*The following information was taken from East Bay SCORE’s manual, “How to Start and Manage Your Small Business”. All references lead to the full copy of the guide which is free to download.
In almost all businesses, people (including you) will be a key factor in the success of the business. Not only will people do the work of organizing and operating the business, people will normally interface, or set up the interface, with your customers. It will be the customers and their level of satisfaction, which will determine the success of the business.
At start-up, you may be the only person actually in your business, but you will be dealing with many people to get it started – Regulators, Planners, Accountants, perhaps Lawyers, and of course, customers.
As you progress, your business may need more people. In this Chapter, we will deal with obtaining more good people involved in your business, in these categories:
- Independent Contractors
- Outside Advisors
Finding and keeping excellent employees is one of the most important things an owner must do. This involves:
- Attracting qualified applicants – After specifying the qualifications, skills, and experience of the employee you seek, you need to attract a group of qualified candidates. This might include bulletin board postings, newspaper & magazine classified advertisements, and Internet help-wanted postings.
- Interviewing and hiring the best candidate – It takes time and effort to screen and interview the qualified candidates and select the best one. Some employers use a 30- to 90-day probationary period during which the employee can be discharged for any reason. After the probationary period the employee can still be terminated “at will” in most States, but good practices normally call for warnings and other remedial steps prior to termination.
- Orienting and training the new employee – Once selected, the new employee should be familiarized with the company, the workplace, the employees, and the job expectations. This can include classroom instruction and a period of on-the-job training.
- Selecting the optimum compensation package – This includes determination of whether the employee is paid on an hourly or salaried basis, the pay rate, the pay period, and what fringe benefits apply. Data is available from Trade Associations and on the Internet to give you competitive area averages. Payrolls are often outsourced to banks or other payroll service providers for reliability, accuracy, and to free up the entrepreneur’s time and resources.
- Maintaining good personnel practices – Writing a Personnel Manual is recommended to specify all the elements of good Personnel Practice, such as probationary period rules, work hours, overtime policy, severance pay, performance reviews, benefit programs, holidays, vacation policy, personal time policy, disability policy, discipline policy, grievance procedures, personal use of company property, safety rules, coffee breaks, retirement, expense reimbursement, and many other topics. Publishers such as Nolo Press offer self-help books, which can help you write a Personnel Manual.
- Evaluating performance, promoting the good, and terminating the bad employees – A systematic procedure to evaluate work performance is important. Input from several persons and use of a written evaluation reduces charges of favoritism. Good evaluations normally result in pay increases, while bad evaluations result in verbal and written warnings, and terminations.
- Complying with current employment law – All of these personnel actions should be done in conformance with current employment law and State and Federal Employment Regulations to lessen the risk of employee lawsuits. Retaining an employment lawyer might be helpful.
Doing all these things well is difficult, if not impossible, for a small business. Some of these steps require the services of a trained HR specialist. So many risks exist of becoming a defendant in a lawsuit that knowledge of employment law is also desirable. For these reasons, small and newly started businesses can evaluate several other ways of employing persons:
- Using a Temporary Employment Agency (Temp Agency) is one alternative. These companies (like ManpowerGroup, Kelly Services, etc.) do the screening, recruiting, and employment of qualified employees and rent them out at an hourly rate, usually billed weekly or monthly. The small business pays a higher hourly rate but saves the employment costs, and can terminate a “temp” on short notice without risk of unlawful activity. If the business wants to hire a “temp” permanently, a fee is paid to the Agency. Some companies use temp agencies as a “recruiting department”, obtaining employees, evaluating them for a “probationary” period, and then hiring or terminating them.
- Using a Professional Employer Organization (PEO) is another option for a small business. The PEO acts like an outsourced Human Resources Department. The business does the screening, recruiting, and then has the PEO place the selected employee on its payroll at a pay rate and fringe package to be agreed on. The PEO bills the business for cost plus profit. This method can be used for all levels of employees, including management. To find a PEO, visit the website of the Trade Organization: www.napeo.org.
If the law allows, a small business can obtain its people by using Independent Contractors (IC’s). Using IC’s allows the business owner to avoid the time and money spent complying with labor laws.
It is important for the business owner to correctly categorize the person. If a person who has been providing services as an IC is later ruled to be an Employee, the business owner may be liable for back taxes, benefits, costs, and penalties.
Several Government Agencies have an interest in determining whether a person is an employee or an IC, especially the IRS, EDD, US Labor Dept, and the Workers Compensation Commission. Although no exact laws exist, IRS has developed Common Law Rules (Refer to IRS Publ. 15-A, rev. January, 2005) to determine if a person is truly an IC. The following comparison should help you make the distinction:
|1||Get detailed instructions on how to do the work||Get specifications on the required outcome|
|2||Are told when and where to work||Set their own schedule and location|
|3||Are provided tools and equipment and told what to use||Use their own tools and equipment at their discretion|
|4||Are told what workers to hire or assist with the work||Choose their workers, hire, and fire them as they see fit.|
|5||Are told where to purchase supplies and services||Select their sources as they see fit|
|6||Are told what work it to be done by a specific individual||Handle their own work assignments, can delegate to others|
|7||Are told what order or sequence to follow||Set their own order or sequence|
|8||Are controlled in the performance of their work||Their actual outcome is controlled|
|9||Are trained to perform services in a particular manner||Use their own methods of training|
|10||Are generally reimbursed for their expenses||Are responsible for their own expenses|
|11||Are not investing in their business operation||Have a significant investment in their business operation|
|12||Have a fixed relationship with generally one employer||Seek out business opportunities, advertise, available to work for others in the relevant market|
|13||Are paid a regular wage for hourly, weekly, monthly, or other time period||Are paid a fixed amount by the job or contract; some professions may be paid by the hour (lawyers, consultants)|
|14||Are not subject to profit and loss||Can make a profit or loss|
|Type of Relationship|
|15||Have agreements defining hours of work, duties, reporting relationships, etc.||Have contracts defining the required outcome|
|16||Are provided employee-type benefits, e.g. vacation pay, sick pay, insurance, pension plan||Do not have such benefits|
|17||Are hired for indefinite period of time||Are retained for a specific job or period of time|
|18||Perform key aspects of the regular business activity, with direction and control by the company||Are retained for aspects of the business not performed routinely by other employees of the company|
Other people that will influence the success of a business are the outside advisors that the business owner uses. These might include:
- Accountants – It is important to file accurate tax and legal returns, and to have good accounting data monthly or quarterly on which to run the company. Depending on the accounting expertise of the owner, it might be wise to retain an accountant to set up the accounting system and prepare periodic reports, with the owner doing the day-today bookkeeping.
- Lawyers – To protect the business against future legal problems, it is wise to set up a legally correct enterprise and have a lawyer review important working forms and contracts. A shortcut to save cost would be to use the self-help books from publishers like Nolo Press, but there will be a risk that the legal framework is not as good as it can be when faced with a suit.
- Engineers – Consulting engineers and architects may be needed to build or improve facilities and equipment layouts in the most efficient way possible.
- Insurance Brokers – To cover the business against major risk, it is important to find a Business Insurance Broker. The company risk profile can be developed with the Broker, who then puts the proposal out to bid among several insurance companies, and presents the business owner with recommendations.
- Sources of Funds / Bankers / Lenders – If the business needs outside capital, it is important to find and nurture sources of invested or loaned funds.
- SCORE Counselors – SCORE provides a source of expert advice from experienced volunteer business persons at no cost.
- Consultants – There are a wide variety of consultants available in almost any area of expertise, including Marketing, Supply Chain, Finance, Human Resources, Purchasing, Organizational Development, Strategic Planning, etc.
- Advisory Boards – To provide experienced advice and counsel on general business matters, it is often wise to recruit and establish an Advisory Board, which meets quarterly to evaluate and plan company operations.
It takes time and effort to choose the persons who will become your outside advisors. Here are some generalizations that might be helpful in the process of choosing:
- Determine which skills you need, put your requirements in writing, and review several candidates
- Make sure the advisor is familiar with your industry and business, or at least with operating a business like yours
- Look at the depth of experience
- After preparation, interview the candidate to see if the fit will be right
- Obtain and check references
- Make sure you are comfortable with the candidate
- Discuss the fee structure. (Advisory Board Members may appreciate some recognition)
- Once selected, keep them informed periodically and prepare for all meetings.
- Evaluate performance quarterly and replace those who are not productive.
Resources and links:
|HR||Insperity (formerly Administaff)||Insperity.com||Extensive HR Power Tools Library $$|
|Professional Employer Services||National Association of Professional Employer Organizations||Napeo.org||Find local PEOs|
|Job Postings||Monster Worldwide, Inc.||Monster.com||Job Postings, Job searches, $$ for higher service level|
|Craig Newmark||Craigslist.com||Job Postings ($$), otherwise free community information|
950 Parker St.
Berkeley, CA 94710
|Self-help books, free information about legal matters of small businesses|
|Your State’s EDD|
This was extracted from East Bay SCORE’s "How to Start and Manage Your Small Business." The full reference manual can be downloaded by clicking here.
*This blog is intended to provide information to support startups and existing small businesses. A sincere effort is made to ensure accuracy, but no warranty, express or implied, is provided in that regard and East Bay SCORE and the author will not be liable for any errors or omissions in this blog.