Hiring and Managing Employees & Relevant Legal Considerations
The process of hiring employees can be filled with pitfalls for a business owner if they do not understand their obligations under the law. Most employment relationships in the U.S. are at will, which allows either the employer or the employee to end the relationship at any time and for any reason, as long as it is legal. If you want to preserve this right, you should make sure to avoid promising job security to a prospective or new employee. On the other hand, if you are trying to convince a highly talented employee to join your business, you may be able to separate yourself from other employers if you provide an employment contract that promises some form of job security.
A business needs to have a plan for payroll before starting to hire employees. This involves getting an Employer Identification Number and any state or local tax IDs that may be needed. Once you have scheduled the pay periods for employees, you also will need to design a plan that provides for holidays, vacation time, and other forms of leave. You can handle payroll internally or use an outside service if you prefer. The person at your business who manages your payroll system should have a clear understanding of the records that need to be kept on file.
Apply for an EIN
Apply for an Employer Identification Number (EIN) from the IRS online or by mail.
To comply with federal tax requirements, you will need to report payroll taxes on a quarterly and annual basis. All new employees at your business must return a completed W-4 form near the start of their employment.
Avoiding Liability for Discrimination
Federal, state, and local laws protect people with certain characteristics from discrimination during the hiring process and while employed at a business covered by the law. Some of these characteristics include race, sex, age (over 40), religion, and national origin. The laws of many states and cities protect a broader range of characteristics and cover more businesses than does federal law. This means that you should not assume that complying with federal law is enough. Business owners also need to be aware of laws against discrimination when they are considering firing an employee. Employment litigation can be a costly, unnecessary burden on your business.
Offering Employee Benefits
Federal law provides that employers must offer certain types of benefits to employees. These include unemployment insurance and workers’ compensation, which can be handled on your own or through a state workers’ compensation program or a private insurance company. Another requirement for employers is paying Social Security taxes at the same rate as employees. Employees also are entitled to the leave benefits provided under the Family and Medical Leave Act (FMLA). Certain states, including California, New York, New Jersey, Rhode Island, and Hawaii, require employers to provide disability pay to employees.
Just because it is optional to provide a certain benefit does not mean that there are no state or federal requirements with which to comply if a business chooses to provide it.
You may want to consider giving your business a competitive advantage in attracting employees by offering additional benefits that are not required. These may include 401ks and pension plans that bolster an employee’s retirement. Many businesses also offer group health plans. If you choose to offer a plan, you should be aware that it must follow federal laws. The Affordable Care Act offers additional coverage to employees, and the Consolidated Omnibus Budget Reconciliation Act (COBRA) can be an option for certain employees. You will need to offer COBRA benefits to employees whom you fire or lay off.
Other types of benefits that you may want to offer to your employees include flexible work schedules, stock options, and company-paid recreational activities, among others. The benefits that you offer may depend on the nature of your business and the work that employees handle.
Distinguishing Employees from Independent Contractors
Whether someone who works for your business is an employee or an independent contractor can have a huge impact on the tax liability of your business. Employees also have certain rights that independent contractors do not, such as the right to a minimum wage and benefits. Failing to classify an individual as an employee may result in significant financial consequences, including paying back wages, back taxes, and penalties.
The distinction between an employee and an independent contractor is heavily fact-specific. In general, an independent contractor has their own business and simply bills your business for work that they do for you. They usually use their own materials and control the way in which they complete the work.