Operations Team

Growing? Hiring? Avoid these 4 common small business mistakes

Think your business is too small for “HR” processes? Think again.

It’s understandable that your growing small business is sharply focused on accelerating sales, managing cash flow and, of course, serving your customers. But with growth comes the need to hire, and with that comes the burden of complying with complex federal, state and local employment laws.

Growing small business owners often put off putting in place the processes and systems for compliance, because, well, there are fires to put out every hour, it seems. But even small businesses with a just a few employees should select someone on the team to begin putting systems and processes in place for hiring and training (and firing), even if it isn’t the person’s full-time responsibilities.

Structures and processes are critical to continued growth, said Kiomara Hidalgo, a consultant with Florida SBDC at FIU specializing in staffing and talent. What company policies do they have in place to properly manage their people? Companies will not be able to grow if the CEO is running everything. CEOs need to start delegating and putting  systems in place, she said.

“When employees are not clear on what are the company policies and how they are expected to behave to represent the company, it is very difficult for the management to supervise employees and deliver good service,” said Hidalgo.

Begin by creating an employee handbook, she said. Have a procedure for terminating an employee, including how to manage the discussions with the employee and document the misconduct. Hidalgo recommends growth-stage small businesses create job descriptions, which will help the management better performance-manage their employees.

“When employees are not clear on their roles and responsibilities, it can create a lot of confusion and lead to poor performance due to unclear expectations,” she said.

Here are four common mistakes small businesses make as they grow and one tip. Let’s go!

Mistake No. 1: Having a casual protocol for hiring.

The first few hires for many startups and small businesses are people they know.  Either family, or friends, or friends of friends.  They are a relatively known quantity. It’s all informal and word of mouth, said Eva Del Rio, an HR consultant, columnist and creator of HR Box.

“But at some point, you have to begin hiring strangers.  But by then, the company has already developed poor hiring habits – make it up as we go along, no formal application, no references, not casting of a wide net of applicants, no clear job description/responsibilities,” said Del Rio.  “This can be detrimental because you are bringing people into the company without fully vetting them and they may or may not be what you need.  They have different expectations than friends and families, they are (likely) less loyal, and they won’t be as forgiving about payroll mistakes, or fudging of pay laws.”

A casual protocol for hiring can also lead to unintentional discrimination, said Patricia Milian, senior VP of ComplyRight, in her presentation at the Small Business Leadership Conference produced by the Jim Moran Institute for Global Entrepreneurship and Florida SBDC held in Orlando last month.

This can happen when hiring decisions are made from the gut, there are no written job descriptions, no training provided to interviewers and the interviewing questions are inconsistent from candidate to candidate, which also may include personal questions. Small talk during the interview is a no-no. Questions like ‘When did you graduate high school?’ and ‘So you have kids?’ can get your business in legal trouble.

The solution, Milian said, is straight-forward: Formalize the hiring process, train the interviewers and don’t let inexperienced managers interview alone.

Mistake No. 2: Keeping employees who underperform.

Many small businesses put off dealing with problem employees, but few things can bring down a small family-like team faster.

“The challenge I see is that some of the business owners struggle to break emotional ties with employees who are not performing. That has a chilling and demoralizing effect on the other employees who are performing. It’s almost a nepotism-like bond that they struggle to break,” said Hidalgo in an earlier interview. Maybe the under-performing employee has been with the company a long time and the business owner wants to reward that loyalty with a second, third or fourth chance. Be careful.

Keeping on a problem employee actually costs money, said Milian. It’s a quadruple whammy: lost productivity due to mistakes, it takes down morale, which may spur valued employees to leave, there’s the potential loss of customers, and of course there’s the legal risk.

The way to resolve the issue of an under-performer: document, document, document. Every incident, complaint or issue, every time, said Milian. Use progressive discipline procedures, which includes a verbal warning, then a written warning, then a final warning, before termination. Be sure to update employee policies as needed and train supervisors on performance management.

Mistake No. 3: Underestimating the importance of what’s required by employment law.

Many small business owners and startup founders are bright and talented, but don’t necessarily have great business acumen.  So they don’t know what they don’t know about employment law regarding their responsibilities as employers and the rights of employees, Del Rio explained.

“This is why they make mistakes like not classifying positions correctly, failing to pay overtime, not having an employee handbook, not documenting progressive discipline and employee evaluations, and  mishandling a termination,” she said. “All of these are in one way or another related to ignorance re: employment law.  This is why it’s a good idea after reaching 5 or 10 employees to either outsource HR or work with an HR professional consultant or a (more expensive) employment law attorney.”

Hidalgo adds this advice: “Educate yourself on what laws apply to your business based on the business size. Having a good understanding of employment laws and how they guide the employment relationship is critical for business success. It is the base for developing your policies and procedures and to ensure the company is protected from liabilities.”

Mistake No. 4: Treating independent contractors like employees AND putting the wrong employees on salary.

Hidalgo says companies need to rationally define the job and whether it should be hourly or salary. She also says she see far too much misuse of independent contractors that should be employees, leading to a financial risk for the company.

Up to 30% of businesses misclassify workers, whether intentional or not, said Milian.

So when should an independent contractor probably be an employee? Here are a few instances that should be red flags, according to Milian:

  • If he or she is working fulltime for the company and has no other clients.
  • If the worker is given a specific schedule or office hours.
  • The worker is given training and provided business equipment.
  • The job or task is open-ended or indefinite instead of a specific project.
  • The worker is paid by the hour rather than by project or deliverable.

Milian recommends using an Independent Contractor Agreement. Define the scope of the job and deliverables up front. Set up the contractor as a vendor and require invoices, which should always be paid out of Accounts Payable. She said ComplyRight has free webinars and other resources on this topic and many of the issues discussed in this story.

Similarly, small businesses need to be careful about which workers they put on salary.

While having workers on salary controls the wage expenses (no OT), some jobs must be paid hourly by law depending on the nature of the job and pay rate. Be careful. It is more common than you think for workers to sue for and win back overtime pay.

Milian recommends writing a job description for every role, reclassifying employees if needed, and implement procedures to control the overtime expense. “If in doubt, pay hourly,” she said. In her experience, 70% to 90% of companies get it wrong.

And the tip: Employees value regular feedback – yes, really.

A “big company” process that should be adapted by small businesses is employee performance management. But it shouldn’t be just a yearly thing.

According to a recent PricewaterhouseCoopers survey, 60% of workers say they prefer performance feedback on a daily or weekly basis, with 75% of participants saying they believe it’s valuable. However, less than 30% of workers say they receive constructive feedback/performance reviews from peers, clients, or customers.

Workers perform at their best when they are given regular feedback, and managers and business owners are seeing the value of investing in processes that enable their employees to thrive in the workplace.

Please send GrowBiz topic suggestions and feedback to GrowBiz@FIU.EDU


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