Preparing To Hire Your First Employee - A Checklist to Protect Your Startup or Small Business
It is an exciting time for a growing business preparing to hire its first employees. However, failing to properly prepare for the legal and business issues that arise with hiring employees can expose a business to significant liabilities and jeopardize its growth.
There are a number of legal and business issues that must be considered when a business decides to hire its first employee.
1. Insurance Coverage
A startup or small business likely will (and should) have commercial general liability and property and casualty insurance. In anticipating of hiring employees, a business owner will need to obtain workers compensation coverage and, depending on the law of the state in which it will employ workers, may need disability insurance. An employer should also consider obtaining employer practices liability (EPL) insurance.
2. Establish Payroll
Before hiring employees, a business must determine who will be responsible for administrating payroll. Options vary from using a payroll company, a professional employer organization (PEO), or handling payroll internally. A soon to be employer must also determine, in compliance with applicable state law, how often employees will be paid.
3. Classify Job Positions as Exempt or Non-Exempt
Virtually all employers are governed by the Fair Labor Standards Act (FLSA) and the wage and hour laws of the state in which its employees work. These laws classify employees as exempt or non-exempt from minimum wage and overtime requirements and carry significant potential penalties for a misclassification of an employee's status. Before hiring an employee a business must understand whether the position it seeking to fill is exempt or non-exempt and how to record time and calculate overtime pay, if applicable.
4. Understand Applicable Job Advertisement and Interview Laws
A business preparing to hire its first employee must also understand the laws applicable to job advertisements and interviewing. For example, job postings should not discriminate, directly or indirectly, against any class protected by state or federal law. Similarly, questions seeking information about an applicant's membership in a protected class are not permitted (e.g. "how old are you?" or "are you married?"). In some jurisdictions, such as New York City, employers are prohibited from inquiring into an applicant's salary history.
5. Establish Workplace Policies and Procedures
In anticipation of hiring an employee, a business should implement workplace policies and procedures. My earlier post on the advantages of implementing an employee handbook can be found here.
6. Prepare Offer Letters
Offer letters should be used to memorialize the terms and conditions of job offers for most employees. An offer letter should include, without limitation, items such as the title or position being offered, the start date, salary or pay rate, expected hours of work, and whether the position is exempt or non-exempt from overtime. All offer letters should also confirm the at-will nature of the employment relationship.
7. Consider Implementing Confidentiality Agreements
Businesses in most industries have proprietary and confidential information. Such information could range from a customer list to proprietary manufacturing processes. Before hiring an employee, a business should assess whether it possesses any information that needs to be protected from disclosure to the public or competitors and, if so, implement confidentiality agreements to be signed by the employee.
8. Comply with Workplace Posting and Notice Requirements
Both federal and state laws require that employers post certain notices in common areas of the workplace, such as a break room or lounge. Examples of these notices include notices regarding workers compensation benefits, anti-discrimination laws, and OSHA notices. Many states, such as New Jersey and New York, also require the employers provide new employees with specific notices, such as Wage Theft Protection Act notices, at the time of hiring.
9. Comply with Federal and State Tax Reporting Requirements
An employer must register with the state tax department in the state in which it will employ workers. In addition, an employer must complete and file an IRS Form W-4 for each new employee and file a similar form with the state tax agency.
10. Complete I-9s for all Employees
Along with having new hires complete the necessary tax related forms, all new employees must complete, and the employer must maintain, Form I-9 to comply with the federal Immigration Reform and Control Act (IRCA).
Addressing the above issues upfront, instead of waiting until a potential problem arises, can save a business significant time and legal expenses. Thus, if your business is planning to hire its first employee or is in the process of growing, you should consult with legal counsel to ensure that your business is complying with all applicable legal requirements.