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MyOwnBusiness Institute

How to hire employees for a new business


It is not possible to include all the complexities and legal rules pertaining to employees. MOBI does not give legal advice, but we recommend you maintain ongoing access to a labor lawyer. In this session, you will learn how to prepare for employees from job descriptions through legal considerations. Your success in finding, hiring, training and motivating good employees will play a key role in building a successful business.

  • Step One: Before You Start
    • Are you hiring an employee or independent contractor?
    • Retain a payroll service provider or a
      professional employer organization
    • Have job descriptions in place
    • Have a benefits package in place
    • Determine overall costs of new employees
    • Create an employee handbook
  • Step Two: Hiring Employees
    • Attracting applicants
    • Interviewing practices
    • Drug screening
    • Americans with Disabilities Act
    • Understanding workplace harassment
    • Prevention of workplace violence
    • Employment eligibility verification
    • Selecting outstanding employees
    • Legal considerations
  • Step Three: Create Training Disciplines
    • Indoctrination
    • Growing employee skills
  • Keeping Good Employees
    • Importance of retention
    • How to retain good employees
  • Discharging an Employee
  • Top Ten Do's and Don'ts
  • Business Resources

It is not possible in this session to include all the complexities and legal rules pertaining to employees. Since employees play such a large role in achieving success, we recommend maintaining ongoing access to a labor lawyer to keep current on labor matters including hiring and firing employees. It is far better to avoid mistakes by securing legal advice before labor issues or claims are raised than to deal with expensive consequences later.

Your success in finding, hiring, training and motivating good employees will play a key role in building a successful business. Since payroll can be the single highest expense in operating a business, a mistake is especially costly when starting. A failure with your first employee will be harder to overcome than when you have many employees.

Employee or independent contractor?
You cannot assume that a hired person is an independent contractor rather than an employee. Unless a person falls clearly under the definition of independent contractor, you will be hiring an "employee" and will be responsible for withholding income tax, social security, and other taxes. 

In the United States there are legal definitions of "independent contractor" that vary by state. It's important to understand the requirements where you will be doing business to ensure that you, your business, and your client are following the law. In some cases, what you think of as a contract position may legally qualify as employment, which would enable you to receive benefits from the hiring entity.

MOBI's blog post about how to start a business as an independent contractor discusses this point in relation to California's law in the below paragraph:

For example, several years ago California’s law changed, adopting the “ABC test” to define an independent contractor as one who satisfies all three of the conditions below:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. (Source: California Labor & Workforce Development Agency.)

The ABC test made it significantly harder to classify a worker as an independent contractor, mostly due to the “B” part of the test. However, new legislation was recently passed in California relating to exceptions to the ABC test, which in those cases makes it easier to classify certain kinds of workers as independent contractors. Some exceptions expressly require the worker to have registered and licensed their business in order for the exception to apply. For other exceptions, an established business is not required but is one of many factors weighing toward allowing the worker to be considered an independent contractor. Either way, independent contractors who formally establish their businesses are taking a step in the right direction to minimize the risk of misclassification. This can be important for pursuing contract opportunities, because it minimizes the risk to the hiring company.

Or would it make more sense to retain a temporary employee through a temporary staffing company? If you do not have a stable operating budget, it is easier and less costly to end a temporary assignment than it is to lay off an employee.

Hire a payroll service provider (PSP) or a professional employer organization (PEO).
Payroll Service Providers: The growth of low-cost PSPs has made internally prepared paychecks no longer cost-effective, even for a single employee. Also, changes in reporting rules and tax requirements are increasingly more complex and without proper knowledge, it is easy to make mistakes.

PSP responsibilities include preparing paychecks, withholding and sending tax payments to local, state and federal tax agencies, preparing quarterly and annual reports to these agencies and preparing year-end employee information (W-2 forms in the U.S.) In the event of a bankruptcy, any unpaid withholding payments are not discharged and the government will look personally to the business owners for payment. Having payments made by a PSP avoids this risk.

Many PSPs provide other employee management services as well, such as administration of retirement and health insurance plans. Your PSP can become a cost-effective, outsourced Human Resources (HR) department! To select a PSP, schedule interviews with firms in your area and compare how they can meet your needs and their costs.

Professional Employer Organizations: PEOs enable firms to outsource management of all human resources including health and other benefits, payroll and workers' compensation. Perhaps the greatest benefit is if you have employees in more than one state when payroll matters can become quite complicated.

Once a company contracts with a PEO, the PEO will then co-employ the company's employees. The PEO and company share certain responsibilities and liabilities: the PEO assuming responsibility and liability for the business of employment such as payroll and employee tax compliance and the company retains responsibility for business operations. 

Job descriptions.
For each employee, you should write out a job description which clearly outlines the tasks and responsibilities of each position. The wording used must be carefully thought out to avoid potential problems such as: "This assignment is not in my job description!" Or a poor job description could limit initiative and creativity.

A benefits package.
It is a mistake for a small business to think that benefits packages are only for big companies. High employee turnover is far more damaging to a small business than to a larger one and your turnover can be minimized by a good package. While you must exercise caution in not making promises that will be hard to keep in business downturns, here are some benefits you should consider:

  • Health insurance is a must. A good insurance broker specializing in health insurance can explain options and costs.
  • A retirement plan. Some plans such as the Simple IRA in the U.S. are designed specifically for start-up and small businesses.
  • Paid vacation, holiday and personal days. You can tailor these days to what is offered by your competitors. If your competitors do not, you can build valuable employee loyalty by providing this benefit.

Budgeting for payroll expenses.
Your payroll budget should include nonrecurring expenses such as "position available" ads, recruiter fees and investigative reports. There will also be expenses for employees' tools such as computer equipment, furniture, mobile phone, travel expenses, etc. Your ongoing budget for payroll expenses should include the expenses you pay in addition to wages. Here is a sample budget spreadsheet. 

Wages $10,000
Health Insurance (12%) 1,200
Employer payroll taxes (12%) 1,200
IRA retirement (3%) 300
Worker's compensation insurance (3%) 300
Total payroll cost: $13,000


Employee handbook.
If your business plan includes building an organization, we recommend you consider the development of an employee handbook. Your handbook should become the written summation of what your employees need to know regarding your company objectives, policies, and current labor rules. It could include divider tabs for the following materials:

  • A document explaining company history and objectives
  • Employment policies
  • Pertinent labor laws and rules
  • Job descriptions and qualifications
  • Benefits package
  • Safety rules
  • Organizational chart and operating procedures


Attracting employees.
Attract the largest possible pool of applicants by making use of all the most appropriate job posting resources. Resources may include job fairs, school placement centers, newspaper advertising and online job boards such as,,, etc. Also, furnish the job description to your current employees and business contacts.

Require all applicants to furnish references, educational credentials, and prior employment record. Always check the references and contact the prior employers of job finalists. Develop a list of specific questions you will ask references. Don't hesitate to ask hard questions. Consider running a credit and/or background check.

Interviewing practices.
Remember that interviewing is a two-way street. You are interviewing candidates and they are assessing you. Introduce yourself as you want to be addressed at work. For example, "Mr. Garcia" or "Tom." Set a professional tone and treat the candidate as your top priority. Do not take phone calls or answer email. Do not discuss other candidates. Keep appointments promptly.

The interview process consists of four parts: preparation, writing questions, conducting the interview and selecting the employee. Avoid questions that have a yes or no answer; instead, ask open-ended questions such as: "Tell me about a time when you had a difficult customer." Encourage candidates to tell about how they have solved problems. For example, "Could you give me an example of a business challenge you have faced and how you overcame it?"

It is also important to know what questions you legally can't ask. The US Equal Employment Opportunity Commission website is one source for employment related information, and there is a specific page entitled What Can't I Ask When Hiring?

Candidate with strengths and weaknesses.
Find a way to have the candidates demonstrate their knowledge of the skills required. If a specific skill such as software programming is required, prepare a test to assess their skills (or lack of skills). After each interview establish an overall rating on a one to ten scale. In this way, you can compare candidates with each other. Finally, write down their strengths and weaknesses including:

  • How can this candidate help my business?
  • Is there anything that you are concerned about?
  • How much training will be required to get the candidate ready?

Pre-employment drug screening.
Drug screening is an important safety issue in the workplace. 

The Americans with Disabilities Act (ADA).
Federal law gives civil rights protections to individuals with disabilities similar to those provided to individuals on the basis of race, color, sex, national origin, age, and religion. It guarantees equal opportunity for individuals with disabilities in employment as well as in public accommodations and transportation. 

Understanding Workplace Harassment.
Harassment occurs when unwelcome comments or conduct based on sex, race or other legally protected characteristics unreasonably interferes with an employee's performance or creates an intimidating, hostile or offensive work environment. 

Prevention of Workplace Violence.
Workplace violence can be any act of physical violence or threat in the workplace. The best prevention comes from identifying problems early and dealing with them. 

Employment Eligibility Verification (Form I-9).
All U.S. employers are responsible for completion and retention of Form I-9 for each individual they hire for employment in the United States. This includes citizens and noncitizens. On the form, the employer must verify the employment eligibility and identity documents presented by the employee and record the document information on the Form I-9. 

Selecting outstanding employees.
Warren Buffett, a great evaluator of outstanding employees, is not a big fan of resumes and instead focuses on brains, passion, and integrity. Success in hiring outstanding employees will be directly proportional to the accuracy of your assessment of these three traits. Integrity is the most difficult and elusive to judge. Here are helpful guideposts:

  • Integrity is when what people think, promise, and do all coincide.
  • Integrity is about principle-centered living — doing what is right rather than what is expedient.

Legal considerations.
Your labor lawyer and payroll service provider can keep you from making costly mistakes in interviewing, hiring and managing employees. For instance, laws protect applicants and employees against various forms of discrimination including race, color, religion, sex, national origin, pregnancy, age, citizenship status, disability, military status, union membership and in some areas, criminal record.

Laws also require employers to provide employees with certain benefits:

  • Time off to vote, serve on a jury and perform military service
  • Comply with all workers' compensation requirements
  • Comply with Federal Family and Medical Leave laws (if you have more than 50 employees)

There are some employee benefits you are not required to pay for. However, most companies offer some of them to stay competitive:

  • Retirement plans
  • Dental or vision plans
  • Health plans
  • Paid vacations, holidays or sick leave.

The SBA has a great resource on required employee benefits to learn more.

Identifying correct employee classifications and complying with complex Federal and State labor laws will most likely require the help of your labor lawyer. For example, mistakes made in identifying employee classifications as being exempt or hourly (non-exempt) or mistakes in making overtime calculations can result in serious wage and hour violations and could be costly. 

One of the main reasons new employees quit is a lack of information about the job or an unpleasant work environment. Starting with the first day of employment, establish a customized training program designed to:

  • Review the job description and probationary and evaluation periods.
  • Outline benefits, training requirements, policies, job expectations, dress code, information on the company, payroll, and work breaks.
  • Introduce to coworkers and tour facilities.
  • Set goals.
  • Review and answer any questions.
  • Have new hire work with an existing employee.
  • Develop teamwork skills.
  • Learn problem solving and conflict resolution.
  • Check periodically to make sure the employee is doing well.

Growing employee skills.
Training should be ongoing for every employee and can come in many forms:

  • When you see an employee mishandling something, use the moment to teach them what to do. But don't correct in front of customers or co-workers.
  • Have regularly scheduled training meetings.
  • Send employees to helpful workshops.
  • Use online training programs to expand employee skills.
  • Have regular, periodic reviews on achieving advancement goals.
  • As you grow you will need to begin delegating authority. For some examples of activities to delegate and how to place limits on authority, see the Getting Your Team in Place session in the Business Expansion course.

Importance of retention.
Employee turnover is very costly. Not only the cost of rehiring and retraining but in disruption of production, customer service and the damage to company morale. According to a survey by Robert Half International, here are the major reasons that good performers leave:

  1. Limited advancement opportunity (39%)
  2. Unhappy with management (23%)
  3. Lack of recognition (17%)

How to retain good employees.
According to Max Messmer, CEO of Robert Half, if offering promotions isn't an option for your small business, here are ways to help you keep valued employees:

  • Tune into whether employees are happy with their roles and with you. Ask their opinion on changes that might enhance their loyalty.
  • Reward extra effort. (Review the MOBI  Expanding and Handling Problems for incentive plans to consider.)
  • Give praise. It should be frequent and personalized. A simple thank you note can be effective.
  • Avoid burnout: Bring in temporary help during crunch times.
  • Have a little fun: Boring, no-fun jobs and businesses are...boring!

Ways to motivate employees.
Key managers can be motivated by sharing in the earnings they individually produce. In many cases, profit centers can be set up on individual profit centers. Employee motivation examples are furnished in the Expanding and Handling Problems session in Starting a Business.

Firing a problem employee is unpleasant. But when called for, you should be ready and quick to act as the occasion demands, and proceed very carefully. You should consult with your labor lawyer to avoid the risk of a discrimination or wrongful termination lawsuit. Although this course does not provide legal advice, here are some helpful steps:

  • Under most circumstances (excluding misconduct such as theft) an underperforming employee should be given early warnings and realistically written performance reviews pinpointing specific shortcomings.
  • Make the termination meeting short and to the point. The reasons for firing should be cited as being for cause but without going into details that would result in an argument. Maintain a positive and professional attitude and remember to treat the person with courtesy and respect.
  • Explain termination benefits including severance pay (if any) and any other benefits including COBRA health insurance. 
  • Collect all company equipment, keys, tools, etc. being held by the employee. Accompany the employee to their desk or work area, and wait while they collect personal belongings. If they have used any company computers, change the passwords at that time.
  • Present the final payroll check, which was prepared in advance of the meeting. The check should include pay for the full day of termination regardless of the time of day the person leaves and any accrued vacation pay. The discharged employee should then be asked to leave the premises. Accompany the employee to ensure no mischief occurs but allow them to maintain their dignity. Do not permit a return to the workstation to avoid the risk of any damaging behavior such as erasing computer files.
  • If appropriate, have the locks on doors changed.
  • If you receive a reference check request on a discharged employee, ask your lawyer to assist in how you respond. Fear of lawsuits keep many employers from replying at all.


  1. Be slow and diligent in hiring.
  2. Verify all references and prior employments.
  3. Verify new employee's names and social security numbers:
  4. Maintain an employee job description and handbook.
  5. Maintain a competitive employee benefits package.
  6. Use a payroll service provider.
  7. Retain a labor lawyer to avoid expensive claims and penalties.
  8. Evaluate potential employees by brains, passion, and integrity.
  9. Maintain ongoing training programs.
  10. Keep all employment records, at least, four years.


  1. Delay in discharging unsatisfactory employees.
  2. Rely on a candidate's claims regarding skills. (Evaluate by testing.)
  3. Assume your employees are independent contractors.
  4. Think that benefits packages are for big companies.
  5. Proceed with hires without evaluating numerous candidates.
  6. Hesitate to ask candidates hard questions.
  7. Deny employees their legal rights: serving on juries, voting, approved leaves.
  8. Overlook classifying employees correctly. (Exempt or non-exempt?)
  9. Overlook praise, recognition and reward of good employees.
  10. Overlook the power of incentive compensation.

If you are writing your business plan while reviewing this material, take a moment now to include any information about your business related to this session. MOBI’s free Business Plan Template and other worksheets, checklists, and templates are available for you to download. Just visit the list of MOBI Resource Documents on the Resources & Tools page of our website.

Here are some key terms and definitions used in this session or related to this session:

Term Definition
Americans with Disabilities Act (ADA) In the U.S., the ADA is a federal law that guarantees equal opportunity for individuals with disabilities in employment as well as in public accommodations and transportation
COBRA Health Insurance COBRA, Consolidated Omnibus Budget Reconciliation Act, is a federal law in the U.S. that allows eligible employees and their dependents to continue their group health insurance coverage for a limited period after certain qualifying events, such as job loss, retirement, or reduction in work hours.
Employee Handbook The written summation of what your employees need to know regarding your company objectives, policies, and current labor rules.
Form I-9 All U.S. employers are responsible for the completion and retention of Form I-9, verifying the employee's eligibility and identity documents, for each individual they hire for employment in the United States, including citizens and non-citizens.
Human Resources (HR) The department or function within a business that is responsible for managing personnel-related matters, such as hiring, training, employee relations, organizational development, and more.
Independent Contractor A person who creates a business opportunity out of the knowledge, skill, and experience they have. They may provide their expertise to another business, an individual, or both. Organizations may hire independent contractors for projects or contracts where an employee is not necessary. There are legal definitions of "independent contractor" that vary by state, and certain requirements that must be met. Be sure to understand the laws in your area if you plan to pursue independent contract work. Independent contractors are similar to freelancers.
Indoctrination The process of introducing a new employee to the business's culture, values, and policies, aiming to align them with the organization's mission and principles.
Outsource To hire external individuals or businesses (for example, not employees of your business) to perform specific tasks or services for your business, allowing you to focus on core activities.
Payroll Service Provider (PSP) PSPs are organizations that can be hired to assist small businesses with things like preparing paychecks, withholding and sending tax payments to local, state and federal tax agencies, preparing quarterly and annual reports to these agencies, and preparing year-end employee information (W-2 forms in the U.S.). Many PSPs can provide other employee management services as well.
Professional Employer Organizations (PEO) Similar to a PSP, PEOs provide employee management and human resources services to businesses and can include things like health and other benefits, payroll, and workers' compensation.
Union An organized group or association of workers who come together to negotiate collectively with employers for better working conditions, wages, benefits, and job security.
Workers' Compensation Insurance A type of insurance that provides financial benefits and medical coverage to employees who are injured or become ill while performing their job, it also protects employers from lawsuits related to workplace injuries.
Workplace Harassment Occurs when unwelcome comments or conduct based on sex, race or other legally protected characteristics unreasonably interferes with an employee's performance or creates an intimidating, hostile or offensive work environment.
Workplace Violence Any act of physical violence or threat in the workplace.
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