THE EMPLOYER’S GUIDE
A brief rundown of next-steps and compliance considerations
associated with hiring employees.
CONTRACTORS VS. EMPLOYEES
Many businesses like hiring workers as contractors as the tax and compliance considerations associated with contractors are often easier to navigate than hiring an employee. However, the government requires that certain workers be hired as employees and there may be penalties for misclassifying a worker as a contractor when qualifications aren’t met.
Determining the appropriate classification for a worker can be a nuanced area of law depending on your company and the type of worker you are hiring. In California, generally, an individual can only be hired as a contractor if all of the following criteria are met:
“The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
For example, it may be appropriate for a food business to hire a graphic designer as a contractor when the food business is relying on the graphic designer’s independent expertise to perform the services and the graphic designer also performs this type of work independently for other businesses.
However, it may not be appropriate for a creative agency that performs graphic design services for others to hire a graphic designer as a contractor to help the creative agency’s clients, because that work is part of the hiring entity’s business. Every situation may have it’s own unique exceptions and considerations and we definitely recommend having professional guidance to assess your unique situation.
TAX FORMS, REGISTRATIONS, PAYROLL, & INSURANCE
If you do choose to hire an employee, you will want to ensure you are properly setup with the appropriate tax forms, registrations, payroll and insurance.
Employer Identification Number (EIN) - If you don’t have an EIN for your business already, you will need to register one with the IRS. This helps the IRS identify your business for tax purposes, including your employer tax obligations.
W2 Payroll - When you pay an employee their wages, unlike a contractor, you need to withhold certain amounts for taxes and other state and federal withholdings. You also need to pay employer taxes on top of the amount you pay to the employee. Often, the easiest way to do this is to get setup with a payroll software platform like Gusto or Square that will automatically calculate deductions, make payments, and issue payroll for you. Alternatively, an accountant or other tax professional may be able to handle this service for you.
W4 Form (Tax Withholdings) - All new employees hired after January 1, 2020 must complete a W4 form to confirm the employee’s withholding preferences. Generally, this does not need to be filed anywhere, rather, you keep it on file accommodate the employee’s withholding preferences accordingly. If you use an electronic payroll platform, such preferences may be automatically entered on the platform. These can be amended anytime by the employee. You should not advise the employee how to complete this form.
I9 Form (Employee Eligibility) - All new employees must also complete an I9 Form and provide documentation to you showing their eligibility to work in the United States. This generally does not need to be filed anywhere, but you should keep it on file to protect your business in case the employee’s eligibility is ever questioned. Completing this process and having the form on file may shield you from liability if the worker turns out to not be eligible to work.
Electronic Federal Tax Payment System (EFTPS) - You will also need to get setup with the EFTPS in order to make federal tax payments, including tax payments associated with your employees. We recommend coordinating all such payments with your accountant and/or payroll provider.
State Registrations - In addition to the above IRS registrations, each state may have its own registration requirements. We recommend coordinating with your accountant to ensure you are properly registered with the state for compliance and tax purposes.
Worker’s Compensation Insurance - All employers with any number of employees must have worker’s compensation insurance. This covers any injuries your employee(s) may incur in the course of doing their job. Failing to have this insurance, even for low-risk jobs, can result in substantial penalties or liabilities, especially if the employee is actually injured on the job. As such, you should definitely contact an insurance broker to get worker’s compensation insurance prior to hiring any employees.
CONTRACTS
Employee Agreement - We recommend that all employees sign an employee agreement. This contract details terms for the employee regarding responsibilities, pay, intellectual property ownership, confidentiality, limitations on your liability, and other terms to protect your business. You should work with legal counsel to prepare a proper employee agreement.
Employee Handbook - Some businesses also benefit from having an employee handbook. These can be helpful to clearly communicate to your employees your company’s culture, policies, rules and employee benefits. These should be prepared carefully with legal counsel to ensure your policies align with the law and your company’s actual practices.
POSTERS
Employers are generally required to have certain posters on display in the work place. These include:
A Family and Medical Leave Act poster (for employers with 50 or more employees)
An OSHA (Occupational Safety and Health Act) poster, for all employers (some states have their own plans and posters)
A Fair Labor Standards Act poster from the U.S. Department of Labor, for all employers
A Notices to Workers with Disabilities Act/Special Minimum Wage poster from the Department of Labor, for employers who have workers with disabilities.
An Employee Polygraph Protection Act poster from the Department of Labor.
You can order these from the U.S. Department of Justice, or work with a Human Relations (HR) team or other vendor to confirm compliance for your business.
LABOR LAW COMPLIANCE
Minimum Wage - If you pay your employee(s) an hourly wage, you should ensure that you are at least paying minimum wage. This amount can vary based on your city and state. For example, below are a few example minimum wages based on jurisdiction, and many city and states require you to pay more than the baseline Federal or State minimum:
USA - $7.25 / hr
California - $12 / hr
Los Angeles - $13 /hr
Note, these amounts may be different depending on the size of your company, and these amounts change often, so you should definitely ensure the wage you pay meets the current minimums based on the size of your company and location.
Overtime - In California, overtime pay is generally required whenever a non-exempt employee works more than 8 hours in a day, or more than 40 hours in a week, or more than 6 days in a row. The general overtime rate is 1.5x the employee’s normal hourly pay. If the employee works more than 12 hours in a day or more than 7 days in a row, they may be entitled to 2x their rate of pay.
Meal Breaks - Non-exempt employees that work more than 5 hours in a day are entitled to a 30 minute meal break, and an employee must take a meal break before working more than 6 hours. It cannot be waived by the employee. The employer does not have to pay the employee during the meal break.
Rest Breaks - Non-exempt employees that work more than 3.5 hours in a day are entitled to a paid 10 minute rest break for every 4 hours they work.
Exempt Employees - Certain employees are exempt from minimum wage, overtime, meal, and rest period requirements. Generally, these are salaried executive or administrative employees that meet certain criteria. In California, the employee must meet the following tests to be exempt:
“Be primarily engaged in executive, administrative or professional duties (generally, this requires the employee dedicate about 50% or more of his or her work time to these duties);
Regularly and customarily exercise discretion and independent judgment on the job; and
Earn a salary equivalent to at least twice the state minimum wage for full-time work (based on a 40-hour workweek).”
OTHER COMPLIANCE
Every employer’s situation is different, and this guide is not an exhaustive list of all compliance considerations. We recommend all employers have some combination of legal, accounting, and HR support to navigate the complexities of hiring employees.