Hiring employees is a big step for any business, as taking on personnel means taking on responsibilities such as payroll procedures, compliance with labor laws, creating policies on employee conduct and responsibility, etc. Before deciding to hire employees, think about the overall goals of your business and determine how employees can help further your ambitions.

Small businesses cannot afford to have unproductive employees on staff, so it’s important to have very specific aims for your staff and to hire people who are dependable and have a good work ethic.

When considering adding staff, the first thing you should do is create a job description for your new employee or employees. Sit down and draw up a job analysis for the new position, detailing the:

- Physical and mental tasks involved with the job, and the physical ability or educational and experience level required to adequately do the job.

- The goal of the position. What the employee will do to further the success of your company, and how the employee will work with you and other employees.

- Pay scales and possibilities for raises or promotions. Understanding how much the position will cost you in salary and benefits is important to evaluating whether the position is worthwhile.

- Metrics for performance. How will you evaluate whether the new employee is meeting your goals? Is there a sales or production number you hope to hit? Will you conduct annual performance reviews for the employee.

Contracting Out

Before committing to creating a new position, consider whether you can contract the services out to an outside firm or employment agency. There are considerable paperwork and managerial benefits that come from outsourcing work, but quality and your ability to supervise may impacted by the decision.

When deciding whether to contract work out, consider the work you need done. If it requires very specific training, it may not be advantageous to contract the work out. However, if it is a more generalized task, or one that the outside contractor has expertise in, contracting the work out may be the better solution.

There are certain tax advantages businesses can derive from hiring contract employees, such as freedom from the responsibility to make tax withholdings and pay employer FICA and unemployment taxes. However, there are laws that govern which employees may be classified as independent contractors and misclassifying employees can result in substantial penalties. It’s wise to consult with your financial advisor or information available from the Internal Revenue Service before classifying employees as independent contractors.

Hiring practices

When you prepare to make hires, be aware of federal laws regarding employment opportunities. Equal Employment Opportunity Commission guidelines forbid employers, in most cases, from asking about age, sex, creed, race, disability, marital status, or type of military discharge the applicant may have received.

When making hires, it’s typically verboten to make inquiries about a candidate’s race, religion, marital status, sexual orientation, family status and other questions of this nature.

Also, the Americans with Disabilities Act forbids employers with 15 or more workers from refusing to hire people with disabilities, if by making reasonable accommodations the employer could create an environment where the worker could do the job.

If you’re not sure whether the job description you’ve written is simpatico with the law, you may want to give the EEOC a call to determine whether your job description is in the clear.

Drug Testing

In some states, employers may be allowed to require their employees to submit to drug testing before they are hired. Drug tests can help to head off potential problems, allowing you to identify employees who, because of their drug use, could pose significant performance, legal and other hazards to your business. Some businesses may even be required by their insurers to use pre-employment drug screening because of the risk for loss that employees who abuse drugs pose.

If you’re thinking about instituting a drug testing policy for new hires, consult with your state’s employment or civil rights authority to make sure testing is allowed, and under what circumstances. Typically, businesses will contract with medical service providers to conduct drug testing.

Help Wanted

Once you’ve completed the job analysis and determined that you need to make a hire, write the job description. List the job’s responsibilities and duties, the work hours and the skills or professional certifications or degrees necessary to perform the work required. Be thorough and be sure to spell out exactly what you want your new hire to do at your business.

When you’ve written the job description you’ll want to advertise the position to draw applicants. You may want to take out a classified ad in a newspaper or trade publication, list a job opening on Monster or other job websites.

Criminal background checks

When you hire new employees, you’re taking a leap of faith by trusting the person you hire with a portion of your livelihood. That’s why you may want to inquire about new hires’ criminal history. Also, in some industries, such as child care, there may be regulations requiring criminal background checks.

Prior to making the final decision on a new hire, run the potential hire’s name through Google to see what you find. Local news reports about crime often make it online, and taking a few seconds with Google could help you spot a red flag. Remember that there is more than one John Smith in the world, and probably in your town, so be sure to confirm identities before making further inquiries or final decisions.

If you need a more thorough background check, contact your local police department. They may be able to conduct a background check for a price or point you to a reputable search firm that can help you. If you’re doing a state mandated background check (for example, 45 states require background checks for child care workers) be sure to use a recognized and approved background search firm.

Hiring Family

If you have a member of your immediate family you can put to work, this may be a good employment solution. By hiring your children or spouse, you may be able to move your family income into a lower tax bracket. Hiring your children is particularly attractive, as it allows you to transfer money to your children without butting into federal gift or estate taxes.

If your business is unincorporated, wages paid to children under the age of 18 are not subject to Social Security or FICA taxes. Older children may be able to make tax-deductible contributions to an IRA, giving them a jump on their retirement plans.

If you do hire family, particularly if you hire children, be sure to pay them a salary that is standard for the type of work that they’re doing, so as not to lead the IRS to believe that you are only employing family to unfairly take advantage of the tax benefits.

One caveat about hiring family – it’s tough to fire them. When hiring family members, be sure to honestly and objectively assess their capability to contribute constructively to your business and the likelihood that they’ll take advantage of their familial relationship to underperform or engage in objectionable behaviors. If they have a likelihood of being a problem, it’s a lot easier not to hire them than to endure the family turmoil likely to occur if you must fire them later.

Small businesses are a major creator of job growth in the U.S. By hiring employees, even on a temporary basis, you’ve helped the overall economy and the individuals you’ve hired. By having a precise idea of why you’re hiring, and making sure to hire the people who will do the most good for your company, the overall good you’ve done for the economy by hiring will also be good for your small business.

Independent contractors are workers who perform work for your business, but are not employed by your business. They may be self-employed or may be employees of another company. Employees are workers whose services are rendered exclusively to your business and who have certain employment rights under the law. The line between employees and independent contractors can be blurred at times. In general, however:

Employees:

- Are given certain rights under labor laws concerning minimum wage, holiday and overtime pay, termination and working conditons.

- Covered by workers’ compensation paid for by their employers.

- Have an exclusive employment relationship with their employer.

- Have income tax and FICA taxes withheld from their paychecks by employers.

- Have employer-provided health care benefits.

- Cannot claim deductions for expenses related to work such as travel or meals.

Independent contractors:

- Are considered self-employed and are not covered by many of the same labor laws that employees are.

- Are responsible for submitting their own income and FICA taxes.

- Must provide their own workers’ comp insurance.

- Typically work for a number of employers.

- Can deduct business expenses from their tax bill.

The Pros and Cons

Each type of worker, independent contractor and employee, has advantages and disadvantages for their employers.

For independent contractors, the chief benefit to employers is the flexibility of the workforce and the lack of standing, long-term commitments to the employee. Hiring independent contractors results in lower overhead, as you will spend less in expenses, payroll and benefits. You also won’t have to spend as much time on bureaucratic work related to employment, such as withholding income and social security taxes.

Not having to provide health benefits is another advantage of hiring independent contractors. Providing health benefits for employees can cost thousands of dollars per employee.

Because you’re hiring workers to work on a per job basis, rather than an hourly basis, you have the flexibility to meet the changing demands of your business, ramping up staffing during peak times and tapering off as business slows. This helps you control your labor costs considerably.

There are some disadvantages to hiring independent contractors, however. You have less control over when the work is performed and how it is performed. With excellent independent contractors, or contractors who have worked for you before and are familiar with your needs this poses little problems, but for new or B and C players, this can be very problematic.

Fluctuating prices are another disadvantage. Independent contractors may charge varying rates per job based on their estimate of the complexity or difficulty of the job or on market demand. In some cases, this can drive costs up considerably at times when that’s the last thing your business can handle. Labor costs for employees are more settled and predictable.

Contractual obligations can be another downside to independent contractors. Contractors can demand extra compensation for changing assignments and also work termination penalties or other terms into the contract that makes it more difficult to dismiss them than employees.

Also, if you make an error and classify a worker as an independent contractor when according to IRS standards they should be employees, you run the risk of substantial penalties.

For employees, the advantages rest chiefly in having a stable workforce with predictable costs.

By hiring and coaching up employees, you can instill a level of buy-in and dedication that you simply can’t expect of an independent contractor who shifts from employer to employer. This loyalty can translate to increased productivity and innovation from your employees.

Employees may be more willing to take on a variety of roles than independent contractors, whose duties are more narrowly defined in their contracts.

Also, the stability a dedicated work force provides can be advantageous as it makes it more easy for you to coordinate yoru projects with employees who all work for you than guiding a loose confederacy of independent players.

The disadvantages for employees lie chiefly in the costs involved in providing them with a regular salary and in more administrative headaches. When you hire employees, you must pay them a regular salary, comply with many labor regulations, make sure that you’re withholding the appropriate amount of tax and deal with various other issues.

Also, the time you spend managing employees takes away time when you can focus on the more creative and dynamic parts of your business.

When making the choice between independent contractors and employees, consider the pros and cons and consider the task you need done. For short-term projects or busy seasons, taking on a few independents may be the right move. For long-term or recurring needs, hiring full-time employees may be a more effective means of getting the job done.

The best way to ensure you have great employees lies in the hiring process. Finding out an employee may not be suited for your business can sometimes take weeks or even months to discover, and in some cases, it could take you months to make the appropriate change because of legal or moral issues. By making sure you hire the right people, you save yourself and people who just aren’t a good fit for your business a lot of trouble.

While there’s certainly red flags that should put you off hiring a person, there are also quite a few indicators that can be used to identify a potentially great employee. Here are a few green flags for prospective employees:

1. Resume. A potential employee’s resume is his or her first opportunity to communicate with you, and an employer can learn a lot about about a job candidate just from his or her presentation on the resume. Is the resume well-organized and easy to read? Are good spelling and grammar used? These may seem like nit-picky items, but an employee who pays close attention to his or her resume is more likely to pay close attention to the important details you assign on the job.

2. Experience. A job candidate who is experienced in the work you’re hiring for has big advantages over less experienced candidates. The experienced candidate will likely require less training and supervision than a less experienced candidate and may be able to help fill gaps in your knowledge if you’re a first-time entrepreneur. In fact, it’s recommended that first-time business owners hire well-seasoned workers in the field in which they’ve started a business to help sherpa them through the early stages.

3. Education. Formal training in a job field is a plus, especially when it’s training specific to the job field you need to fill. Candidates with formal education have important practical training and a grounding in the theory that helps them think through problems rather than just being good at a few narrowly defined tasks.

4. References. Always be sure to check an employees references. You can tell a lot about an employee by what former associates and employers have to say about them. Also consider who they list as references. If an employee only lists co-workers and not managers, this may be a problem.

5. Awards and recognition. If a job candidate has professional awards listed on his or her resume, it shows that the employee both knows and excels in his or her field.

6. Stable employment history. If an employee has bounced around from job to job, chances are that he or she won’t stick around long at your business, either. Unless you’re in a business where high turnover is common or desired, you may want to find someone more willing to go the long haul.

7. Letters of recommendation. If someone took the time to sit down and write a letter of recommendation for a job candidate, chances are you’re looking at a good employee. In today’s busy business climate, time is at a premium. An executive or community leader making the time to recommend a former employee or business associate is a major statement of confidence.

8. Appearance. If an employee presents a clean and neat appearance at an interview, there’s an excellent chance that the employee will present the same respect and attention to detail to your business. Image is a big part of business, and employees who understand this make excellent representatives of your company to the public.

9. Membership in professional or trade organizations. Job candidates who are members of professional or trade organizations show a devotion to their careers and craft that mark them as a cut above average job candidates. Many professional organizations are invite-only groups, so your prospective job candidate has likely already had to meet some pretty stringent requirements. If your prospective employee is an officer in a trade organization or professional group, that shows further personal and professional acumen.

10. Your gut feeling. If you strongly feel that an employee is a good fit for your company, go with that gut feeling as long as there’s no major red flags. Your intuitive thought process may have picked up on something your conscious mind did not.

When hiring employees, remember to be mindful of federal employment laws, and avoid asking questions about race, creed, nationality or other protected status. There’s enough job-related material you can use to evaluate prospective employees without running afoul of the law.

While it’d be logical to assume that in this tight economy, people who have jobs would be glad to have employment, recent research suggests otherwise. A recent survey conducted by a consulting firm shows that only about 52 percent of employees surveyed were found to be engaged in their work. Employee engagement essentially is a measure of employees knowledge of their jobs and willingness to do them.

Low employee engagement can be a problem for businesses, for although employees with a low level of engagement will perform their duties, they won’t perform them to the best of their ability and won’t be on the look out for ways to improve their work or your business. Terminating unengaged employees may not be the best option because of the personal cost involved in firing an employee and the business costs of finding new and training new workers who may not be much more engaged than your old ones. A better path for small business owners may be improving the engagement of their employees.

Research indicates that highly engaged employees are employees who feel supported by management, trust management, understand how performance is evaluated in their business and who are managed effectively by their bosses.

Recent research by Gallup Inc. researchers show that employees with positive perceptions of their jobs create work environments with high employee retention and customer loyalty and improved financial results.

Consistent policies – Having consistent expectations and policies is important to creating a good work environment for employees. All employees should be treated equally in terms of expectations and the rewards and consequences for their actions at work. This creates certainty for employees, who will know what activities are encouraged and which activities are frowned upon by employers. Consistent application of the rules also reduces conflict among employees who may become resentful if one employee is given priviledges or breaks that other employees don’t receive.

Honesty – Employers should strive to be honest with employees about the financial condition of the company and their own careers. Misrepresentation, broken promises or outright lies do not help to create a good work atmosphere. Employers shouldn’t disclose sensitive information about the business or other employees, but should level with their employees about the general health of the business and their career prospects.

Recognition and appreciation – By recognizing the achievements of employees, you make them feel like a more valued member of your team. Recognition can be anything from a simple congratulation on a job well done to a formal award noting an achievement such as meeting a sales goal or providing excellent customer service. Making employees feel valued will increase their dedication to your business, and will result in increased productivity by committed employees.

Open-door policy – Employees should be able to voice concerns or polite criticisms to their employers without fear of retribution. Employees should not be allowed to disrespectfully harangue their employers about work or other employees, but a respectful airing of grievances or concerns should be allowed. Allowing employees to freely speak to their employers can help employers see decisions in another light, have a closer feel for the pulse of their workforce and bring problems or opportunities to their attention that they might otherwise have been unaware of.

Autonomy – Giving employees the opportunity to direct their own work gives them a greater sense of pride in their work and loyalty to their employer. There are a variety of ways employers can give trusted employees autonomy, such as allowing them to set their own work schedules, delegating responsibility for certain aspects of the business to them, etc. Employers should check to make sure the autonomy is producing better results, but by allowing employees to work their own way, they will often be surprised by the increased quality of work they receive in return.

Pitch in – Employees will be more loyal to an employer who rolls up his or her sleeves and helps out with some of the less pleasant aspects of the business. By volunteering to cover an employee’s shift during a holiday, helping with clean-up or working late alongside your employees during work days that demand expanded hours, you create an atmosphere of shared responsibility and camraderie with your workers. Employers who sit in the ivory tower of the office are less likely to be liked and respected by their employees than those who get a little dirty alongside their workers.

Incentives – By offering raises or chances at promotion, employers can help their employees feel more invested in the course of the business, and more willing to work to their best ability.

Raises and promotions aren’t the only way to boost employee performance, however. Employers can also improve employee job satisfaction by offering other incentives, such as work competitions between teams of employees, company events, days off for meeting performance goals, discounts, etc.

By giving your employees a carrot, you ensure that you likely won’t have to use a stick later.

Conflict Resolution – Employers should keep a close eye on how their employees are interacting with one another. Employers should take steps to prevent interpersonal conflicts among employees from affecting business, working with employees to settle conflicts in a professional and peaceful manner.

Employees should be encouraged to interact in a professional and friendly manner, and there should be clear lines about what type of conduct is unacceptable in your place of business.

By working to create a good work environment, employers can boost the job satisfaction of their employees and increase productivity and customer satisfaction as well.

It’s a lot easier to hire the right employees than identify and fire the wrong employees later on, so your employment screening process is important. While in most cases there isn’t one clear alarm that may signal that a job candidate is a potentially bad fit for your organization, there are several clues when taken together can signal that you may want to consider someone else for the job.

The following are a list of red flags you should be on the lookout for when screening prospective employees:

1. Incomplete or sloppy resume – A bad resume is a reflection on the candidate’s ability to organize information and attention to detail. If a prospective employee does a poor job of representing himself or herself, how well will he or she represent you?

2. Misrepresentation – If you catch a potential employee in one fib, can you guess how many you didn’t catch? For your business to be successful, you need employees who you can trust. By avoiding hiring dishonest employees, you can ward off a lot of trouble later.

3. Lack of references – A lack of credible references on a resume shows that your potential employee may have left a former employer on bad terms. This shouldn’t be an automatic disqualifier, but if your potential employee has a lack of references or only references from friends or co-workers, you may need to do some further research before making a hiring decision.

4. Inability to completely answer questions – If an employee can’t answer job specific questions that you ask based on what they’ve put on their resume, chances are they may have embellished their actual work experience or education on the resume. You may want to think twice before hiring.

5. Reluctance by former employers to give references – Legal concerns frequently prevent employers from giving their workers poor references, but if employers completely decline to say anything about employees, it may be a telling sign.

6. Poor punctuality – If a prospective employee doesn’t show up for a job interview on time, it’s highly likely he or she won’t show up for the job on time either. Not a big deal in a non-time intensive business, but in other businesses where schedule is king, punctuality is important.

7. Overqualified candidates – If your candidate is overqualified for the work, he or she may not stick around long, as its likely they’re only taking your job as a place holder until they can find something they’re better suited for. While this may be fine for some business owners, it may be troublesome for employers who need workers for the long haul.

8. Your gut. If you get a bad feeling about an employee, you may want to dig a little deeper before you hire him or her, or avoid hiring him or her altogether. In interpersonal relationships such as the employer/employee relationship, feelings and intuition play strong roles. If someone rubs you the wrong way after a 15 minute interview, consider how you’ll feel after spending 15 months with them.

In general, there are two types of benefits offered by businesses, those required by law and those offered at the employer’s own behest. Government laws intended to provide protections for workers mandate certain benefits be provided by all businesses, or businesses of a certain size.

Benefits required by law of U.S. businesses are not as expansive as those required in Europe or some other highly developed nations. The U.S. government basically requires all employers to pay Social Security and unemployment insurance taxes, and (with a few exceptions) pay for worker’s compensation coverage. Five states, California, New York, Rhode Island, New Jersey and Hawaii, as well as the territory of Puerto Rico, also require employers to purchase disability insurance for their employees.

Depending on your business size, you may also be required to provide unpaid leave under the Family and Medical Leave Act. The act requires businesses with 50 employees or more to provide up to 12 weeks of unpaid leave time to workers who need to care for sick relatives or personal illnesses.

Optional Benefits

There are a wide variety of other benefits businesses may provide to their employees in order to maximize the effectiveness of the employee or as an incentive toward retention.

Health insurance – Perhaps the most commonly offered benefit given to employees is employer-sponsored health insurance coverage. Most businesses are not required by law to offer health insurance coverage to employees, but many do because it promotes employee health, thus protecting the employees’ value to the company, and because it is a widely appreciated benefit among employees. According to recent surveys, nearly two-thirds of employees value health insurance more than any other benefit offered by employers, and companies that provide health insurance benefits enjoy higher retention rates than those who do not.

Employee health insurance can be quite expensive, and small businesses typically pay a higher rate for coverage than larger businesses do. A 2006 survey revealed that the average monthly cost of health insurance per employee for small group plans was $311. Coverage for a family of four was $814. Health care costs continue to sky-rocket, so chances are today’s costs are much higher than those cited by America’s Health Insurance Plans in 2006.

Offering health insurance to employees isn’t a cheap proposition to businesses, particularly small businesses. However, there are some ways to mitigate the cost of providing benefits.

The recently passed Obama health reform law provides a tax credit to small businesses that provide health insurance to their employees. Basically, small employers who pay 50 percent of premiums for their single coverage employees in 2010 are eligible for a tax credit equivalent to 35 percent of premiums paid. After 2014, the credit goes up to 50 percent.  Small employers are businesses with 25 or fewer full-time employees (a firm with 50 part-timers would qualify) whose average wages are less than $50,000 per year.

Small businesses can also realize health insurance savings by finding group coverage from trade associations and other groups the business may be able to join. These associations may be able to negotiate more favorable rates from insurers based on the size of their association (the more members, the broader the risk pool for insurers).

Employers can also realize savings on health plans by offering high deductible plans. While the deductible threshold to get coverage may be high, the benefit of these plans is that they have lower premiums for employees and businesses and allow employees to contribute tax-free dollars to health savings accounts they can use to meet their deductible.

Retirement benefits – Employers who need long-term employees dedicated to the business can help promote retention by offering retirement benefits. The days of employer-provided pensions are in their sunset, but there are a number of other ways that employers can help their employees plan and save for their golden years, such as 401k retirement investment programs, IRAs and assistance with retirement planning.

One easy way of setting up a retirement plan for your employees is to start a Simplified Employee Pension plan, also known as an SEP. In SEPs, employers make contributions to IRAs for all employees of the business, including the employer. One of the advantages of an SEP is that it is not as expensive to start-up and maintain as a conventional retirement plan. It also allows for contributions up to a quarter of each of your employees’ salary.

Another key advantage of an SEP is that the contributions you and your employees make to the plan are tax deductible and earnings on the investments your SEP make are exempt from taxes. Employers are also given flexibility in how much they may contribute each year, and even have the option of not making contributions.

Employers may also be able to realize a $500 per year tax credit for the first three years of the plan to help cover start-up costs.

Profit-sharing is another popular retirement compensation plan among small businesses. In profit sharing, a portion of the company’s profits are deposited in retirement accounts for businesses. New federal rules prohibit employers from depositing more than 100 percent of an employee’s earnings or $46,000 in one year, however.

Flexible schedules – As the Internet age has torn down many of the barriers between home and work life, some employers are choosing to forgo the traditional 9-5 schedule and allow employees to make their own hours. Many employees enjoy the freedom afforded to them by the flexibility to schedule their work hours around family and personal time. If your business doesn’t necessarily need an employee to work set hours, you may offer flexible scheduling or the option of working from home as a benefit.

Sick and vacation leave – Paid sick and vacation leave are another popular benefit to employees. Paid sick and vacation time can foster a sense of loyalty to your company, particularly if you offer increasing vacation time based on years of service to your company.

Employee Assistance Programs – Most appropriate for larger small businesses, EAPs provide support for various personal problems employees may face. An EAP may consist of a hotline for employees to call with emotional, family, financial, substance abuse or other problems. Many EAPs also include a legal assistance program for employees. Keeping key employees emotionally and financially sound can help increase productivity and prevent incidents that may arise if your employees are facing tremendous personal or financial difficulties.

Discounts – One perk just about any small business can afford to provide employees is a discount on goods or services sold by the employer. Offering employees a discount is an easy way to say thank you to your employees for their work and foster a culture of loyalty in your business. Small business owners should take appropriate measures, however, to ensure discount benefits are not abused by employees.

Bargain packages – Many small businesses partner with one another to offer discounts to each others employees. The opportunity to get a discount on restaurants, auto care, electronics, recreational opportunities, etc. can be a great way of generating employee satisfaction.

Employee appreciation events – Holding events like a company Christmas party or rewarding employees with in-work celebrations is an inexpensive morale-builder. By occasionally doing little things like treating your employees to a pizza party or off-site event, you can build a more tightly-knit corporate culture.

When choosing benefits to offer your employees, consider your business needs, the needs of your employees and your bottom line before choosing the plan that best fits your type of business and your employees.