What does a founder need to know about HR?
When chasing your dream leads you to opening your own business, you have a wealth of issues to deal with. You’ll have to become an expert in operations, marketing, finance, tax law, real estate, motivation, sales and a host of other concerns. The Human Resources function is usually not on the list, though it can derail your new enterprise as quickly as any of the others. There are complexities that must be understood and addressed if you are to be successful, and the time you are able to commit may not be enough to handle the work of HR. And, in many cases, that’s ok.
Does a start-up with five employees need to spend a great deal of time working on their annual review process? Is there a need to create a training plan for each employee, or tie it back to succession planning? Will you lose sleep over the fact that, deep down, you aren’t really sure if your job descriptions are accurate? Probably not. But don’t be fooled into thinking you can ignore the HR function across the board. While the profession is responsible to get the most out of people, it is also very often the function that keeps the company out of court and the officers out of jail.
Determined to make it work on your own? Here are a few things you are going to want to take care of.
May as well tackle the big one first. There are a slew of laws to make sure businesses are acting in accordance with our time-honored belief that “all men are created equal.” The women, too. Failure to understand the implications of those laws can be costly. 2009 saw more than 90,000 charges of discrimination filed with the Equal Employment Opportunity Commission (EEOC). Hundreds of millions of dollars were paid towards out of court settlements. Why? Because going to court and losing can be even more expensive.
Can you protect yourself? Of course, but it requires spending a lot of time getting to know the local, state and federal laws that apply to you. You also need to think about anti-discrimination policies, training, knowing the legalities of your own hiring process and the dangers of the wrong steps in your work environment. Does this matter in a small start up? That depends on how much chasing your dream means to you. Would you rather put your life savings into that, or legal settlements for having someone say the wrong thing to the wrong candidate? A question as innocent as, “Are you married?” can cost more than you think
What’s prohibited? Generally speaking, there are several “protected classes” of which you need to be aware. Race, religion, nationality, age (if over 40), gender, family status, disability and veteran status are all included. Sexual orientation is likely to be on the federal list in short order, if not at the local or state level. All aspects of the employment relationship, which includes the application process, interviews, hiring, employment details, pay, benefits, work assignments, training, promotions, and terminations are all subject to review. If you plan to do any of these things, you’d be well served to understand the law or find someone who does.
Wage and Hour Laws
One of the first things to be addressed when building your team will be what roles need to be filled and what you can pay them. There are a number of tools that give you an estimate on what a role is worth, which will set you on the right path. But the pitfalls of being an employer go far deeper the simple pay equity.
For example, your office décor makes a difference. Specifically, the inclusion of a Federal Wage and Hour poster, which the Department of Labor will provide at no charge. This poster will outline the minimum wage rules and exceptions, such as employees in a role deemed “tipworthy” or those under twenty and in their first 90 days of employment. Even if you pay far above the minimum wage, the poster still requires a permanent home in an accessible area.
There is also the Fair Labor Standards Act (FLSA), which outlines which employees are paid overtime, how much it will be and when it is due. The FLSA also defines which roles are not overtime eligible (also known as “exempt” roles), including executives, professionals, some sales, some IT, and some administrative roles. All of this will need to be clearly defined and recorded in your organization files in the event of a government audit. Misclassification can cost you far more than just back wages. Per the Department of Labor, “willful violators may be prosecuted criminally and fined up to $10,000. A second conviction may result in imprisonment. Employers who willfully or repeatedly violate the minimum wage or overtime pay requirements are subject to civil money penalties of up to $1,100 per violation.”
Not an expense most start-ups can afford.
There’s more than just an employee’s wage to be dealt with. Employers are required by federal law to provide unemployment insurance, worker’s compensation coverage and Social Security contributions. In some states, they must also provide Short Term Disability coverage. These are just the bare minimums. You are likely to need to offer a more comprehensive package to attract great talent.
Health insurance is one benefit that most workers will consider a non-negotiable item. The Patient Protection and Affordable Care Act (PPACA), recently upheld by the Supreme Court, changed the landscape significantly for employers and workers alike. While the law does not require an employer to provide coverage, those with fifty or more full-time employees will be subject to penalties for not providing a coverage option. This is packaged with a number of other legal complexities, the implications of which are still being discovered. Regardless, the burden of compliance will rest on the employer to understand and execute.
There exists a range of other benefits to be considered, such as vacation, life insurance, sick time, tuition support, holidays, retirement plans, flexible schedules and more. Your decision on which to offer and to what extent will have a major impact on your ability to attract and retain talent.
Yes, you will undoubtedly go down this path at some point. Not all employees deliver on their promise, and some must be let go. In a start-up, there is little room for those who do not add value.
So how do you dismiss an employee without creating a liability? Do you have grounds for dismissal? Are they documented? What are your rights as an employer?
Many states are considered “Right to Work” areas, meaning either party may terminate the professional relationship at any time with or without cause. This would imply that there is no danger in letting a poor performer go. The truth, though, is that it has become all to common for a terminated worker to file a claim of discrimination or retaliation, claiming they were singled out because of who they are or because of other non-performance reasons. Regardless of “Right to Work,” employers can be held liable and face hefty fines if they are not protected in these cases.
The first step is ensuring proper documentation exists, a task that begins well before the termination process. Tracking employee performance, be it good, bad or indifferent, help create a strong foundation for weighing the merits of each person’s contribution. If you later need to terminate a low performer, your records will support your decision.
If the decision is strictly financial, as they sometimes are, you will need to have a well-documented process for deciding which employee(s) you terminate. Poor company performance will not protect you from discrimination claims in court. In fact, many who put their own assets behind a start-up venture find them defending their actions in court with their home and savings on the line.
Even after termination, there are costs to be managed and duties to be handled. In some states, a terminated employee is due their final paycheck at the time of termination. If you have made life insurance or retirement plans available as part of your benefits package, there are rules around how those items must be transferred, terminated or liquidated. The Continuation of Health Insurance Coverage (COBRA), which applies to companies with twenty or more employees, regulates the health benefits that must be made available to terminated employees. Additionally, some former employees may file for unemployment benefits, which you may contest. While it may reduce your unemployment insurance premiums, there will be a cost associated with the dispute process. Strong documentation will help, but not having a knowledgeable partner who can navigate those waters on your behalf can cost you precious resources.
Your Employee Handbook
Just the idea of a handbook can cause much wailing and gnashing of teeth. But many lawsuit outcomes have hinged on clearly defined company polices (or a lack thereof). It is not enough to determine your stance and obligation on the issues listed above, you must document them as well.
Not all handbooks are created equal. For many years, Nordstrom’s Department Store was famous for their handbook, composed of one rule.
Rule #1: Use best judgment in all situations. There will be no additional rules.
Even this iconic rule, however comprehensive it seems, is now augmented with others. While it is a great basis for your operation, you are legally at risk if you don’t take the time to be clear regarding the basics of your operation.
This is not to suggest, of course, that your first hire should be a full HR team. On the contrary, start-ups often find exactly what they need (at a price they can afford) by outsourcing their HR work to a consultant or freelance professional. This allows them to know their fledgling company is protected, while investing their capital in other ways. It also brings an entrepreneurial spirit to another aspect of the team, which in many ways further the culture of the start-up business.