Small Business Employment Issues
Once your business is up and running (and, hopefully, profitable), you’ll likely need to hire employees to stay successful. While laws regarding labor and employment are numerous and convoluted, we’ve outlined below a few areas of concern and defined some employment terms that you should know before you hire your first employee.
Employment at Will
If you employ someone “at-will,” then either of you (the employer or the employee) can terminate the employment relationship at any time, for any reason. In other words, as the employer, you do not have to show “good cause” why someone should be fired. The law generally assumes an employee is “at will” unless the employee can prove otherwise, usually through written documents. However, even at-will employees cannot be fired for reasons prohibited under state or federal law (i.e. race, religion, or gender). In the end, at-will employment grants almost-free rein to fire employees. The only exceptions are “wrongful terminations,” which are terminations that violate a state’s public policy, terminations after an implied contract, and terminations in violation of the implied covenant of good faith and fair dealing. We discuss each below:
- Public Policy: The employee is wrongfully terminated if their firing violates an explicit, well-established public policy of the state. For instance, an employer cannot fire an employee for refusing to engage in illegal activity. This exception is recognized in most states, including Illinois.
- Implied Contract: If there is no written agreement outlining the terms of employment, the employee may be able to prove there was an implied contract based on other verbal and written communications. A common example is an employee handbook. If the handbook states that the employer will follow specific procedures before terminating an employee, and the employer does not do so, then the employee may have been wrongfully terminated.
- Covenant of Good Faith and Fair Dealing: This exception means that the employer’s personnel decisions are subject to a “just cause” standard or that terminations in bad faith or motivated by malice are prohibited. This exception is recognized in a minority of states.
Offer Letters: What’s Important
Here are a few guidelines and tips to keep in mind when drafting offer letters:
- Check Illinois state laws and include common requirements such as drug and background checks, and I-9 forms.
- Use a template! There are many online and can be easily tailored to fit your company. You can send your potential employee all the orientation information with the offer letter or follow up later, it’s up to you.
- Include an “at-will” statement (see above) to avoid legal issues and making promises you can’t fulfill. State the salary in short terms (days, weeks), not annual, because that may be construed as a year of promised employment.
- Include a proper opening and closing with clear instructions on how to accept the offer and get in contact with you.
- Add a personal touch! This can set you apart from other companies and will show your potential employee that you care.
Here are some crucial things to include in your employee contracts:
- Wage information
- Is the new hire an employee or an independent contractor (see chart below)? This will determine how the new hire is taxed.
- Determine how often the employee will be paid (monthly, bi-weekly, weekly, etc.).
- What about bonuses? If you include bonuses, are they discretionary, a set percentage of profit, or based on performance?
- Detail retirement plans, health insurance coverage, stock options, etc.
- Agreement on best efforts (i.e. both employee and employer will try their best to fulfill their duties)
- At-will statements (see above)
- Confidentiality agreement
Keep the wording simple and to the point.
It’s important to have your employees sign non-competes. Here are a few reasons why:
- Should you want to sell your business, potential buyers know that they aren’t vulnerable to corporate poaching.
- Trade secrets are relevant in most industries and non-competes are an easy way to protect your company’s secrets.
- Clients often become familiar with and loyal to certain employees and may take their business with them when the employee leaves.
- Similarly, clients wish to know that their information will not be available to former employees when they leave.
- Non-competes clarify the expectations you have for your employees and minimize tensions when they choose to leave.
BUT BEWARE: Non-compete clauses may soon be a thing of the past. Recent court rulings show that non-compete/no-hire/non-poaching clauses within employment contracts may violate federal antitrust law. Consult an attorney before including broad-sweeping non-compete clauses in your employment agreements.
Employees vs. Independent Contractors
|Employment Laws||Covered by a number of federal and state employment and labor laws||Not covered by employment and labor laws|
|Hiring Practice||A potential employee completes an application that is handled by Human Resources. The approved applicant receives a job offer. After a person accepts the position, the employer must ask for additional information about the employee such as date of birth, marital status, and citizenship status.||A potential contractor normally interacts with the person or department that wants a certain service or task completed. A potential contractor might complete a proposal. The contractor enters into a contract, including a Statement of Work with the legal or procurement section of the business.|
|Tax Documents||Provides name, address, Social Security number, tax filing status, and number of exemptions on a W-4||Provides name, address, Taxpayer Identification Number, and certification about back up withholding on a W-9|
|Payer’s Tax Reporting Requirements||Reports all money paid to the employee during the tax year on a W-2||Reports payments of $600 or more in a calendar year on a Form 1099|
|Reporting to Other Agencies||Reports for state and federal Unemployment Insurance||None|
|Value of Work or Contract||Earns either an hourly rate or a salary||A contract may be for a total amount. It could be for an hourly, daily, or weekly amount that ends on a specific date or a total amount to be paid when the job is completed.|
|When Paid||An employee pay period must remain the same unless formally changed. Pay periods vary from one week to one month. Federal and state laws require that an employee be paid on the normal pay date or earlier if the pay check is not negotiable on the normal pay date, which can occur on holidays.||Accounts Payable pays a contractor after receiving an invoice. The terms of the contract or Statement of Work dictate when payments are made, such as upon completion of a task or by periodic amounts. Contractors are not paid by payroll staff in most businesses.|
Your employees are the bones of your small business. What could you do without them? Contact G & G Law to get your relationship back on solid ground, or to make sure it stays strong and stable.