Hiring employees is a surprisingly complicated endeavor. In fact, from the moment you say "you're hired," you face the ever-changing challenge of following employment laws, keeping confidential records, staying on top of taxes, and fulfilling Workers' Compensation Insurance requirements.
Employment regulations are complex and burdensome — especially for small IT businesses that don't have an HR department. To help your business plan for these challenges, let's take a look at when you should and should not hire an employee and what your legal and financial responsibilities are when you do.
When Should You Hire an Employee and When Should You Hire a Contractor?
Many IT businesses rely on independent contractors for short-term and self-contained tasks. If you're hired for a project and only need extra help for the duration of the project, it makes sense to hire an independent contractor rather than an employee.
But when your business has the revenue to support a long-term commitment to another worker, employees add value to your company. You can't grow without expanding your workforce.
6 Employment Costs and Responsibilities Small-Business Owners Need to Know
If you've hired employees before, you know the "cost" of an employee is much higher than just their salary. You have to pay taxes and benefits. In addition, there are all sorts of legal obligations to meet. Here's what you need to know:
- Technology Workers' Compensation Insurance. Most states require small-business owners to offer Workers' Comp coverage to their employees. There are some exceptions so check your state Workers' Comp laws or ask an insurance agent.
- Unemployment insurance. Though it's called "insurance," this is really a tax you pay (up to $42 per employee) that goes into the state pool that pays unemployment benefits.
- Social security and Medicare taxes. You'll typically pay half of your employees' Social Security taxes (12.4 percent of their income) and half of their Medicare taxes (2.9 percent of their income).
- Benefits. Businesses with more than 50 employees must offer health insurance (or pay the Employer Shared Responsibility Payment). Depending on the size of your business and the benefits you choose to offer, you could pay for a percentage of your employees' disability insurance, life insurance, retirement plans, and healthcare costs.
- Administrative costs. Don't overlook the HR costs of hiring a new employee. You might purchase software to handle your payroll or outsource this task to a vendor. Even if you do these things yourself, it will take a significant amount of time and energy.
- Training expenses. It will probably take months of training for an employee to learn your business. Training means you'll be paying an employee's salary when they aren't working at full speed. It also means that if another employee trains the new hire, they'll lose time they normally spend performing IT work.
Some HR experts estimate that new employees really cost 2 to 3 times their salary after you include all these hidden costs.
Employment Practices Liability Insurance: Covering Your Employer Risk
Hiring employees also exposes you to a new risk: employment lawsuits. Fortunately, Employment Practices Liability Insurance protects small businesses from common employment-related lawsuits, such as those related to…
- Wrongful termination.
- Unpaid benefits.
Say you fire an employee because her work is not up to snuff. She believes she was fired unfairly, stating that she never once received a formal evaluation and that she thought her work was well received. She files a lawsuit. Unfortunately, you don't have adequate documentation and performance reviews to show that the employee was bad at her job. You'll have a hard time in court convincing a judge that the firing was warranted if you don't have any hard proof.
In this and other employment disputes, EPLI covers your legal expenses and pays for damages you owe employees.
HR Tip: Budget Accurately and Manage Your Risk
Before you hire a new employee, make sure you budget for their true cost, taking into consideration taxes and administrative expenses. Also, remember that your business risk increases as your business grows.
If you need to expand your Workers' Comp, Employment Practices, or E&O Insurance to cover new employees, submit an online insurance application, and one of our IT insurance experts will send you a free quote on small business insurance.