Article: Hiring Your First Employee http://www.entrepreneur.com/article/print/0,2361,326646,00.

html

Hiring Your First Employee

Looking to bring your first employee on board? We'll help you understand the legal
requirements of hiring staff so you don't hit any rough waters down the line.
March 01, 2006
By Erika Welz Prafder
URL: http://www.Entrepreneur.com/article/0,4621,326646,00.html

For months, you've operated your new business as lean and mean as possible and continue to
wear every hat yourself. Finally, you've hit a point--or your breaking point--where, in order to
remain competitive and prosper, you'll need to welcome a helping hand aboard your tight ship.

But before bringing just anyone on board, you need to understand that extra manpower entails
a whole new string of legal obligations, liabilities, expenses and, of course, paperwork. One
estimate tallies the average cost of recruiting, hiring and training a new employee at close to
$4,000.

Beyond the red tape, hiring mismatches can result in high turnover, absenteeism, higher
healthcare costs, workplace violence and theft--substantial costs to an organization's bottom line
and reputation.

To help you navigate the legal ramifications of the hiring process, we've laid out the steps and
precautions you should follow to ensure you make informed decisions, while staying within
legal and ethical boundaries.

1. Don't trust your instincts. Whether your new recruit will be filing reports or configuring
computer networks, realize that criminal, under-qualified, and emotionally unstable minds hide
in all uniforms and job titles. In reality, nearly 40 percent of all job applications and resumes
include bogus or inflated facts. Plus, the number of negligent hiring lawsuits in this country is
mounting--if your staff member's actions hurt someone, you can be held accountable and sued.
And with terror acts, corporate scandals and identity theft on the rise, trusting your gut as a
basis to hire is simply unsafe.

So just what do background checks check, and what kind of stuff is off limits? The search
typically consists of confirmation of prior employment claims, determination of worker's
compensation claims and criminal and incarceration records, drug tests, credit history and
driving record. In some cases, an identity (Social Security) check is undertaken.

While much of this information is documented publicly, certain personal records, including
education, military and medical, are confidential and necessitate an applicant's consent before
digging them up. If you can, you should try to obtain original educational credentials. With
advances in technology, a manufactured diploma or degree is as simple as typing in a few
keystrokes.

When prying into an interviewee's possible criminal past, take note: While a criminal conviction
can be reported indefinitely, arrest records, paid tax liens, accounts placed for collection, civil
suits and judgments can't be included on an employment background check after seven years.
In some states, more stringent reporting rules apply. In California, for example, bankruptcies
are off limits after ten years.

If you plan to farm out a fact-finding hunt to a third-party, you're required by federal law to
alert the person who's under investigation in writing. You must also notify the applicant if he or
she is being denied a position due to disparaging information you've uncovered, and give him
or her a chance to refute that information.

1 of 5 4/1/06 5:32 PM
Article: Hiring Your First Employee http://www.entrepreneur.com/article/print/0,2361,326646,00.html

Be forewarned, however: The internet is loaded with scam artists and private companies that
compile "virtual rap sheets." What such online brokers dish up isn't always accurate or current,
and the low rates they advertise may be deceptive.

Each of the following firms is established in this arena and has been in existence for thirty
years or more:

Sterling Testing Systems

Intellicorp
Krollworldwide

Understand that the more jurisdictions you want to search, the more you're likely to pay.

2. Test for illegal substances. With more than 250,000 drug- and alcohol-related deaths a year
nationwide, our society's battle against substance abuse is far from over. Whether cocaine or
sleeping pills are the drug of choice, addicts can be a terrible drain on an organization's
productivity and balance sheet. Did you know that 65 percent of on-the-job accidents are
related to substance abuse? And drug-abusing employees are six times more likely to file
worker's compensation claims than other staff members.

To weed out such weak links from your work environment, pre-employment and random drug
testing are an employer's best lines of defense. Some occupations actually mandate such
checks, including industrial tractor and truck operators, material movers, child-care workers,
teachers, private and corporate investigators, state and federal personnel and police officers.

Before instituting a drug exam of your own, bear in mind, on pre-employment interviews, it's
illegal to inquire about a candidate's prescription medication use. However, if an applicant
refuses a drug test, an employment offer can be denied or retracted.

3. Screen for unwanted behavior. Depending on the position you're trying to fill, there are
supplementary screening options available. Psychological testing, handwriting analysis, skill
and aptitude tests and even lie detector tests are additional assessment tools that business
owners exercise today to help them select the best job candidates. Such profiling allows you to
select people who have the skills and the temperament needed to succeed in your business. To
avoid any legal problems, before administering such tests, be prepared to demonstrate
job-relatedness, non-discrimination and statistical validity.

Time to Hire
Once you've completed your behind-the-scenes evaluation and have turned up some promising
candidates, you'll need to know the dos and don'ts of interviewing someone face to face.

1. Some questions are off limits. Whether on a written employment application or in person,
it's unlawful to ask about an applicant's age, sexual orientation, marital status, religious
affiliation or race. And questions pertaining to the nature of a physical, emotional or mental
handicap can only be asked if an applicant will need special accommodations for performing a
specific job.

During your dialogue, you should also be mindful of other important federal laws including:

Title VII of the Civil Rights Act of 1964, which covers the subject of discrimination or
harassment on the basis of race, religion, sex or creed
The Age Discrimination in Employment Act of 1967
The Americans with Disabilities Act of 1990
The Family Medical Leave Act of 1993

2 of 5 4/1/06 5:32 PM
Article: Hiring Your First Employee http://www.entrepreneur.com/article/print/0,2361,326646,00.html

For more information on each of the federal laws noted above, visit the sites for the U.S.
Department of Labor, the Equal Employment Opportunity Commission and
MyEmploymentLawyer.com.

2. Check references. Before making a formal job offer, be sure to ask the contender for at least
three references. Two of the references should be professional, and one should be personal to
help endorse the character of the applicant. Then pick up the phone and call those
references--do not neglect this step! You'd be surprised what references are willing to tell you
about an applicant if you'd only ask.

Be sure to keep your queries as objective as possible, and, if you're speaking to the
professional references, make sure they relate directly to the candidate's job performance and
duties and to information provided on the application or resume, or to information provided
during the interview. Forms of discrimination that apply to interviewing and hiring are also
applicable to reference checking, so be sure to avoid questions that involve race, age,
disabilities, national origin, religion or marital status. For a personal reference, find out how
long they've known the person and then ask about the person's character and work ethic; you
might also ask if the person would hire the applicant themselves, if they had an appropriate job
opening to fill.

3. Set a salary and choose the employee's classification. When it comes to paying and
classifying a new employee, federal laws provide clear guidelines when it comes to both. The
minimum wage currently stands at $5.15 per hour--that's the lowest you can go when it comes
to paying hourly wages. And if it's a young person you're putting on your books, the Fair
Labor Standards Act sets the minimum age for employment in non-agricultural employment at
14 years old.

Depending on your hiring needs and finances, you'll need to determine the status of your new
employee as being part time or full time. According to the U.S. Department of Labor, part-time
workers are those who work 20 hours or less per week, while full-timers log in 30 hours or
more. Because states differ on the payment of benefits to part-time employees, you should
check corresponding regulations with your local department of labor.

For tax reasons, you must categorize your worker as an independent contractor, common-law
employee, statutory employee or statutory nonemployee. Misclassification can result in fines
equal to one-and-a-half percent of the questionable wages, plus the withholding taxes. Criminal
charges can apply as well.

As long as you retain the right to control their activities (such as when and where the person
works, the tools and equipment they use, and where they purchase supplies), your workers are
considered common-law employees.

A statutory employee is one who's an employee by statute and is allowed to report income
and expenses as a business. The most common employees in this category are its officers, but it
also includes such employees as:

A full-time traveling salespeople who solicit orders from wholesalers, restaurants, or

similar establishments on behalf of the company. The merchandise sold must be for
resale (for example, food sold to a restaurant) or for supplies used in the buyer's
business.
An agent-driver or commission-driver engaged in distributing meat, vegetables, bakery
goods, beverages (other than milk), or laundry or dry cleaning services
A home worker performing work on material or goods furnished by the employer

3 of 5 4/1/06 5:32 PM
Article: Hiring Your First Employee http://www.entrepreneur.com/article/print/0,2361,326646,00.html

A statutory nonemployee, which includes direct sellers and licensed real estate agents, is
treated as self-employed for all federal tax purposes, including income and employment taxes.

An independent contractor works for himself or herself, often for more than one company.
This person typically works offsite, is paid on a per-job or commission basis, and sends
invoices for his or her services. Employers aren't required to deduct taxes on their behalf or
extend them the same benefits that they do for standard employees. This also applies to
freelancers and consultants. For tax purposes, it's a good idea to draft an agreement with an
independent contractor, stating that he or she is not an employee.

4. Get your records straight. Before your newest team member logs in a single hour of work,
there's a folder's worth of records you'll need to complete and process. According to the U.S.
Department of Labor, there are 12 records an employer must maintain on each member of their
staff for the length of their employment:

1. Employee's full name and social security number

2. Mailing address, including ZIP code
3. Birth date, if the employee is younger than 19
4. Sex and occupation
5. Time of day and day of the week when employee's workweek begins, hours worked
each day, and total hours worked each workweek
6. Basis on which employee's wages are paid (weekly, bi-monthly, and so on)
7. Regular hourly pay rate
8. Total daily or weekly "straight time" earnings for each workweek
9. Total overtime earnings for each workweek
10. All additions to or deductions taken from employee's wages
11. Total wages paid each pay period
12. Date of payment and the pay period covered by the each payment

When it comes to filing taxes, you'll also want to make sure your paperwork's in order. Here's a
list of the taxes you'll need to shell out and the related documents you'll need to file as an
employer, according to the Internal Revenue Service:

A W4 form to withhold the proper amount of federal income tax from a full- or part-time
employee's pay, once a year to your state and federal governments
A W2 form to the Social Security Administration and a share of a full- or part-time
employee's Social Security payroll taxes (FICA) once a year to your state and federal
governments
An I-9 Employment Eligibility Verification form for every new hire
Taxes on 1099 workers (independent contractors) either quarterly or once a year to the
federal government
The same forms must also be submitted to the your state's department of labor or taxation
Proof of worker's comp insurance. Such a policy indemnifies a business against its legal
liabilities towards accidental or fatal injuries sustained by employees during working
hours. Although this is required by federal law, the administration of this benefit is at the
state level.
State and federal unemployment taxes, but only if (1) they pay wages to employees
totaling $1,500 or more in any quarter of a calendar year, or (2) they employed at least
one person during any day of the week during any 20 weeks in a calendar year,
regardless of whether or not the weeks were consecutive. In some states, this is tied to a
worker's status as part time or full time, but you should contact your state workforce
agency to learn the exact requirements.

5. Handle your immigration issues carefully. With roughly 10 million undocumented

4 of 5 4/1/06 5:32 PM
Article: Hiring Your First Employee http://www.entrepreneur.com/article/print/0,2361,326646,00.html

immigrants living in America, obviously, this segment of the population has become a major
factor in our workforce. If you're sponsoring or petitioning a foreign national to work here, you
must verify and send in documents proving his or her eligibility to do so here.

To avoid civil and criminal penalties and audits to your company payroll, you must also file an
I-140 form (Immigrant Petition for Alien Worker) on his or her behalf with the U.S.
Citizenship and Immigration Service (USCIS). An Employment Authorization Document, also
known as an I-9 check, must accompany such credentials.

There are additional, specialized classification forms to fill out, depending on what type of
work the foreign national will be doing. For more on this process and an employer's
obligations, contact the USCIS.

6. Get the right insurance coverage. While only Puerto Rico, California, Hawaii, New
Jersey, New York and Rhode Island require employers to provide income to disabled
employees who get hurt off the job, many experts advise buying disability (or loss of income)
insurance for yourself and key employees from the get-go.

There are two basic types of disability coverage: short term (which covers anywhere from 12
weeks to one year), and long term (which covers anything over a year). An important
component of disability coverage is the waiting period before benefits are paid. For short-term
disability, an employee will generally have to wait seven to 14 days. For long-term disability,
an employee will wait anywhere from 30 days to one year. If having an employee laid up for a
limited period of time wouldn't seriously jeopardize your business, you can decrease your
premiums by choosing a longer waiting period.

Well that's it--the basics of legally becoming someone else's boss. While you may be
intimidated by the scope of your new role, remember why you went solo in the first place.
There's a price to pay for investing in your own destiny. Hopefully your outlay will be eclipsed
by productivity and profit! Happy hunting!

Erika Welz Prafder is a workplace columnist for The New York Post and the author of
Keep Your Paycheck, Live Your Passion: How to Fulfill Your Dream Without Having to
Quit Your Day Job (Adams Media).

Copyright © 2006 Entrepreneur.com, Inc. All rights reserved.

5 of 5 4/1/06 5:32 PM