independent contractor. Many small businesses misclassify staff, often unintentionally, by treating contractors like employees—assigning them set hours, direct supervision, or specific tools and systems.
- Why It Matters
Misclassification is a serious legal issue. It can trigger audits by the ATO, open you up to complex Fair Work claims, back payments of employment entitlements like leave, notice of termination, redundancy benefits, etc , and tax and superannuation penalties. If a contractor turns out to be a de facto employee, your business could be liable for missed obligations going back months or even years.
- How to Avoid It
Familiarise yourself with the difference between employees and contractors—things like whether they are running a genuine business, who controls their work, who covers insurances and liability, , and overall integration into your business. The safest path? If you’re unsure, consult professionals. We offer specialised HR Advice to assess your current situation and prevent long-term exposure.
2. Not having written Employment Contracts
- The Mistake
Skipping the essential step of having a written employment contract is a common shortcut. This often snowballs into other issues such as failing to issue Fair Work Information Statements, maintaining time and attendance records, pay records and payslips.
- Why It Matters
The common misconception is that the absence of a written employment contract means there is no contract. What many businesses fail to understand is that the moment an employee is engaged to perform work, a contract is automatically in place. The question is – do you have a clear, compliant and unambiguous written contract, or a verbal contract that is open to interpretation?
Without proper contracts , you leave your business vulnerable in disputes over pay, leave, misconduct, or termination. Missing or unsigned contracts can weaken your legal standing and create confusion among staff about their rights and responsibilities.
- How to Avoid It
Make employment contracts non-negotiable. Ensure a legally drafted contract is provided to all current employees, and given to new employees before they start work. For peace of mind, you can opt for our small business HR management services or call us for a HR Healthcheck to find out which contracts you need.
3. Ignoring Award conditions
- The Mistake
Failing to accurately understand Employment Awards. The Common misconception is that paying the above award is all that is needed. The part most employers miss is that Award compliance is more than paying above the minimum rate of pay in the Award. Awards must be used to classify employees accurately, comply with conditions that may be unique to specific awards, such as hours of work, span of hours, callout conditions, leave entitlements, break entitlements, and so much more.
- Why It Matters
Fair Work Australia takes wage underpayment seriously. Even unintentional mistakes can result in underpayment claims, back pay, fines, and costly reputational damage. Wage theft laws have toughened, and high-profile cases have shown regulators don’t hesitate to act.
- How to Avoid It
Ensure you understand applicable Awards in detail, use accurate, auditable timekeeping systems (digital is best) and regularly check pay and conditions against relevant modern awards or enterprise agreements. Ensure you’re correctly classifying employees as full-time, part-time, or casual. When in doubt, opt for small business HR support in Australia to review your payroll compliance.
4. Failing to Keep Up with Changing Employment Laws
- The Mistake
Too many businesses create an HR policy once and forget it. Employment law, however, evolves regularly. Some recent changes at state and federal levels have been around , casual employment laws, discrimination, contractor and employee definitions, right to disconnect, pay transparency, etc.
- Why It Matters
Outdated policies can mean you’re not complying with the latest legislation, leaving your business open to penalties or making decisions based on now-illegal practices.
- How to Avoid It
Assign someone to monitor legislative updates or subscribe to legal and HR updates from credible sources. A more effective solution? Partner with a qualified HR consultancy in Perth, that can proactively review and update your policies to keep pace with the law and industry standards.
To find out more about recent updates that apply to you, call us for a HR Healthcheck.
5. Neglecting Positive duty towards managing workplace bullying
- The Mistake:
Many small businesses fail to recognize their duty under workplace laws to proactively prevent bullying, not just respond when it occurs. This includes having no clear policies, training, or reporting systems in place—leaving the door open for toxic behaviours to grow unchecked.
- Why It Matters:
Workplace bullying damages morale, increases turnover, and exposes your business to serious legal risks under Fair Work and work health and safety legislation. Ignoring this responsibility can lead to Fair Work Commission claims, reputational damage, and even penalties for failing to provide a safe working environment.
- How to Avoid It:
Establish and enforce a clear anti-bullying policy, train your team (especially managers) on acceptable behaviour, and set up safe, confidential reporting channels. Make it clear that bullying won’t be tolerated and that all reports will be taken seriously. Remember, preventing issues is far easier (and cheaper) than fixing them. Hence, make it a priority to routinely evaluate your workplace culture and maintain open communication with your staff.
6. Poor Recordkeeping
- The Mistake
Keeping inconsistent records—scattered files, untracked employee leave, missing time and attendance records, incomplete performance reviews—can snowball into legal and operational issues.
- Why It Matters
Recordkeeping is essential for two reasons – first, because many records are mandated under the Fair Work Act. Second, because they are essential to track the employment history, and help navigate the employment relationship more effectively.
- How to Avoid It
Implement a structured system of HR recordkeeping – whether it is through systemised folders, or using software. – . Maintain clear digital files for every employee that include contracts, timesheets, performance reviews, correspondence, and policy sign-offs. Use cloud-based HR tools where possible, or seek out small business HR management services to help set up and maintain these systems efficiently.
7. Not Having a Written HR Policy Manual
- The Mistake
Many small businesses rely on informal processes and verbal instructions, assuming a close-knit team doesn’t need a formal handbook.
- Why It Matters
Without a written HR policy manual, expectations are inconsistent, disciplinary decisions appear arbitrary, and employees may not know their rights. This creates confusion, erodes trust, and increases the risk of legal claims.
- How to Avoid It
Develop a clear, concise HR policy manual tailored to your business. It should cover workplace conduct, leave policies, grievance procedures, safety protocols, and termination processes. Train your staff on what’s in it and revisit it annually to keep it up to date.
Summary:
Staying compliant with HR regulations isn’t just about avoiding penalties—it’s about protecting your people, your reputation, and your business’s future. The mistakes outlined above are all preventable with the right systems, support, and up-to-date knowledge. Don’t wait for an audit or legal claim to realise what’s been overlooked. Partner with Central HR for personalised support, up-to-date compliance guidance, and investigation services tailored to your unique business needs. Let’s talk now!
