A Small Business Guide to Hiring Your First Employee

Wednesday Aug 13th 2014 by Pam Baker
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Congratulations! Your small business just became big enough to require extra hands. But how do you hire your very first employee? This helpful guide will get you quickly and safely on your way.

Whether you're the founder of a new startup or a small business owner that simply has to grow to keep up with demand, hiring your first employee is a big step. Ideally, you don't want to let excitement and a sense of urgency cause you to rush ahead without planning, because a wrong step can lead to a terribly expensive mistake.

Of course, we live in the real world, and sometimes life and circumstances simply refuse to cooperate. We'll begin this guide with advice on the best course of action if you find yourself in a crisis situation and need to hire immediately.

Then we'll look at the steps you need to take to ensure that your hiring processes are legally compliant and designed for your company's best interests. Remember the goal: hire employees in a prepared and measured manner.

When You Need to Hire an Employee RIGHT NOW

Victoria Ley and her partner at FashionStork found themselves in just such a predicament.  "Nine months ago, it was just me and my partner in a tiny little space excited to open our online business idea," she said. "The day we opened we got more than 400 members, and by the end of the week we had more than 1,400 people order from us. We didn't even get a chance to blink first, and we even had to close our sales to be able to supply our service."

How to hire your first employee

Nice problem to have, yes? Unfortunately it's easy to lose your head in such a situation, and what should be a thought-out hiring process turns into a knee-jerk reaction. Ley and her partner avoided that expensive trap by hiring a human capital management (HCM) service to help them keep hiring details on track.

In Ley's case the service provider was ADP, but there are several such services out there. Do your homework before you choose one, as they vary in many ways—from services offered to pricing. Know what you're getting into before you sign the contract.

"In order to get through this insane reality we needed employees, and we needed them fast," said Ley. The entrepreneurs were not prepared to hire and had no idea where to start. The company they turned to managed the process for them.

"They did all of our new hire paperwork, HR forms, posters of federal laws for our wall, taxes for employees, payroll, and even handled the help wanted ads," Ley said. "We have more than 30 employees now, and we still use that same company to handle everything."

Hiring Tips from a Serial Entrepreneur

Not everyone is an overnight success of course. It's much more common that the small business owner or the startup entrepreneur just keeps plugging along doing pretty much everything that needs doing until—boom! One day the money for employees arrives either from an angel investor or when you finally reach a sales benchmark.

However, euphoria or exhaustion can take its toll on your decision-making and paperwork execution. You may be tempted to just go with a service and avoid the pitfalls that way. Certainly that is an option.

Another option would be to check out free resources and chat with other entrepreneurs before you decide what route you want to take.

Jeff Kear is a serial entrepreneur, having launched three new businesses in the last decade. His latest business is an online software company called Planning Pod. Kear offers these two tips:

Tip 1: "Determine the skills that the new employee needs to immediately drive revenues. An employee is a huge financial burden on a small business, and your first hire needs to drive revenue very quickly. Your first hire may be more of an admin person who frees up your time so you can bill more, which makes sense. Or maybe you want a salesperson that can start bringing in new clients. Whatever you decide, that first hire needs to make you even more cash-positive then you already are.

Tip 2: "When you decide to bring that employee on, consider bringing him in as a contractor first. The worst case scenario is that the employee doesn't work out. Before you make a big commitment and sign up the candidate as an employee, consider setting up a three-month probationary period with the person. He works for you as a contractor, and you won't be responsible for his taxes during that period. It gives both of you time to feel each other out and see if this will work for both parties."

Free Online Hiring Resources

Educating yourself about the rules for hiring employees is a critical step to becoming a successful boss. These free resources spell out what you need to know to stay within legal bounds.

1. Check out the free resources and guidelines on the Small Business Administration's webpage entitled Hire Your First Employee.

2. Go to the IRS website for small businesses and self-employed. There you will find links to helpful information, forms and videos.

"If you're hiring a foreign national, you need to accomplish additional steps," says Allan Bennetto, founder of Fruitful Technologies. "Failing to do so may result in civil and/or criminal penalties for you and your business. It's best to consult the U.S. Citizenship and Immigration Service before you move forward."

The Dangers of Hiring Too Fast

That person you just interviewed or scouted may seem to be perfect for the job, but that impression may change over time if the business relationship sours, or if she decides to move on. Be sure you protect your company.

"I strongly advise employers—particularly if the new hire will be part of a technical or management team or will have access to confidential or propriety company information—to consult with experienced counsel. Determine the need for provisions in your employment agreements or written company policies to protect trade secrets, inventions, and company good will," says Christine R. Fitzgerald, employment and trade secrets attorney at Belcher Fitzgerald.   

"These can take a variety of forms: confidentiality, privacy, and non-disclosure policies, codes of ethics, assignments of inventions, and post-employment restrictive covenants such as non-competition and non-solicitation provisions," she added. "Appropriately tailored and drafted, such provisions can go a long way toward preventing the employee from later walking out the door with the keys to the vault to join a competitor."

But it's not necessarily an employee's departure that will create the biggest headaches for you. Fitzgerald says you also need to know in advance if your future hire is subject to any restrictions, and if so, what kind, by current or past employers.

"The restrictions may or may not be an impediment, but it's better to find out on your own in advance than to be served with a lawsuit," says Fitzgerald.

Sometimes it isn't the new hire's behavior that will create trouble for you, but your own.

"When it comes to their interviews, don't be afraid to ask your candidates questions that are related to the job they are applying for," says Bennetto. "However, be mindful of certain restrictions. You are not allowed to ask about their age, sexual orientation, religion and marital status to name a few."

If you're planning to hire employees, Bennetto recommends that you become acquainted with the following federal laws:

Legal Advice on 'Hiring to Fit'

One of the things you should focus on is managing a new hire's expectations, starting in the interview process and moving forward. However the job description may not be enough, and both you and the prospective employee may make assumptions in the conversation that do not mesh. This can be a sign of trouble ahead. One way to offset that is to look for similar business cultures in the prospective employee's work experience.

"Assuming the hire is justifiable, I encourage my clients to look to candidates from smaller organizations because, on balance, those candidates tend to better understand the fluid startup culture. They have expectations that are more in line with the do-all job description and typically 'fit' better with the startup culture—which translates to lower transaction costs associated with the hire," says Nina B. Ries, principal of Ries Law Group.

Step-by-step Hiring Advice from HR Experts

"First, it's important to know the laws of your state. Make sure you have your workers' comp set up and unemployment registered with the state," says Beth Kahn, CFO and HR manager at eZanga, a search engine company. "And don't forget that you'll need a federal tax ID number. Your state's Department of Labor is a great resource for tools on getting started with all of these things."

How to hire employees for your small business

"It's also vital for you to do your research on Human Resource Management," she added. "The HR software I chose came with basic forms that we altered to meet the requirements of our business. Honestly, I learned a lot the hard way, and ignorance is not bliss. So now I have a spreadsheet of all the dos and don'ts."

  • Kahn's HR spreadsheet includes the following:
  • Get basic employee information to put into payroll system
  • Have employee fill out an emergency notification form
  • Obtain employee's direct deposit information
  • Have employees fill out I-9 and W-2 forms
  • Review employee handbook with new employees and have them sign a form acknowledging that they received all company policies and procedures
  • Have new employees sign a job description, so they know exactly what is expected of them
  • Show a sexual harassment video that explains what won't be tolerated in the workplace
  • Notify state Department of Labor about your new hire for potential wage garnishments—it's required by law

Sandra Powers, HR manager at LawyerReviews, also keeps a checklist to make sure she hasn't missed any steps. Powers' list includes:

  • Welcome letter to the employee
  • Provide employees with copies of the "Employee Handbook," and have them sign for it acknowledging that they understand the organization's policies and procedures
  • Any corporate disclosures should be explicitly explained, signed by the new employee and filed away for safe keeping by the company. Examples include: confidentiality and proprietary agreements, trade secret information agreements, background check and drug testing agreements
  • Obtain W-4 paperwork that indicates amount of money the employee wants withheld for tax purposes
  • Obtain form I-9 for Employment Eligibility Verification. A copy of the drivers license, passport, Social Security card, birth certificate, or permanent resident card may be needed for purposes of recording the identity of the new hire
  • The Affordable Care Act (ACA) requires employers give employees written notice of the health insurance exchanges
  • Provide employees with a brochure on company benefits, retirement programs, 401k contributions, etc.
  • Obtain payroll Information

You may want to adopt one of these lists, or some combination of the two, for your own needs.

Advice on Insurance and Hiring

There are lots of insurance rules that you must know and stay on top of from the moment you hire an employee. Too often small businesses and startups skip this part thinking they'll come back to it later. That's a costly mistake as penalties and fines can hit your business hard, as can any uninsured losses.

Small business owners on the cusp of hiring their first employee need to focus on two main items, according to Jon Schildt, founder and managing principal for an insurance brokerage firm called Calculated Risk Advisors.

  • Workers Compensation Insurance. "The minute a small business hires its first employee, state and federal laws require workers compensation insurance to be purchased on that employee," says Schildt. "This cost should be factored in to the overall cost of hiring."
  • Employment Practices Liability Insurance. "While workers comp is required, employment practices insurance (EPL) is simply prudent," he says. "This type of insurance protects the business owner for allegations of discrimination, harassment, and other misconduct towards their employee or potential hires. There can also be protection for wage and hour disputes. If the business hires an hourly employee, who feels he was incorrectly compensated for his time, a lawsuit could ensue. EPL insurance can be structured to provide a limited defense for the business."

Schildt acknowledges that small businesses must take a lot into account when hiring an employee, and they stand a lot to lose. "These risks can be transferred through good hiring practices, internal controls and insurance," he says.

But there are other insurance considerations as well.

Kevin Barnicle, founder and CEO of Controle, an IT/legal consulting and software firm, has some helpful advice and experience to offer regarding employee health insurance.

"Obviously this depends on if you are going to offer health insurance. But if you decide to offer it, you need to determine how much of the bill you as business owner are going to pick up," Barnicle said.

Typically, Barnicle, says, companies pay somewhere between 40 and 70 percent of the total cost. He believes health insurance is not an area where you want to skimp.

"Someone is taking a risk by joining you, and if you are a one-person shop you want to make them feel as comfortable about that risk as possible. Making health insurance a non-issue goes a long way."

Taxes and Hiring Employees

Yes, you need to be aware of the taxes associated with hiring employees, but they're not as scary to deal with as many fear. Before Barnicle began his own business, he spent a lot of time worrying about managing the tax burden, and everything entailed with it. It turned out to be less complicated than he thought.

"There are many resources available to help you figure out what your real requirements are—including the IRS, which I found surprisingly helpful—and tools, such as Quickbooks, to assist managing it all," says Barnicle.  "If you still feel overwhelmed you can meet with an accountant or a tax attorney for a single session for less than $200. Just make sure you come prepared with questions."

Pam Baker has written for numerous leading publications including, Institutional Investor magazine, CIO.com, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, the NY Times, and Knight-Ridder/McClatchy newspapers.

Do you have a comment or question about this article or other small business topics in general? Speak out in the SmallBusinessComputing.com Forums. Join the discussion today!
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