Hiring employees is essential to company growth at every stage. However, the many legal requirements surrounding the hiring process can result in penalties and affect your bottom line.
This post covers what it means to hire employees, legal requirements, and a helpful checklist to help you start on the right foot.
What Does Hiring Employees Mean?
Hiring employees means scouting, interviewing, screening, and employing company staff members. The hiring process also includes obtaining an employer identification number (EIN) for tax and legal purposes from the Internal Revenue Service (IRS). A successful outcome results in the selected candidates signing an employment contract.
Here is an article where the IRS discusses what it means to hire employees.
Legal Requirements for Hiring Employees
Small-business owners need to navigate several legal regulations when hiring employees. These requirements include proper classification, work authorization confirmation, and taking tax deductions. Missing a single legal requirement can result in consequences, such as fines and penalties.
Here are the eight legal requirements that employers should know at a minimum:
Requirement 1. Employer Identification Number
Start by applying for an EIN from the IRS first. You need one for IRS tax and data-reporting purposes. Contact them by phone to apply for an EIN or complete their online application process, completely free of charge, regardless of how you apply.
Requirement 2. Proper Job Classification
Decide if an employee or independent contractor holds the role. Employers have the legal right to control how employees execute their work performance. Independent contractors are self-employed, while employees perform services under the employer’s control. Other factors that are considered include the degree of control, the method of payment, the provision of benefits, and the relationship between the parties.
Requirement 3. Work Eligibility Verification
It would be best to verify employee work eligibility legally by having them complete an I-9 from the U.S. Citizenship and Immigration Services (USCIS) website. Complete the form and authenticate the documentation to confirm work eligibility. Ensure that you keep this documentation fine for at least three years or longer.
Requirement 4. W-4 Form Completion
Give your new hire IRS Form W-4 to complete for federal income tax withholding purposes. It’s impossible to know the amount of federal tax to withhold from the employee’s paychecks without one since they need to specify what they’re claiming.
Requirement 5. Taxes
Contact local and federal revenue agencies for applicable come tax withholding guidelines. Some states don’t require employees to withhold state income tax, while others do. Further, local agencies may ask you to register for a state employer identification number in addition to the federal EIN.
Requirement 6. New Hire Reporting
You should also register with applicable new-hire reporting programs in your state since many require you to report new promptly and rehired employees. The program helps state agencies locate individuals who owe maintenance and withholding payments. Federal laws require you to submit the employer and employee names, location, EIN, employee Social Security number (SSN) and hire date. Not all states have this requirement so employers should check if their state has a new-hire reporting program.
Requirement 7. Workers’ Compensation Insurance
Get a workers’ compensation insurance policy according to your state’s requirements. Companies might be able to obtain insurance through a state program, through self-insurance, or via a commercial insurance carrier.
Requirement 8. Review Federal and State Labor Laws
Contact the Wage and Hour Division about federal wages, tips, breaks, and overtime regulations. They can also provide you with the required posters as well that you must legally display in conspicuous worksite areas that address employment rights.
Please consult with your local state labor department to meet their requirements. They may adhere to some federal labor laws or have different minimum wages, breaks rules, and overtime laws, of which they can let you know.
This web page also discusses requirements for hiring employees.
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Checklist for Legally Hiring Employees
There are several legal requirements for hiring employees, making it challenging to keep track of the process. Below, we’ve outlined a seven-step checklist for legally hiring employees so that you have a starting framework:
Step 1. Establish a Recruitment Policy
As an employer, you are responsible for adhering to anti-discrimination laws when interviewing and recruiting new employees. You must exercise caution in your language use and avoid specific phrases that could be construed as discriminatory. Instead, questions should focus on the applicant’s ability to perform the job’s duties successfully.
Step 2. Conduct Background Checks
If you intend to conduct a thorough background check on applicants, you must comply with all applicable laws. You must adhere to all of the Fair Credit Reporting Act’s requirements. Arrest records that are not accompanied by a conviction should be disregarded during the hiring process, as there is no evidence of guilt. Before conducting a background check, applicants should sign a written consent form.
Step 3. Meet Your Tax Obligations
Ensure that you are adequately equipped to collect and remit employee taxes. If your business is new, you can begin the process by requesting an employer identification number via IRS form SS-4. Additionally, you must register with your state’s tax and labor department’s where applicable.
Step 4. Avoid Immigration Law Violations
You are responsible for meeting all immigration requirements at the state, local, and federal levels. Verify identification and all pertinent documents to ensure that you hire only individuals legally permitted to work via an I-9 Form that’s completed within three days. You must keep these signed forms on file for at least three years.
Step 5. Get Workers’ Compensation Insurance
Many states require employers to carry a workers’ compensation insurance policy for all employees. Certain states require this regardless of the number of employees. Other states require you to have this insurance in place if you have a certain number of employees under your control.
Step 6. Draft an Employee Handbook
Your employment handbook should cover all pertinent company policies, including anti-discrimination, anti-harassment, and company code of ethics. You can also address attendance and conduct standards as well as possible disciplinary actions if they go unmet.
Step 7. Address Workplace Safety
New employees should receive any necessary training. This training should include training on workplace safety and a review of all applicable federal, state, and local safety and health laws.
Step 8. Draft Employment Agreements
Employment agreements ensure that both parties understand expectations, duties, and obligations. Employers may consider drafting these agreements to clarify expectations, duties, and obligations, but this may vary depending on the jurisdiction and circumstances.
- Confidentiality agreement
- Compensation & benefits
- Severability clauses
- Probation provisions
- Start date
- Position offered
- Termination provisions
Your contracts may require special provisions. Work with employment lawyers throughout the employment letter agreement process.
Employee vs. Independent Contractor
Independent workers are legally classified as self-employed or independent 1099 contractors, whereas employees perform traditional employment functions under a W-2. Employees generally work under an at-will relationship, and contractors must meet the terms and conditions according to their agreement.
When noting the differences between independent contractor vs. employee, here are three easy questions you can ask yourself to help you decide:
- Question 1. Does the employee work free from managerial control?
- Question 2. Does work take place off-site?
- Question 3. Can the employee offer services to other companies?
If you answered “Yes,” to all three questions, you should classify the employee or role as independent contractor work. Ensure that you update your employment letter agreements and other types of employment contracts as well. Employment lawyers will help you navigate the legal complexities of hiring either role.
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