A smart business owner knows that a company is only as good as its employees. However, hiring real talents is a multi-faceted skill that combines social networking, strategical thinking, and intuition. Anyone who has ever had hiring responsibility understands all-too-well the extent and depth of the hiring challenge. In addition, the challenge increases by the fact that you are now interested in hiring someone in a country where you don’t know the legal framework. Do you know, for example, what legal rights job applicants have even before they are offered a contract in the US? Prior to starting your first, or next, hiring process, there are important regulations to consider and it can be of substantial help to contact an expert on the subject.
HIRING YOUR FIRST EMPLOYEE
There are lots of articles for startups and entrepreneurs about what to look for in new employees and how to build a great culture in your business. But, once you have found the right person, what exactly do you need to do to hire him or her?
In the U.S., employment law is not just governed by federal law, although federal laws often create minimum requirements as well as tax obligations. Employment law is also governed by state laws, and even sometimes regulations at the city or municipal level. So, before we talk about how to approach hiring your first employee, you should consider whether the relationship you need is one of “employment” or an “independent contractor”. For example, in some instances sales representatives can operate as independent contractors, and other parties engaged for short-term or temporary projects can as well. The regulations and requirements around an independent contractor are much easier to meet, and typically involve a brief contract and annual tax reporting of gross amounts paid to the contractor. Many rules related to employees don’t apply to independent contractors; especially overtime requirements for hourly employees. The caution here is that it is not appropriate to classify workers as independent contractors if they are really acting as employees because that can, and has, resulted in both civil litigation and governmental fines. Some of the mistakes made are having an independent contractor agreement that does not have an end date, or where there is a fixed term, but it is very long. However, there are situations when a first hire might not need to be a direct employee and an independent contractor relationship may be easier, faster, and less expensive overall to put in place. An attorney knowledgeable in employment law can help identify the right approach as you start up operations.
Once you do hire someone as an employee in the United States, there are many requirements that need to be met and, as noted above, the requirements will vary depending on where the employee will be based within the United States. Before identifying some of these key requirements, let me point out that there are several established companies that provide a solution referred to as a “professional employer organization” or “PEO.” What this means is that the PEO actually provides a service to undertake all the administrative work handling employee hiring, payroll processing, benefits and other human resources matters. This can be a cost-effective solution to bring on regular employees until your organization is ready to manage the regulatory requirements of hiring, processing payroll and payroll taxes, and other important HR functions.
Key focus areas
Whether you work with a PEO or you want to handle HR responsibilities yourself, here are the key areas to address in hiring employees:
- Offer letters. In the U.S., it is strongly advised to use written “offer letters” of employment, and these include key details such as compensation as well as confirming “at-will” employment status. At-will employment is almost universally used in hiring in the U.S., and it simply means that either party—the employee or the employer—may terminate employment at any time and for any (lawful) reason without notice. While custom usually involves at least two weeks’ notice from an employee, and similarly at least two weeks’ notice (or pay in lieu of notice) from an employer, the U.S. does not have the concept of a set notice period required of employees. Offer letters are typically accompanied by a special confidentiality agreement used for employees. Both the offer letter and the confidentiality agreement have specific references to address regulatory issues so it is advisable to check with legal counsel for proper forms for the situation you have in mind.
- Payroll processing; tax withholding; benefit programs. One of the most strictly regulated areas of U.S. employment law is the handling of payroll, both in timing as well as the proper calculation, withholding, and remittance of taxes. Even for companies who do not wish to use a full-service PEO, it can be advisable to work with an established company that provides payroll processing for your organization. Significant fines and penalties can apply for late payroll payments or payments with improper deductions. In the U.S. an employer may not always be required to provide health or other benefits, although increasingly federal regulation is set to charge certain employers who fail to provide qualifying health benefit programs. Other popular benefit programs such as tax-deferred “401k” retirement plans are federally regulated and often made available to employees by employers, but require significant compliance efforts. Some states are starting to impose requirements for paid sick time, but typically there are not legal requirements for paid holidays or vacation time off, although when they are offered some rules apply around how such benefits accrue and if unused time must be paid out at termination.
- “Exempt” and “non-exempt” employees. These terms refer to whether an employee is considered “exempt” from certain wage and hours laws (such as overtime requirements and rest breaks) and may be paid a salary only, or is a “non-exempt” employee, meaning that such regulations apply and affect the calculation of hour wages, overtime rates, entitlement to paid and unpaid breaks, etc. The failure to manage the accurate reporting and payment of hours worked for non-exempt employees is often a significant risk for companies who can be required to pay back-wages and other fines or penalties even months or years later. As an example, California’s overtime rules are described here for non-exempt employees: https://www.dir.ca.gov/dlse/faq_overtime.htm
- Regulatory compliance with state and federal laws on leaves of absences, workplace injuries, discrimination claims, and other matters. While many aspects of state and federal law in the United States may not be as protective of employees as might be the case in Sweden or the EU, there are still mandatory provisions of law in terms of when and how employees may be entitled to paid or unpaid leaves of absence—including for pregnancy or the illness of a child or family member), rights to accommodation required for persons with disabilities under the Americans with Disabilities Act and other laws, employer liability for sexual harassment at the workplace, or liability for discrimination claims. While some laws can reduce or eliminate some requirements for small business with 5 or fewer employees, most claims are still universally available. Special expertise provided by a PEO or legal counsel is often critical to properly handling employee issues of this sort, especially when handling terminations.
As you can see, hiring your first employee in the United States can be much more involved than just signing an offer letter. Managing proper payroll processing and compliance with labor laws requires special expertise. PEOs can be an excellent first step to manage this well, and often offer access to benefit programs and other services you may need for your employees. Eventually as your business grows and becomes successful you may reach a point where it will be more efficient to have in-house HR expertise and support from outside employment counsel, but at the outset, use of a PEO (or at a minimum a payroll processing organization) tends to be the best solution for hiring your first U.S. employees.
…………………………………………………………………………………………………………………………..
Take-aways before you make your hire in the US:
If the relationship you need is one of an “employment” or an “independent contractor” as different rules apply. It is not the contract itself that may determine the status but the relationship as such and an incorrectly reported relationship can result in both civil litigation and governmental fines.
The requirements for employees may vary as they are depending on where the employee is based, both federal and state laws apply.
Consider if you want to handle all employment related work in-house or hire an external company, PEO, to help you as there are certain key areas that need to be addressed in hiring employees.
