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What to Do When You Hire an Employee for the First Time

Congratulations, your small business has grown enough that you need to cease flying solo and hire an employee to help run the company. It's a big, but necessary, step in your company's growth, but there are obligations to the new employee and to the company which you must satisfy. You're the boss now, which means you not only have to monitor and maintain your new employee's performance (which may be a chore for longtime sole proprietors), you must also be aware of your employee's rights.

This article will cover the things small business owners must legally do when hiring a new employee, as well as suggestions on what you should keep in mind when hiring your first employee.

Legal Obligations

When hiring a new employee, in addition to the headache and cost associated with the hire (more on this below), there are tax, safety, benefits, and privacy related legal issues which must be resolved on your end. Many of the legal obligations below are also covered by the federal government's "Business USA" small business website, which contains detailed descriptions, FAQs, and requirements for small businesses.

  • Obtain an Employer Identification Number: Employer identification numbers (EIN) are employer tax IDs and are necessary in order to report taxes and submit other documentation to the Internal Revenue Service (IRS). You'll need an EIN to report information about employees to state agencies as well. To obtain an EIN, you'll need to file IRS Form SS-4. You can call the IRS at (800) 829-4933 or apply online on the IRS website
  • Set up a system to withhold taxes: Not only do you need to keep good records to monitor your business, the IRS requires that employers keep records of employment taxes for at least four years. Employers must submit Form W-4 (filled out by employees) to the IRS. W-4s are forms which state how much will be withheld from each paycheck. Additionally, employers must report each year how much they've paid in wages and withheld in taxes by filing a Form W-2. See "Tax Agencies: State Guide" for more details pertaining to your state.
  • Verify the employee's eligibility to work in the United States: Within three days of hiring an employee, employers must complete an Employment Eligibility Verification Form (Form I-9) to confirm the employee's eligibility to work in the U.S. The I-9 doesn't need to be submitted to the government, it just needs to be kept on file with the employer for three years after hire or one year after termination, whichever is later.
  • Register the new employee with the state's reporting system: Employers must report new and re-hired employees with their state's agency within 20 days of hiring. For information on your state's new hire reporting system, visit the U.S. Small Business Administration's (SBA's) "New Hire Reporting for Your State." 
  • Obtain Workers' Compensation Insurance. Employers are required to have Workers' Compensation insurance. See the Workers' Compensation section of the SBA's Website for state-specific information.
  • Unemployment Insurance Taxes. Your company may be required to pay unemployment taxes to your state. To see if your company must pay, see your state's agency.
  • Disability Insurance. A few states require employers to obtain disability insurance for their employees. If your business is in: California, Hawaii, New Jersey, New York or Rhode Island, you will have to purchase disability insurance on their behalf.
  • Posting Required Notices. State and federal laws require employers to post notices informing employees of their legal rights in the workplace.

Maintaining Employee Satisfaction

While the following suggestions are not necessarily legally required, they are good ideas that may help retain employees and help your business in case issues arise down the road.

  • Maintain employee privacy. Employers should maintain personnel and any medical records (if relevant) in separate areas. All files should remain confidential and contain all forms from hiring (job application, resume, W-4, I-9, etc.) to termination (performance evaluations, benefits, etc.).
  • Employee benefits. If you choose to offer benefits such as health or pension plans, you will want to create a system through which employees can sign up easily.
  • Employee handbook. Creating employee handbooks are essential for larger companies and are extremely useful for smaller companies as well. They signal to the employee that you are serious about respecting their rights and through the handbook you can outline all of expectations you have of the employee.

Other Considerations

Hiring your first employee is stressful not only for monetary reasons, but because you must share a level of trust with an "outsider" with your business. Below are a few methods which some employers use to assist their search.

  • Drug screening. You can choose to administer pre-employment as well as random drug testing in the future as a condition of employment. If an applicant refuses to submit to the test, an offer can be denied.
  • Interview. The interview is obviously the first line of defense against potentially unwanted people and/or behavior. You should ask probing questions, but they must relate to the performance of the job itself. It is illegal to ask certain questions that may be discriminatory against one's race, gender, national origin, age or disability. 
  • Background checks. In addition to checking a candidate's references (which you should, of course, fully investigate), you can also enlist the aid of companies which will do background checks of applicants' criminal and credit records. In order to perform such checks, you'll need your employee's consent and understanding that the background check is a condition of employment. You should also do simple (and free) internet searches on your own.
  • Disciplinary and review processes. Related to creating an employee handbook, creating written process for discipline and regular performance reviews can also be a separate endeavor if you so choose. Outlining these things from the outset makes the processes more transparent and easier on both you and your new employee. Since the employee is your first, you'll both want regular and pre-determined communication about their progress.
  • Training program. If applicable, create a training program for new employees that outlines all of your expectations of your new employee and contains full description of the job duties.
Next Steps
Contact a qualified business attorney to help you
prevent and address human resources problems.
(e.g., Chicago, IL or 60611)

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