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How to Hire Your First Employee, for Very Small Businesses

A paper sign taped to a window that says "Help Wanted," which is something a business would put out if they're looking to hire their first employee.

Congrats! Your business is finally at a stage where you need to hire your first employee. For some of you, this is after a long period of working by yourself or with contractors. For others, you’ve set up the other aspects of your business, are ready for your grand opening, and now need the extra hands to help run the day-to-day. So, how do you go about hiring your first employee? What are the extra taxes and other costs you’ll have to pay? What do you need to do to follow all the laws? We’ll go over all these issues and more in this new series of articles on how to hire your first employee.

Before we go on, though, here’s an important note. Parts of this article talk about labor and employment laws and regulations. Most of our readers are in the US, so we only go over US laws and regulations. If you’re in a different country, be sure to check your country’s laws. Every country’s employment-related laws are different. You don’t want to be following the wrong ones.

Hiring Employees Isn’t the Same as Being an Employee

Most of us have been someone else’s employee at some time in our lives. But working for someone else is very different from hiring your own workers. It’s not as simple as deciding that you need help, figuring out an hourly rate, and posting a “Help Wanted” sign outside your door. You’ll need to make a mental shift from being an employee to an employer when you hire your first employee.

Obviously, as the owner of the business, you’d be the boss. You get to set out a direction you want your business to go and plan how you want your employees to get there. But there are other costs and legal requirements you need to worry about too.

You’ll want to have a good idea of the total costs of adding an employee, so you understand the maximum wage you can pay them without losing money. You’ll also want to understand your other legal obligations when bringing aboard an employee.

Fortunately, as a small business, you’ll qualify for a lot of exemptions to employment-related laws. These exemptions will reduce some of your overhead costs. But there are other laws—minimum wage laws, for example—that will apply right away. We’ll point out which laws you must follow and which laws you might be exempt from as we go through this post.

Your First Step When You Hire Your First Employee is to Figure Out Their Job Duties

When small businesses hire their first employees, it’s often because they’re so swamped that they just need a live body—any live body. If they’ve prepared a written job description, the description is often vague. The new employee often ends up handling a lot of different types of work. This chaos can set the new employee up for failure even before their first day.

This is why, even though we know you’re completely swamped, we recommend that you take a few moments to think through how you want to delegate your work. This way, you can write a clearer job description—for yourself, for your records, for the job ad (if any), and for the new employee.

In our experience, delegation works best if you know what you’ll ask the person to do and what results you expect to get. For a small business, it’s often easier to delegate work that requires lower skill levels. For example, it’s far easier to train a widget assembler than to find a CFO. It’s also easier to train a person to a job that has specific job duties. And, understanding what you’ll delegate can help you decide if you need a full time employee, a part time employee, or even that you can make do for a while with an independent contractor.

Like it or not, it might take a few tries before you find an employee who can perform the duties to your satisfaction. Having a job description makes hiring a replacement easier.

So, before you hire  your first employee, think through how you want to delegate your work. Then decide the scope of the job you’re hiring for and write a good job description. Things will work out smoother this way.

You Might Want to Start with Contractors First

Sometimes, after thinking through how you wish to delegate work, you discover the job is suitable for a contractor. But why would you want to use a contractor instead of an employee?

You’ll Have Less Administrative Costs and Tax Burden If Working with a Contractor

In general, you pay a contractor somewhat higher hourly rates than an employee. But the contractor takes care of all their overhead, including paying their own federal and state taxes. Usually, all you have to do is to send them a W9 for tax purposes at the end of the year.

Typically, you use a contractor for discrete projects. You pay them per project. They work on the project using their own tools and on their own schedule. They just have to complete the project on a specific date and hit the quality standards you both agreed on.

You can use contractors for lots of types of work. Virtual assistants can be contractors. So can bookkeepers. You can also hire a contractor machinist to make a small part of the widget you sell. Or you can even hire assemblers who will put all the widget parts together and box them for you. Some contractors like to call themselves freelancers, but the law treats them the same way.

Some contractors are highly skilled. You wouldn’t be able to afford them as full time or part time employees. But, you might be able to afford them one project at a time, so you can get high quality work with less commitment.

Some employers give their employees various types of benefits such as paid vacation. Contractors aren’t entitled to any of these benefits.

Not every type of work is suitable for contractors, of course. Sometimes, you’ll have to hire an employee.

You’ll Have More Flexibility Hiring an Employee but You Might Have Higher Costs

When hiring an employee instead of using a contractor, you might pay more for similar experience level. But you’ll also have more control over how and when the person works for you.

You typically hire employees if you require them to work on projects using your tools and on your schedule. But an employee’s job duties can also be more flexible. For example, you can hire a person as a receptionist but after a few weeks move them to be your full time personal assistant.

With an employee, you’ll have to pay a portion of their employment taxes, withhold and remit for them their portion of employment taxes as well as income taxes, and pay for various types of insurance such as unemployment and worker’s comp insurance. And, of course, you’ll have to supply them the equipment they need to do their jobs.

You Might be Penalized if You Misclassify an Employee as a Contractor

Even though it’s often easier to use a contractor over an employee, there are rules on how to classify a worker as one or the other. If the law classifies the worker as an employee but you’ve been paying them as a contractor, you might have to pay fines and, sometimes, give them backpay or even benefits.

Unfortunately, there are several different rules on how to distinguish between a contractor and an employee. And both the federal government and the state governments all have their own rules. If your contractor is in a state different from yours, you’ll have to use their state’s laws to decide if they’re a contractor or an employee.

The employee vs. contractor laws are too complicated to explain in an intro article like this one. So, if you’re thinking about using a contractor, be sure to look through our more detailed article on how to distinguish between a contractor and an employee.

Contractor vs. Employee: An Explainer for Small Business

If you decide to hire a contractor instead of an employee, here’s our series on how to hire contractors. The link below is to the intro article. The article links to more detailed articles for more complete explanations.

Finding a Freelancer or Contractor, for Startups

Decide If You Want to Hire Full Time or Part Time, Hourly or Salaried

If you decide to go ahead and hire your first employee instead of using a contractor, you’ll need to figure out if this person will work full time or part time. You’ll also need to settle on whether you’ll pay them hourly or on a salary.

Hours Worked Can Trigger Overtime Wages

When you think through the job duties of your new employee, you’ll get an idea of how much work you’ll have for the new employee. This, in turn, will tell you whether you’ll need to hire a full time or a part time worker.

The law doesn’t care how few hours an employee might work. But if the employee works over 40 hours per week, you might have to pay overtime wages.

So, if you wish to avoid overtime payments but do have about 40 hours or more of work, you might want to hire two part time employees instead of one full time employee. This way, you can avoid paying overtime.

The way to calculate the 40 weekly hours can get a little bit complicated. We’ll go over the rules later, when we go over how to calculate your actual costs of hiring an employee.

There is an exception to overtime wages. If your employee is an exempt employee, then you won’t have to pay them overtime. Exempt means the employee is exempt from the federal, state, and local minimum wage laws. Exempt employees are typically paid a salary, but that’s not the only factor to look at.

Pay Attention to Whether the Employee is Exempt or Non-Exempt

In general, exempt employees are paid a salary while non-exempt employees are paid hourly. You don’t have to pay overtime to exempt employees, but the exempt status is tricky to classify.

The federal law that governs minimum wage is called the Fair Labor Standards Act (FLSA). Your state or local government might have additional laws on minimum wage. But all these laws have similar ways to determine whether an employee is exempt or non-exempt.

In order for an employee to be exempt, they usually have to make at least $684/week or $27.64/hour. These employees usually work at “white collar” jobs. They tend to be executives, administrative personnel, professionals, and outside sales personnel. Some computer workers—usually programmers but not customer care/help desk personnel—can also be exempt.

It can get pretty complicated distinguishing between an exempt employee and a non-exempt employee. Giving someone the title “manager” is not enough to change a non-exempt employee to an exempt employee. We go over how to tell an exempt employee from a non-exempt employee in our detailed article on overtime pay. You’ll find the link in the section below.

If you followed our recommendation that you should hire easily delegatable jobs first, your first few employees will probably be hourly/non-exempt employees. They’ll fall far below the weekly or hourly exempt wage thresholds.

Calculate the True Cost of Hiring Your First Employee

We mentioned earlier in this article that employees cost more than just their pay. Let’s go over some broad categories of these extra costs. Then we’ll go into the specifics of how to figure out the costs.

Extra Costs When You Hire Your First Employee

In general, in addition to an employee’s hourly wage or salary, the employer has to pay:

  • If hourly worker, 1.5x their hourly wage for any overtime
  • 50% of their federal employment taxes (Social Security and Medicare)
  • Federal unemployment insurance
  • State unemployment insurance
  • Worker’s compensation insurance
  • Possible local payroll taxes
  • Payroll software to manage all of the above plus income tax withholdings, wage garnishment, etc. (recommended but not mandatory)
  • Miscellaneous overhead costs such as office/work equipment, office/locker space, uniform, etc.

Smaller businesses tend not to have the following additional overhead costs, but you might want to keep these in mind for the future:

  • Medical insurance (if you offer a medical insurance plan, an employee may become eligible if they regularly work 30 hours/week)
  • 401k or other similar retirement benefits (you’re not required to offer this, but if you do, federal ERISA law applies)
  • Paid leave/vacation

Minimum Wage and Overtime Calculations Can Get Tricky

Of the above, overtime calculations can get especially tricky. In addition to having to correctly distinguish between exempt and non-exempt employees, there are some rules on how to calculate the 40 hour work week. There are also special rules for restaurant workers and farm workers.

And, while the federal FLSA applies to minimum wage most of the time, some states and even some cities have laws that require you to pay a higher minimum wage. So, before you decide a base hourly wage, be sure to check with your state and city-level government to make sure that you aren’t required to pay more.

Because this article covers the general issues on how to hire your first employee, we want to keep the article of manageable length. So, we’re placing the more detailed information about minimum wage and overtime calculations in a separate article. You can find the information here:

Understanding Minimum Wage Calculations

How to Calculate Overtime Pay, for Small Businesses

Employers Must Pay Half of the Employee’s Social Security and Medicare Contributions

One of your biggest costs when you hire your first employee is that you have to pay 50% of your employee’s Social Security and Medicare withholdings. This is also known as the FICA (Federal Insurance Contribution Act) tax.

As of this writing in 2023, your half of the FICA tax translates to 6.2% of your employee’s wages for the Social Security portion and 1.45% of your employee’s wages for the Medicare portion. (To be clear, your employee pays 6.2% and 1.45% out of their wages as well.)

There’s a yearly maximum for Social Security withholdings but not for Medicare withholdings. For 2023, once your employee has earned $160,200 in wages, both you and your employee can stop paying Social Security withholdings.

You and your employee have to continue to pay the Medicare taxes until your employee hits $200,000 in wages. ($250,000 if filing jointly or $125,000 if married filing separately). Then, you have to withhold from your employee’s wages an additional 0.9% for their Additional Medicare Tax. You don’t have to make a similar 0.9% contribution on top of what you already pay, though.

The various Social Security and Medicare filing minimum/maximum numbers can change every year. If you’re reading this article after the year 2023, check this IRS page for the latest numbers.

You Have to Pay Unemployment Insurance for Your Employee

Both your state and the federal government require you to pay unemployment insurance for your workers. This cost comes entirely from your pocket. Your employees don’t have to make a similar contribution.

The federal unemployment tax is called the FUTA (Federal Unemployment Tax Act) tax. You basically have to pay FUTA from the time you hire your first employee. But, technically, the threshold is that you have to pay FUTA when you’ve had one worker—full time, part time, temporary—for 20 weeks out of the year or you’ve paid them $1,500 in wages. FUTA is collected by the IRS and is 6% of the first $7,000 you paid an employee for the year.

You have to pay unemployment insurance to your state as well. Typically, you have to notify your state when you hire your first employee. Your state will give you a tax filing number, and they’ll tell you your tax rate. This rate can fluctuate in the future, depending on how many and how often your former workers claim unemployment insurance.

Sometimes, depending on how your state unemployment tax works with the federal tax, you might get a federal refund of up to 5.4% of the 6% of the FUTA tax. In other words, what you pay to your state can reduce your federal tax. Every state is different, though, so you have to check with the IRS.

You don’t pay FUTA for contractors. But we emphasize it’s dangerous to misclassify an employee as a contractor. You might have to pay some pretty heavy fines if the tax authorities decide you made a mistake.

For more information on unemployment tax, including how and when to pay the IRS and your state, see our more detailed article:

How Unemployment Insurance Works, for Small Businesses

Most States Require You to Buy Worker’s Compensation Insurance

Every state has laws that cover the concept of worker’s compensation insurance for workplace injuries. But the laws are not uniform. Some states require employers to buy worker’s comp insurance. With other states, the purchase is encouraged but not mandatory. In some states, you can buy the insurance from the state. In other states, you must buy from private insurers or can even set up your own insurance program.

Every state is different. Be sure to find out your state’s requirements and figure out the insurance costs before making your first hire.

A Payroll Service Can Take Care of All the Calculations and Help You Make Payments

If all of the above sound confusing and complicated, they are. And this is especially true when you hire your first employee because everything is new to you. So, of course there are businesses that are willing to help you simplify everything…for a fee.

Typically, payroll services will help you withhold and submit all your state and federal payroll-related taxes. They often charge a base monthly fee and then a per-employee fee.

We do recommend you use one of these services. While it’s true that a typical business will only have to know the withholdings of one state, these numbers can change each year. As well, if your business has several locations in different cities/towns, you might have to deal with different payments for each of these cities or towns.

Yes, you can do all the calculations by hand and keep track of all the withholdings and submit them to the proper authorities at the proper time. But the point of hiring employees is to save you time and free you to do other things to grow your business. If you end up spending your freed-up time on payroll tax calculations, then it defeats the purpose of hiring employees in the first place.

While the payroll services cost money, compared with your employee’s wages, it’s relatively minor. At the end of the day, it is the safest way to go and the path that saves you the most time.

We looked through some very established payroll services, paying attention to how they might integrate with the accounting software we recommended in an earlier article. Here are our recommendations:

Great Small Business Payroll Software

Where to Look to Hire Your First Employee

To hire their first employee, most small businesses hire a family member, someone they know, or friend/family of someone they know. This is fine. Don’t forget to reach out through your work or professional network on sites like LinkedIn to broaden the net.

But if you need to hire your first employee from outside your network, you might need to post the opening on internet job boards or work through employment agencies. We suspect small businesses hiring their first employees won’t be using professional recruiters. However, in case you’re considering this, know that it’s generally the hiring party (i.e. you) that pays the recruiter their finder’s fee. The fee can get quite expensive, depending on the industry. So, it’s typically high value jobs—jobs in the six figures—that use recruiters.  

As for DIY hiring, sometimes “Help Wanted” signs still work. But, as we write this article, the job market is still highly competitive in favor of employees. Our understanding is that these signs posted right outside the business tend to be less effective these days.

This means you might have to get online and post jobs on job boards. There are some free ones. But others require a fee. Some of the well-known sites include:

  • Indeed
  • CareerBuilder
  • LinkedIn

Here’s our detailed article on job sites to post your openings. This is meant to be a quick, at-a-glance article for you to be able to pin down the site to try out.

Great Job Posting Sites for Employers

Know Your Workplace Laws Related to Hiring, Employing, and Letting Go Workers

In the US, we have a lot of workplace-related laws that govern how employers should treat their employees. Some are supposed to make hiring, employing, and terminating (fire or layoff) employees fair and non-discriminatory. Other laws make sure employers provide a safe working environment for their employees.

Let’s take a look at the major laws and see if a very small business hiring their first employees will have to comply with them.

Major Workplace Laws to be Aware Of

Here are the major workplace laws in the US:

  • Fair Labor Standards Act (FLSA)
  • Federal Insurance Contributions Act (FICA)
  • Federal Unemployment Tax Act (FUTA)
  • Immigration and Nationality Act (INA)
  • Family Medical Leave Act (FMLA)
  • Title VII of the Civil Rights Act (Title VII)
  • Equal Pay Act (EPA)
  • Age Discrimination in Employment Act
  • Title I and Title V of the Americans with Disabilities Act (ADA)
  • Title II of the Genetic Information Nondiscrimination Act of 2008 (GINA)
  • Civil Rights Act of 1991
  • Occupational Safety and Health Act (OSH Act)

The EEOC (Equal Employment Opportunity Commission) is the US agency responsible for administering and enforcing most (but not all) of these laws. OSHA (Occupational Safety and Health Administration) is the other big agency that regulates workplace behavior.

Each state typically has its own agency that works on similar laws and regulations. Often, the EEOC and OSHA and their respective state agencies divvy up the work so they don’t duplicate enforcement efforts.

When You Hire Your First Employee as a Very Small Business, You are Often Exempt

The number of laws and what you have to do to comply with them can be dizzying. Luckily, when you hire your first employee, you’re often exempt from these laws.

Most, though not all, of the laws start to apply when you have 15 or more workers. For example, the FMLA applies only when you have 50 or more workers. The ADA applies when you have 15 or more workers. There are a couple of exceptions, though.

The first exception is the FLSA, which governs minimum wage, overtime, and child labor requirements. It applies pretty much from your first worker. You will, of course, also have to withhold and contribute to the FICA and FUTA taxes every time you pay your employee.

The other exception is the INA. Under the INA, you’re supposed to check a person’s eligibility to work in the US before they start work. The INA starts to apply on your 4th employee.

Some OSHA regulations for some industries start to apply on the 10th worker.

Even though most of these laws won’t apply to you right away, we think it’s smart to adopt some best practices as soon as you can. This way, when the laws do start to apply, you won’t have to make major changes.

For a more detailed discussion of the laws and our recommended best practices, follow the link below:

US Employment Rules and Regulations: A Guide for Very Small Businesses

The Interview Process is Fairly Individualized, Depending on the Nature of the Job

If your first hires are friends or family, you’ll probably skip the interview process because you already know them. But, if you’re hiring a friend of a friend or a stranger, you might want to interview them before making a decision.

We trust that you have a firm idea of how to recognize a candidate who can do the job, so we’re not going to go into any details. Some businesses evaluate a candidate with a test. As long as the test is given to all candidates and the test results evaluated equally, you shouldn’t have any problems with anti-discrimination laws.

Some job interviews involve several rounds of interviews. Others throw you into a room with a group of interviewers, typically to test your reaction to highly stressful situations. However, these tend to be jobs where the candidate has to meet with a lot of potential co-workers. As a small business hiring your first employee, it’s less likely that you’ll need to interview a candidate more than once.

To avoid running into trouble with anti-discrimination laws, focus your questions on a candidate’s qualifications for the job. Try to tease out answers that suggest they can or can’t do the job. Don’t ask personal questions that can be mis-interpreted as discriminatory.

Folks tend to hire others they think they can get along with. And that’s perfectly fine, as long as you don’t base your decision on any of the protected classes like sex, age, race, nationality, etc.

Once the Candidate Accepts the Job, There are a Few Onboarding Matters to Take Care Of

Once you find a candidate you like, you might ask for and check their references. If the references sing the candidate’s praises—which they often do—then it’s time for you to make the job offer. There may or may not be some negotiations on pay (and maybe benefits). Typically, the person accepts the job verbally. For many very small businesses, often this is the end of it, and you’ve now hired your first employee. The new employee simply shows up for work on the agreed-upon date.

But we recommend you think through some other things and write a formal offer letter to follow the verbal offer. And include some additional requirements in that letter.

You Might Want to Do a Background Check

Like it or not, some people lie about their work experience. This may or may not matter to you. After all, if you’re hiring folks to help you on a landscaping project, it probably doesn’t matter if they never went to college but claim they did. But, if you’re hiring a master plumber, you’ll want to make sure they truly do have that license before you hire them.

So, depending on the type of job you’re filling, you might want to do some background checks before you finalize the offer. Some typical checks include:

  • Asking the potential hire to produce the required educational records or professional license
  • Requiring the potential hire to pass a drug test
  • Doing a criminal history check
  • Doing a driving records check
  • Performing a credit check
  • Searching the internet or social media for additional background issues

Whatever type of check you do, be sure there’s a job-related reason for it. For example, you might want to pull traffic ticket reports for a candidate for delivery driver. Or if you’re hiring a shift manager that will be handling your store’s cash intake, you might want to run a credit check or do a social media check. You might not want to hire a person who is in a lot of debt and constantly posts social media photos of their nightly high stakes poker games.

Some Background Checks Require Permission Because of Privacy Concerns

Every state has slightly different laws on background checks. Be sure to check what you’re allowed and not allowed to do. Your state probably has a new employer’s guide at the same place you sign up for paying unemployment insurance. This type of information might be in the guide.

One of the most common background checks is a credit report check. You’ll need to get written permission from the candidate to pull the report. There are plenty of free permission forms on the internet. Just do a search for “credit check authorization form,” and you should have your pick.

You’ll Almost Certainly Have to Run a Work Eligibility Check

Of all the pre-employment checks you’ll need to make, there is one that is mandatory if you have 4 or more employees. You’ll need to check their eligibility to work in the US.

To be eligible, the potential employee must be a US citizen, a permanent resident, or a non-citizen national permitted to work in the US. You’ll have to ask them to fill out an I-9 Form and provide a document acceptable for verification to work. Acceptable documents include:

  • US passport
  • US permanent residency card
  • Driver’s license plus one of the following: Social Security card or birth certificate

There are other less common documents that are also acceptable.

For the document the potential employee provides, you have to decide if it “reasonably appears to be genuine and relate to the employee.” See this page from the US Citizenship and Immigration Services for additional information on how not to discriminate against applicants.

What if You Find Something You Don’t Like?

Of course, when you check a potential employee’s background, you might uncover something you don’t like (e.g. they lied on their resume). You can retract your offer for employment, but you need to be sure to have told them that this was a possibility back when you made your job offer. This is why we recommend you always make the job offer in writing, and state that the offer is contingent on the potential employee passing all the checks.

To make things easier for our readers who might not have time to draft their own job offer letter, here’s one we drafted. You’re free to use or modify the letter for your own use. We’ve done our best to make sure the letter has that “contingency offer” language, but of course we provide the letter to you without any sort of guarantees.

Sample Offer Letter

Here’s the sample letter.

Dear [Insert Name]:

We’re pleased to offer you the position of [insert job title]. Your initial job duties are expected to be:

[insert the job description you used when planning this job or that you used advertising for the job]

Your initial pay rate is [insert pay rate].

Your job duties and the pay rate can change in the future, depending on our need or other work-related situations.

This job offer is contingent upon your passing the following background checks:

  • Confirmation of your eligibility to work in the US
  • Credit check
  • [any other checks such as submission of school transcript, drug test, motor vehicle record check, criminal background check, etc.]

To complete the above, please fill out the attached I-9 Form and the credit check authorization form. [Add any other forms you need them to fill out or give directions on where to get the drug test that you have arranged.] Please complete the above within [5 business days] so we can complete the checks.

Once the background checks are completed and found satisfactory, we can set a start date. [You can also just state their start date, as long as you’ve connected with the potential employee and found a date that will work for both of you.]

As a clarification, this offer letter isn’t a contract. Our working relationship is governed by at-will employment.

If you have any questions, please feel free to contact me.

Welcome aboard!

Best Regards,

[Your name and title]

You can email this or print it out and send or mail this to the prospective employee.

A Few Comments on the Sample Letter

We didn’t include asking for references in the letter because the reference check is typically done before making the job offer. Other things like checking the candidate’s publicly accessible social media accounts can be done without the candidate’s permission. We recommend you do this before you make the job offer.

If you’re going to retract your job offer based on the potential employee’s credit report, you might have to explain why the credit report is relevant to the job. In fact, in some states, there has to be a connection between the candidate’s credit worthiness and the job before you’re allowed to do the credit check at all. Here’s some guidance from a very big law firm on whether you should do a credit check and how to reject a candidate based on a credit report.

Lastly, we included a sentence confirming that the person will be an at-will employee. While this sentence often isn’t necessary, it’s a good practice to be clear anyway.

Other Forms Your Employees Will Have to Fill Out Before Starting Work

Once your employee starts, you can ask them to fill out other paperwork such as:

  • W-4 form (tax withholdings)
  • Information for state taxes and withholdings
  • Emergency contacts
  • Paycheck direct deposit form

If you have an employee handbook, either hand them a copy, or send them an electronic copy/link.

Don’t forget to notify your state of your new hire for unemployment insurance.

Be sure to set up a physical or an electronic file to keep all the paperwork the employee filled out and signed. Because of privacy laws, you’ll need to keep credit checks and I-9 forms separately. This way, those who look through the employee’s files can’t see the employee’s credit or nationality information unless they have additional authorization.

After You Hire Your First Employee, You Have to Provide Them With a Reasonable Work Environment

Some workplace laws like the Americans with Disabilities Act require businesses to provide accommodations related to an employee’s work environment. But most of these laws apply only to businesses with 15 or more employees. As a small business that’s just hired your first employee, you’re usually exempt from these requirements.

Still, your state might have laws with a lower exempt threshold. So, always check with your state or local government to make sure you don’t have to comply with various workplace laws.

Some Aspects of the FLSA Relate to Work Environments

There are some exceptions to this 15 employees threshold. One of them is the FLSA. Generally, the FLSA covers minimum wage, overtime, and child labor laws. But it also covers whether you need to give workers breaks and whether the breaks must be paid or unpaid.

You’ll find this information in our overtime calculations article, which we linked to in an earlier section. Depending on how many hours of work you assign your employee, their paid and unpaid breaks can affect the 40 hours per week overtime threshold.

OSHA Regulations Deal with Workplace Safety

OSHA regulations might also apply to very small businesses with just a few employees. OSHA rules typically relate to workplace safety, and the rules require you to report workplace injuries. But small businesses with 10 employees or less are exempt from the reporting requirement. As well, there’s a specific list of industries where you’re exempt from such reports, no matter the size of your business. You can find this list here.

Most Federal and State Laws Require You to Post Notices About Various Laws

Most workplace laws have notice requirements. That is, you have to put up posters to notify your employees that certain laws might apply to them. This is true even if you only have one employee. Naturally, you won’t have to post laws that don’t (yet) apply to you.

For the laws you are required to follow like the FLSA, the posters need to inform your employees of their basic rights and where to file complaints. Typically, you put up these notices in a break area. But often you can post them online such as in a folder accessible by all employees or in a virtual room like those available on Slack. There’s no rule where you can post them. They just have to be available for your employees to see.

Both your state and the federal government provide these posters for free. You can download the free federal law posters here.

How Working from Home or Work from Anywhere Affects Employers

We all know that COVID forced a lot of employers to make changes. One of them is that many employees now work from home, either completely or for a few days a week. Some employees even moved out of town or out of state, to a location they like better. But there are quite a few implications for employers when an employee works from home or lives out of state.

As a small business, the labor market is likely still tight for you. You might be tempted to hire as an employee someone you’re already using as an out-of-state contractor. Or, as an incentive, you might be thinking of offering an employee the work-from-home perk.

We want to highlight a few possible issues when an employee works from home or works out of state. This way, you can make an informed decision on whether you want to offer this perk.

You Might be Subject to Labor and Employment Laws of Your Employee’s Location

We mentioned earlier in this article that, sometimes, states and even cities might have their own employment laws and regulations on top of the federal ones. In general, you have to follow the more stringent law.

Another basic rule is that you follow the law where the employee is located. So, if your business is headquartered in New York but one of your employees is in Texas, you have to apply Texas employment law to your Texas employee (but apply New York law to your New York employees).

A third thing to keep in mind is that every state has rules and taxes on out-of-state businesses “doing business” in that state. Usually, you have to register your business as a “foreign entity,” pay income and/or franchise taxes, and collect sales taxes for sales in that state. Having an employee in a state almost always means you’re doing business in that state.

So, it usually makes no sense for a small business to hire someone out-of-state or even someone who doesn’t live in the same area (if there are different local employment rules). If you wish to hire someone out of state—or keep an employee who’s moved out of state as an employee—be aware that you’ll now be subject to additional paperwork and taxes.

The easiest solution to continue to work with an employee who’s moved outside your immediate business area is to change them to an independent contractor. Of course, you’ll have to be careful to understand their state laws of contractor vs. employee so you don’t end up owing backup withholdings.

Work Injuries Might be More Difficult to Ascertain

Most states require you to have worker’s comp insurance. The insurance covers workplace injuries. If your employee works from home, then it might be more difficult to distinguish between a workplace injury and a home injury. So, it would be harder to decide if your worker’s comp insurance needs to pay.

This issue probably affects the employee more than it affects you, however. The insurance would take care of approving or denying coverage.

If You Monitor Your Employees, You Might Need to Get Consent

Some businesses monitor their employees who work from home to ensure they’re actually working. Sometimes this is done through video. Other times, this can be done through a key-logger on their computer.

No matter how you do this, you’ll have to watch out for privacy issues. If the employee is at your work location, there’s technically no expectation of privacy. You can monitor all you want. But, when they’re at home, there’s usually an expectation of privacy. You’re still allowed to monitor. But you’ll have to get their permission first. Make sure you get their consent in writing.

There’s a Proper Way to Fire or Lay Off an Employee

Sometimes, you mess up and hire the wrong person for the job. We suspect, because you’re new at this, the odds of this happening can be pretty high when you hire your first employee. Maybe the person is just a bad hire, or maybe you overestimated your need for an extra pair of hands, or maybe it’s some other reason. The bottom line is that you have to let the employee go.

There’s a right way to let go of an employee and a wrong way. Part of this has to do with the law. Another part has to do with interpersonal relationships. You’ll also have to tie up any operational loose ends after you’ve let an employee go.

We’ll hit some of the bigger points below, so you have an idea of the process. But, if you’re getting ready to let an employee go, we highly recommend you look through our detailed article here:

How to Let an Employee Go, for Small Businesses

Most States Have the Employment-at-Will Doctrine

Every state except Montana follows the employment-at-will doctrine. This means you can let an employee go at any time, for any reason or no reason. (An employee can also leave their job at any time, for any reason or no reason.) Employment-at-will can be changed with an employment contract. As well, many states use a modified employment-at-will doctrine, so you do have to have some cause to fire an employee.

There are federal and maybe state laws on mass layoffs. Usually the laws require the business to give employees advanced notice. But these laws only affect bigger employers, so we don’t expect this to apply to you.

You do have to keep discrimination laws in mind when selecting the employee to let go, if you’re laying off employees. Don’t make your decisions based on a protected class such as race, sex, or national origin. If you have employee performance reviews, use those instead.

Be Sure to Tie Up Operational Loose Ends

Once you’ve let an employee go, don’t forget to tie up loose ends like revoking computer access, taking away access keys, and taking back various work equipment like a work laptop.

In some states, you’ll have to pay the former employee their last paycheck fairly quickly. So, be sure to cut a check ASAP. Make sure you have their correct home or forwarding address, so you can send them their W2 at the end of the year.

Make sure you keep the former employee’s personnel records for a number of years. Different laws require different periods. A safe rule of thumb is to keep the files for 5 years.

Don’t Forget the Human Factor

Lastly, losing one’s job can be pretty devastating to a person’s mental and financial well-being. While it’s not always possible or appropriate (e.g. if you caught the employee stealing), we hope you approach this process with as much empathy and compassion as possible.

It Can Feel Daunting to Hire Your First Employee, but It’s a First Step Towards Growth

As you can see from everything above, hiring your first employee can be a complicated process. Still, you can’t truly grow your business without additional help. And, at some point in time, using independent contractors just won’t cut it anymore.

So, congratulate yourself that you’ve built your business to a point where you can hire your first employee. (Even if you’re hiring employees just so you can open your store—it’s still an achievement that you got to the stage where you’re about to start).

Employment matters can be complicated, even if, as you can see, we’ve limited our presentation to very small businesses that don’t have to follow various federal labor and employment regulations. But, hopefully, at some point in your business’s growth, you’ll get above that threshold. And, hopefully, by then, you can afford to hire someone with some HR experience to help you with all the details.

Meanwhile, we recommend that, even as a very small employer, whenever possible, start building good practices that follow the federal and state regulations for bigger businesses. This way, when you do get bigger and the laws start to apply, you won’t have to rush and make changes.

Next Up

We’ve come to the last section in our how to start a business guide: taxes. It’s something every business has to deal with, typically after they start operations. We’ve touched on taxes here and there earlier in our guide so that you remain in compliance when your business is small and tax is often less complicated. Now, we’ll dive into the details a little more.

As a business, you’ll be dealing with income taxes, sales or use taxes, and business organizational taxes such as franchise taxes or business registration renewals. We’ll take you through each in our next series:

Tax Guide for Small Businesses

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

DISCLAIMER: This article does not constitute legal or accounting advice. Instead, it contains general information. The information gives you the background you’ll need to hit the ground running when you do go get advice from a lawyer or accountant. Only lawyers and accountants properly licensed in your state/country are qualified to give you legal or accounting advice.

Questions? Comments?