Launching a business is exciting, but overlooking human resources (HR) basics can lead to costly problems for ambitious entrepreneurs. In the beginning, many small businesses focus on building operations and growing sales, only to discover the hard way that avoidable HR mistakes can have costly legal, financial, and even cultural consequences. Here are the most common HR mistakes and how entrepreneurs can avoid them.
Misclassifying workers
If a worker should be considered an employee, just treating them as an independent contractor, even if reflected in a written agreement, won’t fly. These misclassifications can lead to awards of back pay, tax penalties, and potential lawsuits. Furthermore, not paying an employee overtime due to misclassifying their position as exempt can also cost the employer back pay, fines and penalties. Tip: Carefully review the arrangements and duties of each position under the federal Fair Labor Standards Act and comparable state laws and regulations. If in doubt, treat the worker as a nonexempt employee.
Operating without clear policies or an employee handbook
Many new businesses don’t create written policies or bother to update them. Although not legally required for small businesses, having clear policies, ideally incorporated into an employee handbook, define workplace standards and expectations for both employees and those responsible for managing them. Tip: Create a simple employee handbook early on and make sure all employees acknowledge receipt of their copy. And don’t forget to regularly review and update it.
Overlooking payroll and reporting rules
Payroll may seem straightforward. That is, until an issue arises. Employers in every state must maintain proper records, pay earned wages on time, and typically report all new hires to the state. Neglecting these responsibilities can result in costly fines. Tip: Use a reliable payroll system that tracks hours, overtime, and pay schedules; and, if necessary, consider the use of an outside resource to assist with federal and state tax reporting responsibilities.
Treating HR as an afterthought
Entrepreneurs are used to wearing many hats, but HR is often one they overlook until a problem arises. A proactive approach to HR will result in more reliable practices and a more positive workplace culture. Tip: Begin building HR structure from the outset to ensure consistency.
Inconsistent hiring and firing practices
Entrepreneurs often rely on personal relationships or first impressions when building their team. They also may act impulsively when terminating an employee. These critical decisions, especially when not thoughtfully considered, can result in the violation of applicable federal and state anti-discrimination and retaliation laws. Tip: Use structured hiring and termination processes. Create and use job descriptions, conduct consistent interviews, and fully document the bases for decisions to ensure they are made for legitimate reasons and do not violate applicable laws.
Poor documentation and recordkeeping
Critical documents — from resumes to payroll notes–can easily be misplaced. Missing or incomplete records, at the very least, create challenges during audits or when defending workplace disputes. Tip: Maintain organized digital or paper files for each employee, including offer letters, Forms I-9, tax forms, time records, and signed employee handbook acknowledgments. Follow applicable retention requirements before discarding records.
Ignoring changes in employment law
Perhaps no area of the law is more dynamic than employment, especially under the new federal administration. Enforcement priorities and regulations continue to shift and evolve at both the federal and state levels. Failing to monitor and adjust to these changes can leave policies outdated and create compliance gaps that should not be ignored. Tip: Identify a reliable source for obtaining timely HR and employment law updates. A quick policy update today could very well prevent a costly compliance issue tomorrow.
For entrepreneurs, HR might not feel urgent. But this attitude can create avoidable headaches or worse. The most successful entrepreneurs treat HR as a strategic function that protects their business, enhances a positive culture and supports solid growth.
Dan Gilmore is the founder of Squire Strategies, an employment law and human resources consulting practice. He also teaches employment law as an adjunct professor for UTC’s Gary W. Rollins College of Business.