So you just hired an employee – now what?
Yipee! Your business has grown and now you need help to get some of the day to day work accomplished. This could be the start of a great collaboration, and it is the first step toward your company becoming a world dominating behemoth. But what else needs to be done now? You may have heard some horror stories about employees suing their former employer, and investigations by taxing agencies. Are they are just rumors or do you have something to worry about?
There are some concerns but a few simple steps will go a long way to easing those fears. The first step is to be sure your new collaborator is an employee. If you haven’t already seen it check out our previous blog on the difference between an employee and an independent contractor. Once it is clear that you do have an employee here are nine best practices that you should follow.
Create an Employee File
It sounds trivial, but creating an organized documentation system where all important documents which provide a history of an employee’s trajectory at the company are housed is important. There are certain documents that you will need in the event that government agency asks you questions about the employee. There are other documents that will help you manage the relationship with the employee while they are employed, and finally there are some documents that will protect you after the employment relationship has ended.
Document the verbal “contract”
In most instances small businesses do not create a formal written employment contract with a new employee. That is fine and in most states this type of agreement is considered to be employment on an “at-will” basis. This means that employment will continue indefinitely until the employee quits or the employer fires the employee. With at-will employment the employee can quit at any time and the employer can only fire the employee for cause.
In the absence of a formal contract, it is a very good practice to have a document that the employee has signed or confirmed their agreement to as to the rate of pay and other general terms such as place of work and how many hours they are expected to work. A written job offer will do the trick, as will a simple onboarding form. This will create clarity with the employee, and provide a point of reference for you in the event that you aren’t sure what you promised later on. It also provides a baseline for employee performance. If you have hired the employee with the expectation that this person would work 40 hours a week and they are only showing up for 35, you have a documented point of reference to use as a basis for discussion with the employee.
As time passes some important details of the employee’s compensation or working arrangements may change. The best practice is to document those and file them in the employee’s file as well.
Create an Employee Handbook
Employee handbooks document all of the general policies that apply to all of the employees of the company. There are details about policies such as dress code, usage of technology, the company holidays, employee benefits, how a full time employee is defined, etc. This provides a reference point for both the employer and employees for these types of issues. The best practice is to have the employee sign a document indicating that they have received a copy of the handbook which should be saved in the employee file.
Fill out Mandatory Paperwork
When a new employee is hired you and they must fill out a series of documents. Some of them should be filed in the employee’s file, and others need to be sent to a taxing agency.
Forms for the employee file:
- Withholding paperwork for Federal, state and local taxes.
- You need to verify that the employee has the legal right to work. Form I-9 is where you document that you checked their identification proving that they are legal.
Forms that need to be sent to the government:
- As part of the system set up for helping track down individuals who own child support or other debts all states require that each new employee is reported to a specific agency. Here is a list state by state.
- There is an electronic system set up to verify the information collected on form I-9 to determine an individual’s eligibility to work in the US. Depending on the state it is mandatory or optional. Here is a list state by state.
Start withholding payroll taxes
Some business owners say that having employees feels a lot like having children, and here is a situation where the employer employee relationship is very parent like. When the Federal income tax was first passed into law in 1913 each individual needed to file a declaration of their annual income and pay the corresponding tax. This was done once a year often on a simple form. During World War II the Federal Government was short on funds. Using the war and a history of individuals having a hard time saving up enough all year to pay their income taxes on time as justification, congress passed the Current Tax Payment Act of 1943 requiring advance payments of income tax. The Employers were required to collect the income tax on behalf of their employees, and send it in to the government after each paycheck was issued. Now as an employer your employee entrusts you with their hard earned money and it is your legal responsibility to pay those funds to the government on behalf of your employee.
Now times have changed and in addition to income tax, Social Security, and Medicare also must be withheld from all employee’s paychecks. In addition, depending on the location of the workplace, local, and state income taxes may also need to be withheld.
File quarterly and annual payroll tax returns
In order to reconcile the tax deposits that have been made to the government versus the wages that have been paid to the employees, quarterly and annual filings are required by almost all payroll taxing agencies.
This compliance process can be quite cumbersome to do manually by a business owner. There are multiple tools available to help with the process. Gusto is one of our favorite tools that, in some cases, allows for complete automation of the process
Be a good person
If an employee feels that they are being treated unjustly and are terminated they may have a claim for wrongful termination. While there is a large legal history behind the evolution of workers rights and what constitutes wrongful termination and constructive discharge, in my opinion it comes down to being a good person, and using the golden rule. Here are a few examples that could be considered inappropriate:
Humiliation: Demoting a vice-president to the custodian position overnight
Harassment: requiring a female employee to work extra hours for the same pay as a male co-worker
Abusive behavior: badgering, a threat of violence or actual physical abuse
Discrimination: terminating a worker due to their age, race, sex, religion, national origin or a disability that does not influence their job position.
Public Policy: Terminating a worker because you have to go through the hassle of garnishing his or hers wages to catch up on delinquent child support.
If you need more clarity or have doubts on this subject, the best course of action is to consult with a qualified attorney.
Pay a fair wage and overtime
It is not only uncool to exploit your employees, it is also illegal. After many, many years of workers having very little rights, and often being exploited, The Fair Labor Standards Act (FLSA) was passed in 1938 and has imposed a minimum level of compliance on key issues for employers. The FLSA has determined, among other things, a national standard for a minimum wage, when it is required to pay overtime, and when posters must be hung in the workplace.
Most states have added additional requirements on top of the national standard. Here is a link to a state by state guide of minimum wage and overtime standards. Here is a link to more information on hanging posters.
Fire with dignity
If an employee has not been able to cut the mustard, or due to a change in business conditions you must eliminate the position, it is important to communicate clearly with the employee as to the reason for termination.
If the employee has repeatedly failed to meet the standards that you have set for them, it is important that these situations be documented. It is important to document both what happened and when the employee was informed that it was not acceptable. If there are repeated incidents of non compliance when it is time for termination, you can present the documented instances to the employee and they should have little to dispute because it had already been discussed, and is no surprise. All this documentation should be stored in the employee file as well.
If the position is being terminated because of a lack of work clearly explain the situation to the employee and be sure to document the cause in the file.
Often an employee will want to vent a little when they get the news, and while you may also have your own emotions running high it is best to listen, pay them what is due, and wish them well in the future. Harsh words will only inflame the relationship and increase the likelihood that an embittered employee will make a claim.
What to with this information?
There is a lot of things that you can do on your own, many links have been included where further information can be gathered. Currently most small companies do not run their own payroll. There are many very affordable resources out there that will help with the payroll tax, and new hire reporting compliance. It is highly recommended to use a service because the IRS watches payroll tax deposits like a hawk any delinquency in the payment of those taxes will lead to hefty fines which can very quickly outstrip the cost of using a payroll service.
We also recommend that assistance in creating an employee handbook is sought out. For a relatively reasonable fee, a seasoned professional can walk you through best practices and the steps of creating a document that is yours to later update with changes as needed.
For any further information please don’t hesitate to reach out to us by filling out the form on the side bar.