A solid HR strategy often goes overlooked when launching a new business. After all, it’s not exactly one of the most thrilling parts of launching a company. But knowing when to bring on a human resources pro to take on recruiting and employee relation responsibilities is key for first-time founders and early-stage startups. It’s common for early-stage companies to have a skeletal staff, comprised mostly of part-time contractors, friends and/or relatives. That casual, familial company structure can fool founders into thinking they don't need to hire someone who specializes in providing HR services for startups. Don’t fall for that trap: It’s a rookie move that could run you into serious trouble with both federal and state labor laws. That’s right, HR involves laws, which is one of the primary reasons to do it right from an early stage.
So, when should you hire someone in an HR role?
When your business grows to 10-15 full-time employees, then it’s imperative you either outsource your HR needs to a firm that specializes in HR services for startups or, if you are growing rapidly, that you create an HR role within your company. Sure, you can probably get away without an HR person in the beginning if you have a staff of five or less; but as your team grows, you’ll need and want someone who specializes in HR services for startups to play a major role in your company. If your company is running lean and you don’t have the capital to hire a full-time employee for this role, outsourcing your HR can provide the help and peace of mind you need without breaking the bank.
Once you’ve hired a human resources person, the first order of business should be to create an employee handbook.
An employee handbook spells out exact company policies and procedures so that there is no ambiguity. Whether it’s information ranging from paid time off (i.e. vacations and personal days) and leave of absences to payment policies and benefits, all should be contained in the handbook. Make sure you include staff protocol that defines what is acceptable behavior at work and what is not. This can range from proper work attire to policies on sexual harassment, alcohol and drug use. And always list the disciplinary actions that will result when a worker is guilty of violating specific rules, such as habitual tardiness or insubordination.
The employee handbook should also cover employee termination protocols and policies. If you decide to terminate an employee after he or she has been put on probation, you need a clear map of the course of action that will be implemented. This process must, of course, be fair and above board to both you and the employee. But you’ll also need it in order to protect yourself from possible litigation should the fired or downsized employee choose that route.
A good note to remember: employee handbooks run the gamut from simple and concise, particularly if it’s coming from a startup, while others can look and feel like an encyclopedia. If you’re still in the early stages of your startup, start small and add to the employee handbook as the company grows.
Whatever the length, ask an employment attorney to review the handbook thoroughly before it goes to print and becomes an HR standard. Without proper legal review that ensures your HR policies adhere to city, state and federal laws, you could end up in a world of hurt. Yep, laws...
Another common pitfall among first-time founders and entrepreneurs is relying exclusively on contractors.
Hiring a workforce full of contractors whose benefits you don’t have to pay and whose taxes you are not responsible for might seem, in the short term, like a smart, cost-effective move for bootstrapped startups; yet, it can be a strategic error in the long run. With the government cracking down on startups that misclassify full-time workers as independent contractors, this cost-cutting HR tactic could culminate in founders being forced to pay back taxes and penalties for federal and state income taxes, social security, Medicare, and unemployment.
To prevent this disaster scenario, a startup HR professional needs to understand the legal ramifications of hiring contractors versus salaried employees. Even if your intention is to keep expenses low, it’s crucial that each contractor you hire knows beforehand the duration of their work commitment with your startup. This should be delineated in the provisions of the contract agreed upon between you and the contractor. And, there should always be a written agreement, not just oral, with a contractor as it will protect the startup should something go awry.
To gain further clarification on the legal definition of a contractor as opposed to a full-time salaried employee, please visit The Equal Employment Opportunity Commission.
According to the Small Business Administration website, which provides vital guidelines and resources to small business owner and entrepreneurs, a startup HR pro should also:
- Get an Employer Identification Number (EIN).
- Find out whether you need state or local tax IDs.
- Ensure new employees return a completed W-4 form.
- Schedule pay periods to coordinate tax withholding for IRS.
- Create a compensation plan for holiday, vacation and leave.
- Choose an in-house or external service for administering payroll.
- Decide who will manage your payroll system.
- Know which records must stay on file and for how long; and report payroll taxes as needed on a quarterly and annual basis.
- Check with both the IRS and state tax guidelines when it comes to filing taxes as an employer, advises the SBA.
Additional HR services for startups
In addition to providing legally required benefits to workers, such as paying social security taxes and unemployment insurance, which varies according to the state you’re in, as well as offering workers’ compensation (disability pay is required only in California, Hawaii, New York, New Jersey, Rhode Island and Puerto Rico), it might be a good idea to provide other enticements that will help you attract and retain staff. This could be a retirement plan, such as a 401(k), a pension plan or a group health plan. Whatever you decide, make sure these benefits comply with federal law.
Other options might include employee incentive programs, which can help raise employee morale and improve management engagement with staff. Popular examples of HR services for startups include stock options, flex time, wellness programs, corporate memberships and company-sponsored events.
Ensuring your business is compliant with labor laws should be a top priority for a startup HR. Not only do you want to protect the rights of your workers but also the business from running afoul of industry regulations. At the same time, providing a solid foundation in HR best practices can be key in guiding a startup on a successful track versus one that falls by the wayside.
Resources for Startup HR
The information gleaned from these below links can provide valuable insight for startup HR when it comes to planning retirement programs and formulating leave policies.
Small Business Retirement Savings Advisor – U.S. Department of Labor
Choosing a Retirement Solution for Your Small Business – a joint project of the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) and the Internal Revenue Service.
Family and Medical Leave Act – U.S. Department of Labor