Taking on your business’s first employees is a big deal. The reality for most businesses is that employees are absolutely necessary to effectively grow and scale the business. It takes a lot to bring on a new employee. You have to search, screen, hire, train, manage, and compensate a new employee BEFORE they are able to really benefit your business. BUT, if you do all of those things just right, your employees can be one of your business’s greatest assets.
Employees allow you to appropriately delegate tasks in order to increase sales volume, expand services and/or streamline operations. The benefit$ of hiring employees are obvious, but what most small business owners fail to recognize (and plan for) are the risks that go along with such a transformative business decision.
The government has a vested interest in regulating employee relations because of its tremendous impact on our economy. As a result, employee relations are heavily regulated by all levels of government, including federal, state, and local.
This means that your business has a responsibility to comply with all federal, state, and local laws relating to your employees.
Your business’s hiring procedures, disciplinary and termination decisions, employee compensation, employee treatment, and its general employment practices go under the government’s microscope the moment you hire your first employee.
Without the appropriate employee relations framework in place, your business is all but destined to fall into one of the countless money traps set for non-compliant businesses. If your business’s operations are not set up to comply with the various
federal, state, and local laws, not only can your business be sued for its assets, but YOU personally, can also be sued for your personal assets.
This means that a decision made by one of your employees could cost you your personal savings, home, or other valuable assets, in addition to whatever tab your actual business has to pick up. While growing your business with a team is intended to help increase your bottom line, most businesses lose money because of: poor retention rates; poor procedures and expectations; and poor legal protections.
Studies show that it costs employers anywhere from 16-33% of an employee’s annual salary to hire a replacement if that worker leaves. For a $10/hour employee, the cost of replacement would be $3328 on the low end. For a manager making $40,000/year, that number is closer to $15,000.
Even more alarming, according to data collected by the Small Business Administration, small business legal costs for actual litigation ranged from $3,000 to $150,000 with only one-third of those providing a response under $10,000.
If you are preparing to hire your first employee(s) or have already hired employees without an appropriate employee relations framework in place, your business cannot afford to operate with such a lack of formality. There are five (5) essential components of a strong employee-relations framework. These five (5) components are essential to protecting your business and personal assets from the risks associated with being an employer.
That means most lawsuits (at least two-thirds) are costing small business owners between $10,000 – $150,000 each in legal costs alone. This does not account for lost opportunity costs, reputation costs, loss of productivity, or any of the other losses that are less tangible (until they hit your checking account . . . or don’t – depends on how you look at it). Many of these small business owners reported that the cost of litigation nearly put them out of business.
Unfortunately, we won’t get to hear the perspective
of those who actually went out of business due to forced litigation, but I’m sure they’d appreciate the opportunity to prevent the litigation that took them out of business if they could do it all again.
1. Employee Handbook – The Employee Handbook is one of the key elements every employer needs to govern and guide the employer-employee relationship. The employee handbook is designed to:
- Minimize liability exposure (lessen the chances of getting sued and the costs if it happens)
- Act as a defense to litigation for your business (if you get sued, you’re prepared);
- Minimize cost of employment-related disputes (poor documentation and procedures leads to lengthier litigation-$$$)
- Aid in PERSONAL asset protection
- Create predictability and increase success of employment process
2. Standard Operations and Procedures Manual – The SOP Manual provides a way to communicate and apply consistent standards and practices within your business, creating a controlled work environment. Controlling the work environment of your business is critical to controlling litigation (and reputation) costs. The SOP should be drafted in such a way as to:
- Limit liability exposure (laying out clear legally compliant step-by-step processes reduces the likelihood of error)
- Increase productivity by providing clear instructions on how employees must operate while performing job duties
- Reduce hiring costs by providing formal guidance in recruiting, training and execution requirements and procedures
3. Employee Performance Review and Planning Form – The Employee Performance Review and Planning Form aids in documenting your employees’ performance. Well-documented employee performance is arguably the number one defense against employment related lawsuits like wrongful termination and discrimination. If it ever hits the fan, you’ll have to prove your business made its decision for reasons permitted by law. This worksheet should be drafted in such a way as to:
- Act as a defense to employer liability for various types of litigation
- Minimize liability exposure related to employee discipline and termination decisions
- PERSONAL asset protection (Discrimination = personal asset liability $$)
- Provide a map to improvement for employees, increasing employee value and ROI
4. Employee Benefits Worksheet – The Employee Benefits Worksheet guides you through the process of determining and documenting a legally compliant compensation plan for your employees. Employee compensation is a heavily regulated topic, with the government having a vested interest in catching violators red-handed because the government gets its own check for these violations (not just the checks you’d be cutting the employees for the violations). The Employee Benefits Worksheet should be drafted in such a way as to:
- Minimize liability exposure stemming from compensation disputes;
- Document employee compensation decisions;
- Help keep annual minutes, company books, and other records current and consistent
5. Core Contracts – There are three (3) core contracts every employer needs to protect very specific business interests that are jeopardized by the employment relationship.
- Employment Agreement – Used to structure the relationship between specific employees (often of a certain level), their work, and your business. This agreement would protect your business’s rights to the products or other work employees are compensated to produce. Without this document, your employees may be legally entitled to what should be business assets.
- Independent Contractor Agreement – Used to structure business arrangements with providers that will not be considered employees of your business. This document is necessary to protect business assets like your client list, marketing/business plans, recipes or other trade secrets that are invaluable to your business. If you wouldn’t want someone outside your business to end up with access, or even ownership of your business’s assets (whatever those are), you’ll need to secure your business’s ownership rights using this agreement.
Non-Disclosure Agreement – Anytime you will be sharing your business’s proprietary information with anyone, they should be signing an NDA, but it becomes particularly important for employees. Employees have access to some of your business’s most value assets, like business and marketing plans, new product developments, technology, and customer lists, just to name a few. The NDA contains provisions that protect your legal right to receive the return on your business’s biggest investments.
As an employer, your business is legally responsible for adequately documenting all information necessary to prove its compliance with the law. If you can’t prove your business complied with the law, your business pays, so create a system to keep your documents accurate and up-to-date. Lack of formality in your business’ employee relations is a liability your business cannot afford.
Need help implementing a strong employee relations framework for your small business? I’ve got you covered!