Employment Basics for Small Businesses

Over the years, many start-up businesses have asked what they need to do to begin setting up their human relations policies.  While small businesses often don’t have the wherewithal to develop detailed human relations policies – and almost certainly don’t have a full-time human relations director – some steps should be taken early on to make sure that the business is in compliance with its obligations under applicable employment law.  While these steps may seem to be prohibitively expensive and time-consuming when the business faces so many other expenses and time demands during the start-up phase, the cost of not taking these steps early on can far exceed the cost of taking these steps.

As the company grows, it may become a target for claims arising out of the employment relationship, and at that point it will become important to develop a more formal human relations structure if one isn’t already in place.

Getting Started

Companies often overlook basic human relations obligations when getting started, because there are so many other details to consider, and typically there aren’t many employees yet anyway.  Unfortunately, many companies find that their failure to address employment matters at the outset can create problems as the company matures.  Employees whose rights may have been inadvertently infringed may have claims, and employees upon whom the company later tries to impose new obligations may resist accepting them.  In some instances, these new obligations – while often well intended – could even be considered discriminatory changes in terms and conditions of employment.  For these reasons, it is important to address the following matters when the first employees are hired, and to consistently apply company policies to all personnel from the beginning.

Compliance With Wage and Hour Laws Must Begin on the First Day of Business

Wage and hour laws must be followed from the day the company opens for business, even if there is only one employee other than the owner.  This means that hourly workers must be paid correctly on an hourly basis and they must be paid overtime when it is earned.  Accurate and contemporaneous written time records must be kept.  These records should be stored in a safe place for a minimum of three years, as they may be needed in the event that the Department of Labor conducts an audit.

Businesses should consult counsel before assuming that an employee is exempt from the application of overtime pay requirements.  A failure to pay an employee correctly can trigger penalties and attorney’s fee awards.

Anyone who is paid as an independent contractor must truly satisfy IRS criteria for independent contractor status.

Although federal wage and hour laws control in most states, a handful of states have stricter wage and hour laws.  In those states, the stricter state laws must be followed.  Because wage and hour laws are complex and vary somewhat among states, a business should consult counsel to confirm that employees are being paid correctly under applicable state and federal wage and hour laws.

Compliance with Laws Against Discrimination and Harassment Should Commence Immediately

Many of the anti-discrimination laws don’t begin applying until a business reaches a certain threshold number of employees.  Nevertheless, a failure to establish nondiscrimination standards when the first employees are hired can result in employees developing habits that must be broken once the number of personnel reaches the threshold at which these laws begin to apply.  For this reason, upon hiring, all employees should be properly trained to comply with laws against discrimination and harassment on the job.  This means that they should be informed that the company does not discriminate on the basis of age, gender, race, religion or disability, and that discrimination or harassment on such a basis will not be tolerated.

Employees should be periodically reminded of the business’ antidiscrimination policies, both verbally and in writing.

Employees should be monitored for compliance with these obligations, and any allegations of discrimination or harassment should be promptly investigated and addressed by management.  Counsel should be consulted regarding proper investigation and resolution of any such claims, as the specific circumstances will govern how the matter should be handled.

If at all possible, employees should be given a minimum of two managers or owners to whom they may report any allegations of discrimination or harassment.  Typically, these two individuals should be the employee’s direct or ultimate supervisor and one other manager or owner (or a human resources officer if one exists).  The reason for providing two people to whom to report harassment or discrimination is that the employee needs to have recourse if the person engaging in the discrimination or harassment is one of the two people to whom harassment is to be reported.  Having a second person gives the employee a “safe” means to report the harassment or discrimination and insulates the company from a claim that the harassed employee had nowhere to turn for help.

Disciplinary Procedures:  Keep Uniform Except Where Doing so Will Have a Discriminatory Effect as to a Protected Group

Even in a small business, proper disciplinary procedures should be in place.  This means that all employees should be notified of company policies and required to comply except where requiring compliance will violate the employee’s rights.  (This is discussed further below.)  Infractions should be addressed promptly and appropriately based on the nature of the infraction, and discipline should be documented in the employee’s personnel file.  Discipline of  infractions should be consistent and uniform as to all employees, with the nature of the discipline determined by both the type of infraction and the number of infractions previously committed by that employee.  Management’s failure to consistently enforce policies may make it difficult to discipline an employee who fails to comply.

Employees should be invited to ask questions if policies are not clear.  There are two benefits to this approach:  (1) employees can more easily comply if they understand a policy, and (2) it will be more difficult for an employee to later credibly claim that he/she didn’t understand the policy if he/she passed up an opportunity to obtain clarification.

There is one exception to the rule of thumb that employers should consistently enforce company policies across the board.  Where a policy will have a discriminatory effect on one or more members of the workforce, those employees should be exempted from application of the policy or the policy should be modified to accommodate them.  In such a situation, the business should consider whether a legitimate business reason even exists for the policy.  Examples of policies that may need to be modified to accommodate specific groups include the following:

  • A “no facial hair” policy may discriminate against African American males who develop dermatitis from shaving;
  • A prohibition against wearing a head covering indoors while on duty may discriminate against members of several religious groups who believe that head covering is required by their faith; and
  • Requiring cashiers to stand behind a counter while on duty may discriminate against employees who have difficulty standing for long periods of time.

Counsel can assist the business in developing policies that are both reasonably necessary and appropriate to the business, and  unlikely to have a discriminatory effect on any groups of personnel.  And counsel can assist the business in “carving out” exceptions as appropriate to accommodate the needs of individual employees.

Employment Agreements for Certain Industries

In many states, including Georgia, employees have no right to continued employment in the absence of a written agreement providing for continued employment.  In other words, the employee can be terminated (or can resign) at any time and for any reason, so long as the reason is not an illegal one.  Employers generally should not agree to hire an employee for a specific length of time unless there is a benefit to the employer from ensuring that the employee will remain on board for that length of time.  Counsel can advise as to when it may be appropriate to promise employment for a specified length of time.  Any such promise would need to be in writing, and the employer should receive a benefit from making the promise.

Depending on the nature of the business, it may be important to have employment agreements with key personnel the day the company opens its doors for business.  (These are not necessarily agreements to keep the employee on board for a specified length of time, but rather they are agreements governing the employee’s conduct during and after employment.)

Employment agreements that address post-employment competition and contact with customers will be important with respect to sales personnel.

Employment agreements that address confidentiality obligations, trade secrets and intellectual property rights will be important with respect to any employees who are involved in product development, software development, or any other work that by its nature should be kept confidential.

The specific types of protection that should be in place will depend on the nature of the business, and counsel should be consulted to assist in determining the types of agreements that are needed and then to draft the appropriate agreements.

Employers should bear in mind that employees are more likely to agree to sign these types of documents at the time of hire; while in many jurisdictions an existing employee can be required to sign such an agreement to stay employed, a request that an existing employee sign an employment agreement can sometimes create ill will and even prompt the employee to resign.  In that event, it will be too late to obtain the employee’s consent to the types of restrictions that may be important.

Employment Termination

Employers should make sure that any terminations or changes in the terms and conditions of an employee’s employment are made on the basis of legitimate factors.  Employment, termination and discipline decisions should never be based on age, gender, race, religion or disability, or on the employee’s assertion of a right such as the right to vote or to serve on a jury.  Counsel can advise on the specific employee rights and protections that are provided by state and federal law.

Business Is Starting To Mature:  Time to Draft an Employee Handbook

Once the business has matured, all of the procedures and policies listed above should remain in place.  Many of the procedures will require modification as the company grows and various personnel issues are addressed.  To the extent that any of the procedures and policies have been announced verbally but not memorialized in writing, a maturing company should begin to document its policies and procedures in writing.  This is when an employee handbook should be created, or an existing employee handbook should be updated.  The employee handbook should address vacation and severance policies, discrimination and harassment policy, disciplinary procedures and grounds for termination, the company’s confidentiality expectations of its employees, and all other human relations policies that have been developed by the company.  Counsel can assist in identifying the policies that should be included in the handbook, and counsel should draft the handbook.  Each employee should be given a copy of the employee handbook, with the company maintaining a log of employees who have signed to receive it.

Please note that this article is not intended to be comprehensive, but merely touches on some of the many employment-related considerations for small businesses.  Counsel can advise as to how these and other employment considerations impact your business.

The analysis set forth in this article is provided for general understanding only and should not be considered legal advice.  Counsel should always be consulted for advice regarding a specific situation.

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