The Complete How-to on Hiring Employees

So, your business is off the ground running and you are getting to that point where you are asking that very tough question: “Am I ready to hire my first employee?”

For the sake of this article, we will discuss the logistics and practice of hiring your first employee. However, you must also adhere to Federal, State and Local laws regarding being an employer, for information on getting started on these requirements, see these articles in the HSCG How-to Library:

• Employee or Independent Contractor?
• How to Register as an Employer With Your State
• Employment Taxes
• How to Obtain an EIN (Employer Identification Number)

Let us also assume that you are ready to hire a part-time or full-time employee and not an independent contractor. For the differences between the two and how to comply with regulation and the IRS, read the article above entitled “Employee or Independent Contractor?”

Getting Started – What to Do BEFORE you Start Interviewing

Before you post your job and seek applicants there are a few things you need to do to ensure that you are protecting yourself and your business. Please follow the articles in the How-to Library in order to set yourself up as an official employer. Once you have this part taken care of (it can take a little time but only needs to be set up once) you are ready to get your paperwork in order.

Non-Compete/Non-Disclosure Agreement

What do I mean by paperwork? You want to protect your business by having an attorney draw up a non-compete/non-disclosure agreement. This may seem like a big expense up front but you will be ensuring that your employees cannot take your products and recipes and go down the street and open their own handcrafted soap & cosmetic business to compete with yours. These agreements are not foolproof but they do protect you against most attempts to undermine what you have built. It is important to keep your trade secrets and your employee from becoming your direct competitor.

You can use an online tool to create your own non-compete agreement but it is still a good idea to run the final draft by an attorney. Keep in mind that these types of agreements are specific to the state you live in. Here is a good online tool for creating a non-compete document.

If, during their employment, they will have access to sensitive and confidential information, this document is a must. A trade secret is information that gives your products and/or your company a competitive edge because it is not widely known or easy to learn. Trade Secrets can be formulations, methods, techniques and processes that you have made reasonable efforts to keep secret.

All states in the U.S. honor non-compete agreements, with the exception of California. California employers can use a non-solicitation agreement and a non-disclosure agreement to protect trade secrets, customer lists and employers.

Employee Handbook

Next, you will want to establish a basic “Employee Handbook”, to lay out your policies on a number of items:

• Term of Employment – At Will?
• Non-Discrimination Policies
• Sexual Harassment Policies
• Drug and Alcohol Policies
• Open Door Policy
• Privacy Policy
• Call In Policies – How can your employee call in sick, etc.
• Use of company equipment policy
• Payday Policies
• Dress Code and Code of Professional Conduct
• Grounds for Disciplinary Action
• Grounds for Termination

The National Federation of Independent Businesses has a sample Employee Handbook that can be used to draft yours. Once you have a draft, we recommend taking this to your attorney for final review and approval.

There is no law requiring you to have an Employee Handbook in place but it is a very good idea. This document gives clear, laid out expectations of your employee and you will be able to prove that all employees are aware of these expectations/policies, by having them sign that they have received a copy. This will protect your business if an employee decides to take legal action against you or your company.

Insurance, Insurance, Insurance – What Policies/Coverage Do You Need?

Chances are if you are in business you already have a General & Product Liability Policy to cover your business and products. If you decide to take on employees, you will now have to carry a few more policies that are mandated by state and federal employment laws: 

Workers’ Compensation Insurance

Workers’ Compensation Insurance requirements vary from state to state. Depending on the state it can be required, required depending on how many employees you have or not required. Here is a great table that tells you what the requirement is in your state.

If you are required to have it there are a number of insurance companies that will provide a policy.

Disability Insurance

Currently, if your business resides in any of the following states, you will be required to purchase Disability Insurance:

California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island.

This type of insurance provides partial wage replacement coverage for non-work related sickness or injury.

Unemployment Insurance

All businesses with employees are required to pay unemployment insurance taxes under certain conditions. If you are required to carry this coverage, check with your state’s workforce agency or labor board for regulation and access to Unemployment Insurance Policies.

Personnel File

Lastly, you need to establish a personnel file for all employees. This file should contain:

• IRS Form W-4
• Job Description of the Position
• Job Application or Resume of the Employee
• Offer Letter to Employee
• Signed acknowledgment of receiving the Employee Handbook
• Performance Evaluations
• Contact Information and Next of Kin of Employee
• Complaints lodged against Employee by co-workers/customers
• Warnings and Disciplinary Actions
• Notes on Attendance and Tardiness
• Contracts and Written Agreements
• Termination Documents and Agreements

Once you have all of your paperwork in order, you are ready to post your company’s job opening.

Posting Your Job Opening

Now, you are ready to advertise for your position. You can do so locally in the newspaper (for a nominal fee) or online using free or paid sites. Give an email address to receive applications or resumes and give a detailed job description, title and compensation to be clear what you are looking for.

Set a cut-off date for submitting applications/resumes and give yourself a week to review the candidates to choose who will be called for a phone interview.

The Interview Process

Conduct a phone interview first to pre-screen candidates and decide who to call in for a face-to-face interview. This will save you time in the long run as in person interviews do take longer. It will allow you to cut down your list to those people you are most excited about and see working at your company.

During the face-to-face interview, be sure to get and keep the prospective employee talking. This is your chance to learn about them. Although you should explain the position and your company/products, don’t fall victim to being overly chatty, your prospective employee will leave and you will not have learned enough about them to make a decision.

There are several questions that you legally cannot ask a prospective employee, be sure to eliminate these or any version of these from your interview questions. Do not ask questions about:

• Religious Affiliations
• Pregnancy or Plans for Family
• Political Affiliations
• Race, Color or Ethnicity
• Age
• Disabilities
• Marital Status
• Finances
• Alcohol or Tobacco product use

 Checking References

Checking references may seem like a good practice, however, they are often not as helpful as you would think, unless you do a little homework.

Consider this: A candidate is going to provide references from only positive sources, they would be reluctant to provide references from companies they did not do well with or were terminated from. Furthermore, there are many legal pitfalls, for former employers, to providing a negative reference. If a former employer provided a negative reference and said anything that could not be proven or substantiated, they could be facing a defamation lawsuit.

Having said this, not checking references is a dangerous practice. In order to get a good picture of the person you are considering hiring, do not just call the people listed at the bottom of their resume. You can be pretty sure that these people will paint a positive picture of your candidate. Instead, ask your candidate for three alternate references, try to tap into supervisors, co-workers and subordinates (if applicable). Doing this will likely get you more useful information.

The Offer Letter

Once you decide on your candidate, present them with an offer in the form of a letter of employment (to later be placed in the Personnel File). Include the following items on the letter:

• Salary – Clearly state the salary, frequency of pay and method of pay. Be sure to state your policy on this in full.
• Benefits – Clearly state employee benefits (if applicable)
• Dates and Times – Clearly state when you want an answer, the length of probationary period (if applicable), hours per week and the start date/time.
• Relevant Documents – State which documents the employee will need to sign prior to starting (Employee Handbook receipt, IRS Forms, Non-Compete Agreements, Confidentiality Agreements, etc.)

Click here for a sample of a good employment offer letter.

Payroll – How to Set Payroll Up Right

Now that you have an employee you will need to decide how to keep track of their pay and withholding and employments taxes that will be due at both the state and federal levels. Deciding how to do this is an important decision, as you do not want to end up paying penalties to your state or the IRS for failing to execute payroll properly.

For the sake of this article we are assuming you already have an EIN, have reported your new hire to the state and are aware of employment taxes. For a review of these items go back to the beginning of the article for the links to these topics in the HSCG How-to Library.

It is highly recommended to use a payroll service to keep your records, withholdings, tax filing and IRS paperwork all in good working order. There are many services out there that do payroll; the important thing is to find the best one, with the best reviews to use for your business that won’t break the bank. We love “Business News Daily” review of Payroll Services. Check out their article and survey to find the one that is best for you.

Now that you have a new employee, how do you keep them?

If you are fortunate enough to find a good employee that is hard working, contentious, respectful and loyal, you must take steps to keep them. Good employees are like gold for your company. They keep your productivity and enthusiasm up; they share your vision and have a genuine love of their job and your company. Don’t let someone like this slip through your fingers because you are not paying attention.

Start your relationship off right by sitting down with your employee and sharing your expectations. Be sure to give them the proper training and instruction so that they know how to do their job and feel like they are contributing to your company’s success.

Once your employee is off and running, doing the jobs and tasks that you have laid out, do not make the mistake of micro-managing them. You started this company, you had the vision, these are your products and this is essentially your “baby”. That being said, you hired an employee because your company is growing and you cannot keep up with everything yourself. Let go of some of the control and have faith that your well-trained employee will do their job. Allow them to make suggestions to improve your processes or procedures and always, always, always praise them for a job well done or a great idea. Give them the proper credit when they have brought something to the table that has helped your company.

If the time comes that you need to correct your employee, do so respectfully and focus on the behavior you want changed, not anything personal. Make corrections in a timely manner, right away, if possible. Do not allow things to fester or stew only to find you have a much larger problem on your hand.

A good employee will help make your company grow, you only need to allow the input of a different point of view in order to see it happen.

Conducting an Employee Review

It is important that you set up an Employee Review for at least once per year. You can do more informal “check-ups” throughout the year to provide your employee with your feedback both good and bad. This is the only way an employee can improve if it is warranted and be praised for a job well done.

Here is an example of a good Employee Evaluation Form; you can use this to develop on of your own.

In your yearly Employee Review, provide your employee with a self-evaluation form to fill out prior to the process beginning. This is your employee’s opportunity to give you feedback on their view of the workplace and your management. It can be a valuable tool to make adjustments and improvements to ensure that your employee is satisfied with the workplace.

Set up a time to do the review and give your employee some advanced notice. Bring a copy of the self-evaluation and a written evaluation that you have completed prior to the meeting. Try not to do the review when you know your employee is busy or on the last day before a stretch of time off (i.e. a weekend, vacation, etc.). Keep your constructive criticism as positive as you can but be direct and to the point. Be sure to praise your employee for all of the things that they do well or exceed expectations.

At the conclusion of the review, ask your employee if they have any questions or comments and have them sign a copy of the review. You countersign it and file it in their personnel file.

What to Do When Your Employee is Not Doing Well?

Verbal Warning

When you become an employer you will eventually have to deal with an employee that is not performing or has practices that do not work for you and your company. This can be a difficult situation for all those concerned, the better you handle it, the quicker you can get back to seeing your company grow and thrive.

As previously stated, if your employee is for the most part doing well and has one or two behaviors that you want to see improve, sit them down for a private face-to-face meeting to reiterate your expectations. Never have this type of meeting in front of other employees and keep the meeting confidential. Again, focus on the behaviors you want changed, do not comment or focus on anything personal.

At this point you can choose to carry on or place the discipline record in the employee’s personnel file. It is highly recommended to place a record in the file so that a paper trail is created in the event that the worker does not correct the behavior and further discipline or termination is warranted.

Written Warning

If the employee has not fixed a behavior that they have been verbally warned about, it will become necessary to give them a warning letter. By it’s very nature, a written warning suggests that things are serious and immediate correction by the employee is required.

Provide the letter to the employee in private, discuss your expectations and provide a date in which you will both sit down again to discuss progress. Be sure to include consequences for not correcting the behavior or improving. Try to be as clear and concise as possible so that there is no room for interpretation. Stick to the facts and do not embellish. Have the employee sign the document and place it in their personnel file.

Honor your employee’s privacy by keeping the disciplinary action under wraps and away from other workers. You will likely have a much easier time if the employee feels their privacy has been respected.

Terminating an Employee

Sometimes, no matter how you counsel your employee and try to get them on the right path, a day will come when you must make the decision on whether or not to keep them.

It is very difficult to both decide to fire an employee and to carry it out. As a small business owner, with passion for your industry, products and business, firing an employee will rank among your least favorite tasks to perform.

If you do indeed decide to terminate an employee, keep in mind that how you handle the actual firing could mean the difference between a somewhat amicable and easy exit to the employee deciding to create more problems or sue you.

Choose the location in which you will carry out the termination carefully. Even if your employee has been warned both written and verbally, chances are they will not see this coming. Being fired is very traumatic as the person has to immediately process several things simultaneously: How will I pay my bills? What is X going to think? What does this mean for my insurance, 401K, etc.? How did this happen? What do I tell people? Will this make it difficult for me to find another job? Choose a place that is private and will allow the employee a few moments to process the news. Be sure to keep this away from other workers or customers.

Start the termination meeting by telling the employee that you are terminating his or her employment as of a particular date. Do not start out with small talk or discussions about the company, products, workplace or position. Bite the bullet and dive right into the purpose of the meeting. Be very direct and concise so that the employee knows that this is the end, there is no more room for negotiation, training or change. Use the word terminated, do not beat around the bush and say things like, “it isn’t working out” or “you need to think about moving on”.

Once you have informed the employee that they are terminated you can briefly state the reasons why professionally and direct. Do not show emotion or delve to deeply into an entire account of the employment. You are not legally required to justify your decision. Be sure to leave your employee with the idea that this is a final decision and he/she is terminated.

Should your employee want to get into a debate about their termination, sit back, listen and keep your comments general, for example: “I understand but the decision is final”.

Allow your employee to collect their personal belongings and return company property. Walk them out and try to end it on as positive a note as possible.

Final Pay and Termination Agreement

You can take steps to ensure that there is no legal blow back on your company by having them sign a Termination Agreement. This is a document that should be provided to you by an attorney. Most of the time, however, this would be overkill, as long as you handle the termination with respect and dignity. If you are interested in pursuing a Termination Agreement, here is a sample that you can use to discuss it with your attorney.

It is a good idea to have your employee’s final pay, unused vacation, etc. determined prior to having the termination meeting. This way you can answer questions and close up the relationship cleanly. If it is the last day they will work for you, you can hand them their final paycheck when they leave.

If your employee signed a non-compete/non-disclosure agreement (recommended), review this document briefly and provide them with a copy.

In Conclusion

Hiring employees is a very rewarding experience and will help you grow your business. Just be sure to take all the legal steps required to set yourself up right, this will save you problems down the road and ensure that both you and your employees have a fantastic work environment.