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CHAPTER 12 Employees

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HIRING AND WORKING WITH EMPLOYEES

Employees ... who need's 'em? Depending on your specific business, hiring employees may be necessary, but the responsibility of having employees is awesome. This chapter deals with the complexities of this responsibility. Hiring, employee policies, specific employer responsibilities, working with employees on a daily basis, and alternatives to hiring employees is covered.

"REAL" COST OF AN EMPLOYEE

Add to the employee's wages the cost of benefits expected by most employees (including health insurance which is getting more expensive daily!), the cost of your additional tax and insurance liabilities plus administrative time, and suddenly your $20,000 per year secretary is costing you $50,000! Hiring the employee is the easy part (and even that process can cause you problems). With even just one employee, you are now required by law to be aware of and implement a sea of regulations. This is both expensive and time consuming and with your hands full starting and running your business you should think twice about this additional responsibility. In the event you determine employees are mandatory (we'll talk more about this later), hiring is the first hurdle.

TRUISM 24
The "real" cost of an employee is approximately
2½ times his or her yearly wages.

HIRING

Potential problems with employees start with the hiring process. You can get yourself into trouble by simply asking the wrong questions during an interview. For example, you cannot ask applicants for any of the following information:

Age or birthplace
Ethnic origin or nationality
Race or Religion
Marital status or number of children
Disabilities
Arrests

A common method for finding employees is to run advertisements in your local newspaper or journals. Be careful! You must word your advertisement so that one class of individuals is neither specifically included nor excluded. Prior to placing an advertisement, pass the copy by your attorney for review ... just in case.

The above advice also applies to your employee application form ... there is much information you cannot ask for such as social security number, gender, race, labor union membership, marital status, height, weight, and more. Have your attorney review it!

Your application form should, however, ask for references, and you should check them all. Al-though a former employer, by law, can't reveal too much about a former employee, there is one question you can ask requiring a "yes" or "no" answer that is the most important information the former employer can give you, "Would you hire this person again?" You should also verify the information the applicant gave you such as employment dates and salary.

TRUISM 25
You get what you pay for.

If and when you do decide to hire, hire the best.

Hire individuals who are smarter than you are in what they do. The reason you hire employees is to extend your expertise or perform tasks you cannot perform yourself. Take your time and do not settle for second best. Every person who works for you will be representing YOU and your company. Think about that before you say, "You're hired." EMPLOYEE POLICIES An employee policy manual is mandatory. It must be comprehensive since it will set forth all the policies you and your employees will live by relating to the employee-employer relationship. This policy manual should include items such as ...

Working hours
Vacation, sick leave, leave of absence
Holidays
Benefits
Compensation
Pay periods, overtime pay
Salary review periods
Time off policy
Training
Retirement
Grievances
Promotion
Performance reviews
Termination
Substance abuse
Dress policy
Smoking

Changing your policies can be painful so try to get it right the first time. The references at the end of this chapter suggest some additional sources on the subject.

EMPLOYER RESPONSIBILITIES

Your responsibilities will grow as your number of employees grows but the list is long even with one employee! This section is limited to those items of interest for companies with less than 100 employees ... that should hold you for a year or two! Unless otherwise noted below, you are responsible for the item even if you have a just one employee. The following list is not exhaustive but it does cover the major items. Your attorney and your accountant will be able to fill in the details where necessary. Do not take any of these items lightly since non-compliance can bring heavy fines and possibly lawsuits.

The paperwork nightmare includes ...

• Collecting and paying FICA taxes.
• Paying employer social security taxes.
• Paying Federal and state unemployment taxes.
• Maintaining worker's compensation insurance.
• Maintaining an employee benefit plan (this is not a formal requirement).
• Complying with Employee Retirement Income Security Act (ERISA). This is a very complex regulation and requires the assistance of your attorney and your accountant to ensure compliance in your specific case.
• Complying with Occupational Safety and Health Administration (OSHA) requirements. (http://www.osha.gov)
• Complying with the Federal Fair Labor Standards Act (FLSA), including child labor, minimum wage, and overtime payment. (http://www.insiderreports.com/bizrprts/nolo1.htm)
• Complying with Federal and state anti-discrimination laws. (Most of these laws are not applicable unless your business has fifteen or more employees.)
• Complying with immigration law requirements, as applicable.

One last item to consider before hiring employees: In the unfortunate likelihood that you must declare business bankruptcy, payroll taxes, such as social security, are not discharged debt. You will be personally liable for these payments as well as the possible severe penalties.

UNEMPLOYMENT TAXES

As previously noted, you will be responsible for payment of Federal and, in most cases, state unemployment taxes. The rate you pay is a function of how many of your former employees claim and receive unemployment benefits and can range from .8% to more than 6% of the first $7,000 of annual wages per employee. Because of this, most businesses fight each claim that is presented against it. The law is complicated in this area and you must be very careful how employees leave your employ. Professional advice is mandatory from your accountant.

The following listing, excerpted from "Starting and Operating a Business in [state]," and reprinted with permission from The Oasis Press® and M. D. Jenkins, Copyright 1991, is a series of tips on how you can keep down the number of unemployment claims filed against your business.

Be aware, when you are hiring, of the cost, if you have to lay people off. You may hire a number of new employees for an expansion or new project with the view that, if things don't work out as planned, you will simply lay them off and cancel the project with no further cost. Not so! Remember that if you do have to lay them off, you may be paying a much higher unemployment tax for several years as a result.

Document in writing your reasons for firing an employee, if for reasons such as theft, insubordination, absence, or intoxication on the job. This will buttress your argument that the fired employee is not entitled to benefits if he or she should file a claim.

Be aware that if you change an employee's hours of work and he or she quits as a result, it will be considered involuntary dismissal and the employee will probably be eligible for benefits. So it pays to have a written agreement signed by the employee to work any shift, hours, weekends, etc., that may be required. Then if the employee quits it will not be due to a change in job conditions, in the eyes of the law.

If you decide to fire someone for cause, do it on the spot. If you keep them on at your convenience until you find a replacement, it will not usually be considered a discharge for misconduct, and the fired employee will most likely be eligible for benefits. It is a good idea to have someone with you when terminating an employee to protect yourself against possible future misinterpretations.

If new employees do not work out, consider firing them before they have worked three months. In most states, a person has to work for you at least three months before they can earn unemployment benefits that are chargeable to your reserve account.

In almost all cases, the help you will need may be obtained by contracting for the services you require. These services may be in the form of temporary workers hired through an agency or by using another company for the work required. This arrangement will make your legal life much simpler but does not relieve you of the responsibility of selecting the best person (or company) for the job or making sure you are getting the most for your money.

When looking for help, it is generally possible to find the help you need either by contracting through an agency or directly with a person or company as an independent contractor. What you pay may seem high but remember what you are saving by not having a "regular employee." In cases where manufacturing is part of your business, consider subcontracting the various manufacturing processes to appropriate vendors.

Joseph was doing quite well with his small manufacturing business but lamented the fact that he spent too much time with employee problems ... not an uncommon complaint. We reviewed his manufacturing costs and started looking for contract help. We located small companies to purchase and quality control materials; perform the manufacturing process; and finally to a company which provided the testing, packaging, and shipping. Joseph was able to reduce his staff to one ... himself. Cost of manufacture went up, overall costs decreased, and profits increased. An added benefit to Joseph was a lot more free time to pursue other business activities.

Joseph's solution is not an uncommon one but there is one caveat with this technique: Select reliable sub-contractors and provide for backups in case one fails you. It is up to you to make sure that quality assurance UP TO YOUR STANDARDS is being practiced by each company you deal with. Do not contract with anyone who cannot provide you with a satisfactory quality assurance manual.

Remember, you are responsible for your product.

Finding the help you need on a contract basis can be easier than you may think. Countless individuals are looking to "moonlight." An excellent place to look is at your local universities, colleges, and trade schools. In some cases, if you find the right person(s), you can always offer stock or other ownership in your company. Sometimes this kind of trade is well worth the expertise you can attract.

A word of caution about independent contractors. It is up to you to ensure an individual you hire as an independent contractor meets various "tests" for both legal and tax purposes. A mistake can make you liable for a number of different fines, back payroll taxes, legal damages in the event of injury, and others. The IRS looks very carefully at whether a worker is an employee or independent contractor, since you, the employer, avoid paying social security and unemployment taxes for independent contractors.

The most basic test for determining if an individual is an employee or independent contractor concerns how he or she is managed. Your worker is an employee if you decide what the job is and how it is to be accomplished. The worker is an independent contractor if he or she is given a job to do but with no further instructions as how to accomplish the task. Sometimes the distinction is easy to make, and other times not so obvious. Because of this, the IRS has a long list of audit guidelines to assist in making this determination. The details of these guidelines are beyond the scope of this book. Contact your accountant and ask to discuss the contents of IRS Audit Manual Exhibit 4640-1. The IRS also provides Form SS-8, which contains information for use in determining if a worker is an employee for purposes of Federal employment taxes and income tax withholding. See references at the end of the chapter for details on how to obtain this form.

LEASING EMPLOYEES

Another interesting alternative to hiring your own employees is to lease the employees you need through a leasing firm. You pay the leasing firm a small fee and the payroll costs and they, in turn, take care of all the legal headaches associated with employees such as compliance, claims, payroll, tax and insurance, as well as providing a benefits package. Make sure the leasing company you deal with is a member of the National Association of Professional Employer Organizations (NAPEO). See the references at the end of the chapter for where to obtain additional information on this approach.

WORKING WITH EMPLOYEES

Dealing with employees (contracted or yours) is always challenging and will tax your best management and leadership skills. There are numerous books dealing with managing people and management techniques and you can spend a lot of time reading about this subject. However, there are two small books on the subject well worth acquiring: "The One Minute Manager" by Blanchard and Johnson and "Putting the One Minute Manager to Work" by Blanchard and Lorber. These two entertaining texts contain a lot of practical and wise advice for working with employees.

The following listing, based on a good deal of experience, are items to consider that will help keep you out of trouble when dealing with your employees:

CHECKLIST #12: WORKING WITH EMPLOYEES

• Be willing to pay for the best. Remember, you get exactly what you pay for ... no more and no less.
• Everyone has their own way of doing things. We all seem to forget this and insist it be done "our way." A better approach is to give instructions as to what is needed and allow the individual to provide the method.
• Remember to always criticize in private and to praise in public.
• Remember that EVERYONE needs to feel appreciated. Talk to your employees and make certain they know they are providing a valuable service.
• Stay visible. Make certain all your employees see you at least once a day. Your employees need to know you're involved and interested.
• Keep your promises. If you say you're going to do something, do it! There are no good excuses in the eyes of your employees.
• Ask your employees for suggestions on a regular basis. Do this personally ... not just with a "suggestion box."
• Allow your employees to fail! It is well documented that successes are generally preceded by one or more failures. The employee who is afraid to fail will be less likely to be innovative. It is up to you to see that none of these failures is fatal to the business.
• Every employee must know exactly what their responsibilities are and what authority they have for carrying out these responsibilities. This usually is accomplished by very precisely written job descriptions.
• Manage by objectives. Each of your employees should be assigned (by mutual agreement) specific goals to be obtained within a certain period of time. These goals must be measurable and you will periodically review them so that corrective action, if needed, may be taken to get back on track. Managing by objectives stresses real results as opposed to a job description that only lists the individual's responsibilities. (The references at the end of this chapter give some more sources of information on this subject.)
• Constantly motivate your employees to do a good job. Talk to them about their job and its importance to the business. Maintain an "employee-of-the-month" program with an appropriate certificate and a traveling trophy. Make the monthly presentation with fanfare.
• Implement an effective training program to encourage promotion. Any employee who thinks they are in a dead-end job will not perform up to expectations.
• Remember the "Peter Principle"... to paraphrase: Everyone rises to their level of incompetence. See that this does not happen in your business.

SUMMARY

Think twice before making the decision to hire employees. The resulting expense, responsibilities, and complexities may not justify the convenience.

Consider the alternative of leasing or using independent contractors. If you do hire employees make sure you hire the best and treat them accordingly. It's the least you can do, after all, your employees represent you and your business.