Business is booming and you have determined that in order for your business to continue to grow, you need additional help. You can no longer do it all. The big question you need to answer first is not "Who should I hire?", but "What should I hire?" Do I need to hire employees (full or part-time), temps, independent contractors or should I out source the functions? Once you have determined the "What" you can better answer that very important question - Who should I hire?
You have several different options when it comes to hiring additional help for your business. As you look at the different options, you also need to be aware of the impact on your bottom line. What type of worker (employee classification) you hire makes a difference. You may ask yourself what difference the employee classification makes to your business. Employee classifications impact your business's bottom line - the classification impacts salary expectations, benefits, and taxes. It can also make a difference if you inadvertently classify an employee incorrectly: your business can be subject to fines, penalties and back taxes.
Employee Classifications:
Employees: Employers typically have the most control over employees: you determine the hours the employee works, what they do and how they do it. Employees normally perform work at the employers location, the employer provides the tools, materials, and other equipment; they also provide training and supervision.
Employees can be full time or part time; they can be salaried (exempt from the Fair Labor Standards Act) or non-exempt (hourly and eligible to earn overtime wages).
Employers are responsible for withholding federal and state, Social Security and Medicare taxes from employee wages, as well as matching Social Security and Medicare taxes. Employees are entitled to certain mandated benefits such as Social Security and Medicare, Workers Compensation Insurance and unemployment insurance. As the employer you have the option to provide other benefits such as healthcare insurance, vacation leave and tuition reimbursement. By providing other benefits your company becomes a more desirable place to work, but you must be careful and evaluate the return on your investment and the impact to your cash flow.
Temporary or Contract Workers: These are workers who are hired on an as needed basis. They may be hired to complete a project or to cover for someone on vacation. Employers can hire temporary workers directly, however most choose to use the services of an outside staffing agency. Staffing agencies often have a selection of candidates immediately available. For a fee, the staffing agency retains responsibility for the compensation, payroll taxes and benefits for the contingent worker. The employer has the flexibility to add qualified staff with minimal exposure for tax liabilities. There is a premium attached to this flexibility. The hourly rates for workers hired through an agency are usually 40% higher than the direct hire rate, but you, the employer are not responsible for withholding and other benefits. For short term needs, this can be the most economical solution.
Leased Workers: Leased workers differ from temporary or contract workers; they are usually hired for an extended period of time. Leased workers are obtained through a PEO - Professional Employment Organization. The PEO is responsible for the financial and administrative responsibilities for the employees' salaries and benefits; the employer is responsible for determining the hours the employee works, what they do and how they do it. Leased employees work at the employer's location, the employer provides the tools, materials, and other equipment; they also provide training and supervision. Because PEOs usually administer benefits and salaries for large numbers of employees, they are able to offer comparable wage and benefits packages to employees and charge the client company less than they would normally pay. There are questions regarding "joint employer" status with PEOs.
Be sure to check with your state regarding unemployment law; in Pennsylvania leased workers paid after July 1, 2005 are determined to be employees of the client company and the client company is responsible for reporting the leased workers' wages on their UC Tax account (See Section 4(j) 2.1 of the PA UC Law). Prior to July 1, 2005 the state will apply a directions and control test to determine the employer of record.
Independent Contractor: Independent contractors are usually professionals who perform services for a company on a project basis and then bill the company for those services and related expenses. The independent contractor controls how and where the work is performed, provides their own tools and equipment and is responsible only for the results. Employers have no tax liability for an independent contractor; they are only responsible for paying the invoice and reporting the payments on a 1099 form. When hiring an independent contractor it is best to spell out the expectations in the form of an Independent Contractors Agreement which includes a Scope of Work. There are many versions of an Independent Contractors Agreement available on the Internet. It is always a good idea to have your attorney review it, since laws differ from state to state.
The IRS has developed a subjective 20 factor checklist for determining whether sufficient control exists to establish an employee-employer relationship. If the arrangement fails the IRS review, an employer can be liable for back withholding, penalties up to 100% of the back taxes, and other statutory payments and penalties on behalf of the now designated employee. If you have questions on whether an individual is an employee or an independent contractor it is best to err on the side of employee. It could be cheaper in the long run.
Outsourcing: Companies can outsource entire departments or functions such as shipping, human resources, bookkeeping, customer service, benefits administration, or computer networking to a firm specializing in that field. This can be cost efficient; the company does not have to invest in new equipment, facilities or additional employees. The outsourcing firm can work side by side within the company or can work out of its own facility. Standards and expectations are developed and for a flat fee the outsourcing company handles the work. By outsourcing non-core functions the company can concentrate on its core business.
Hiring Strategy
An important factor to keep in mind - you are not limited to one type of worker. By determining your needs, you can develop an overall hiring strategy comprised of a mix of staffing options. During the development of your business plan you reviewed your potential staffing needs based on the needs of the business. If you didn't create a business plan when you started your business, now is a very good time to develop one. Even though you may not be looking for outside money, laying out your business plan for the next several years, creating a budget and doing income projections will help you determine your staffing strategy. If the thought of all that makes your head spin, your first hiring decision may be to retain a professional, an independent contractor to help you work through your business plan and hiring needs. You may save significant time and resources by hiring a consultant to help you with your business plan and to identify job functions and tasks, skill requirements and qualifications.
Once you are comfortable with your business direction and budget ask yourself the following questions:
1. What specifically do I need that person or persons to do? Develop a job description for each need which includes the following:
a. Overall responsibility - short sentence which covers the general responsibilities of the position
b. Specific areas of responsibility
c. List of required skills
d. Experience Requirements
2. How much time will that person need to spend on the required tasks?
3. Is this a permanent position or do I need this person for a specific period of time or for a one time project?
4. What equipment do I need to buy or lease for this person to come on board?
5. Do I need to obtain Worker's Compensation Insurance, a Federal Tax ID number, new facilities?
By answering the above questions and reviewing the various options open to you, you are well on the way towards developing a hiring strategy and deciding who to hire! The next step in your hiring strategy is to identify recruiting sources. The next article will discuss both traditional and non-traditional sources for workers. As always, it is wise to consult your attorney or CPA for the specific legal and tax issues affecting your new hires.
Margaret Catalfamo is a small business consultant who provides practical, comprehensive advice and support in the areas of Business Start-Up, Strategic Planning, and Human Resource Services. To obtain a free template to create job descriptions or for more information contact her at Resource_Alternatives@yahoo.com or visit her website: http://www.resourcealternativesconsulting.com
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