Copyright ©1998-2006 by Ethan A. Winning
By definition the entrepreneur is one who takes risks; the smart entrepreneur and business operator takes calculated risks. Most have a business plan, have consulted with an accountant, and often have sought advice from an attorney. However, in one area of tremendous liability and pitfalls, smaller businesses fall short in their planning and control employment relationships.
Twenty-eight states have some form of labor code; all come under federal labor codes and laws. Yet few owners/operators/managers study this area that affects their enterprises. They should, if for no other reason than to level the playing field with outside sources on whom they depend.
The most common hazards in employment relations are:
- Lacking policies and procedures. Saying too much in employee handbooks, thereby creating implied contracts.
- Absence of job descriptions.
- Misclassifying employees as exempt when they may be nonexempt. Misclassifying employees as independent contractors.
- Not bolstering an "at-will employment" doctrine. Putting too much faith in at-will employment.
- Inconsistencies in the application of policies (or actions which become policy). Giving preferential treatment to an employee or group of employees.
- A lack of documentation.
- Not evaluating performance.
- Waiting too long to discharge an employee.
These are certainly not mutually exclusive. For example, because so many performance evaluations are haphazard if done at all and therefore, because documentation is lacking, it is often difficult to terminate the marginal or unsatisfactory employee. Even though "protected" by at-will employment provisions, one rarely can terminate an individual out-of-hand ... nor should an individual be terminated without some justification.
Lack of Policies and Procedures: Before a company hires its fifth employee, it should have some sort of written policies and procedures. While most companies wouldn't think of operating without a bookkeeping function, the majority do not think about putting employment policies in writing until after at least one negative incident involving the behavior of an employee.
Why the "fifth employee?" Most state laws, especially state laws concerning compensation or wages, are in effect for the very first employee. After that, the "magic numbers" seem to be 5, 10, 14, 20, 25, 50, and 100. As an example, while the federal government's maternity leave law is imposed on companies with 15 or more employees, some states have pregnancy leave laws which must be adhered to by companies with five or more employees.
It is not just because governments mandate adherence to the laws that smaller companies should have written policies and procedures. There are practical matters to be considered: what are the hours of work? What is considered tardiness? How much absenteeism is the company willing to accept? During the "introductory period?" Does the company provide medical insurance? Sick leave? How much vacation time is accrued and over what period of time? What actions can lead to termination? Has the company established itself in writing as an at-will employer?
The reluctance to establish some structure through written policies often emanates from an overly-paternalistic attitude toward employees and a fear that the company cannot compete with larger employers. Last things first: if the company can't compete with the larger company, then it can't compete, period. But many employees will join a smaller firm, perhaps taking risks as well, because the smaller organization offers more in the way of stability than the megacorp which has downsized seven times in four years. Security and a pleasant work atmosphere have become extremely valuable as lures for the smaller business.
"But," the entrepreneur cries, "how can this be viewed as a pleasant place to work if the first thing we tell the new employee is that we have an at-will employment policy, and then hand him or her a handbook that tells them how we can fire them?" First of all, the handbook is a mix of the positive and negative. Second, it establishes mutual expectations. Third, it communicates information that the employee must know in order to become a valued team member. Fifth, without policies and procedures, you have three choices: let your actions become your policies; have employees constantly asking questions about everything from hours of work to benefits; have employees who are too afraid to ask anything and perform by in a vacuum. Last, life is a tradeoff, and life in the corporate world seems to have this tradeoff (the positive and negative) only in smaller companies.
These apprehensions also lead to the smaller business person making promises within policy handbooks. The statement, "We hope you have many productive years with our company" is not the same as, "We know you will be with us many years." Nor is, "We provide benefits as we can" the same as, "You can expect to receive all the benefits here as you would with our largest competitor." These are actually minor compared with explicit contractual statements that I've found in manuals over the years. The admonition is simple: be careful in how much you say as well as what you say in employee handbooks.
An Absence of Job Descriptions: No one likes to write them, certainly no one likes to keep them updated, but the job description is a valuable tool. It describes the responsibilities of the incumbent in a job. (It should also describe the accountabilities, but rarely does.)
Invariably the first few employees are hired with only a vague notion as to responsibilities. The title "secretary" doesn't sound good in the 90's, so we give the title, "Office Manager." And, what does this Office Manager do? Well, he/she does all the things that a secretary does: computer input, typing letters, greeting people, answering phones and making calls, setting up meetings, and so on.
Quite often, we are taken in by titles, titles that we gave. We often think the job is more important than it is and, worse, we often think it should be compensated higher than it should. It's the same as believing our own D&B ratings. And that's the second thing a job description can do for you: it can give a wage range based upon what other secretaries, office managers, operations officers, sales people...are getting in the industry and location.
The job description should also be related to performance appraisal. How can an individual's performance be evaluated if the manager doesn't know what the employee is supposed to be doing?
Misclassifying Employees: What seems commonplace to someone who's been in Human Resources for 30 years is obviously not common knowledge in smaller businesses -- the difference between an exempt and a nonexempt employee. (See Labor Pains or the subscriber's section for a complete discussion.) The federal Fair Labor Standards Act, enacted in 1938, defines the difference between the two types of employees and gives the six criteria which must be met simultaneously for an employee to be exempt in one of three classifications (Executive, Administrative, and Professional) from the Act.
Although all criteria must be met, the most important at least in conducting a cursory evaluation -- are that the employee, (1) manage a department or function of the company or supervise two or more employees within the company; (2) use independent discretion and judgment without direct supervision; and (3) has the authority to hire or fire, or whose word will be given weight in hiring or firing other employees. There's more to it than this, of course, but for the purposes of this article, this will suffice.
If an employee is exempt from the Act, then the employee is not eligible for overtime, and this is perhaps where the confusion lies for an individual who is not exempt from the act is eligible and must be paid overtime. There are five states in which overtime must be paid for any time worked (by a nonexempt employee) over eight hours in a day. All states require that nonexempt employees be paid for work in excess of 40 hours in a week.
A title is not a criteria for exemptions. Therefore, you might give a title of vice president to the person on the loading dock: s/he is still nonexempt and eligible for overtime. Further, just because you were foolish enough to pay the administrative assistant $55,000 a year does not make that position exempt.
In determining whether an incumbent's responsibilities meet the criteria for an exemption, a job description is, once again, an extremely useful tool.
Throughout the country there are business papers such as the "San Francisco Business Times." Every week (or month) these papers usually publish a list of companies who have been fined or against which a lien has been placed for nonpayment of taxes, and about a third of the "violations" listed are for nonpayment of overtime. Considering the time-and-one-half plus penalties, failure to comply with the law can been very costly indeed.
Misclassifying an employee as an independent contractor is perhaps more serious because the IRS usually takes the view that the company had done so as a subterfuge from paying income and employment taxes. There are anywhere from six to 20 criteria for truly being an independent contractor -- depending upon which state and which federal or state agency you're talking to. If one criterion stands out, however, it is this: an independent contractor can and does work for more than one company.
At-Will Employment Clauses: All states except Montana recognize the concept of "at-will employment," employment that can be terminated by either the employer or employee with or without cause and with or without notice. Too few smaller businesses establish this right -- one of the few protections they might have. Why should a business have to establish the right if the law says that the company has the right? Because the employee must be notified that the company is an at-will employer and allows the individual to terminate his or her employment under the same conditions as the company.
At-will is so important that it should be on application forms (which all applicants should sign, including those with resumes), on "consultation" or "warning" reports, and on the first page of any employee handbook. But don't take too much comfort in at-will employment rights. Though it may be stated that the company can and will discharge an employee with or without cause, the truth of the matter is that there should always be some justification for dismissal. If the cause is "poor performance," back it up with a performance review. If the cause is that "the employee's personality just didn't fit in with the company's," one had better have some specifics: claims of wrongful discharge are not dead.
Inconsistency: Inconsistencies in applying policies and procedures can be the ruination of whatever structure a company has established. While many still adhere to the dictum that "rank has its privileges," sometimes the "privileged" give special consideration to their own subordinates. The VP of Engineering, for example, who allows his or her subordinates to be late while the VP of Accounting wants to dock his or her subordinates for being 10 minutes tardy, undermines all departments' attempts to be equitable in enforcing policy.
Furthermore, inconsistencies and preferential treatment such as this can lead to claims of discrimination. Admittedly, it is a tightrope, but it is one which must be walked. Treat all employees fairly and with equity: it is better to be consistently strong than weak.
Documentation: Forget what has been said for the past 20 years: the business world does run on paper. Aside from what normally goes into an employee's file -- and, yes, there should be a file -- be certain that there are the following documents: Application for Employment, any performance reviews and consultation reports, attendance records, and any agreements that have been signed by the employee such as trade secrets or nondisclosure agreements.
Any time that an employee must be disciplined should be documented. Initially, the document can be a handwritten note, but if the offense is sufficiently severe, a "formal" warning or consultation report should be completed, a meeting held with the employee describing the specific offense(s), and the form should be signed by the employee. (The employee should be allowed to rebut the report, but always have the individual sign the original even if s/he wants to write in a disclaimer.)
If the employee does something positive and worthy of mention that, too, should become part of the file. (We have designed a form, the "Occurrence Memo," which has both positive and negative actions listed.) The combination of such memos, always dated, makes evaluation of performance and positive or negative actions so much easier.
Performance Appraisals: Without periodic documentation, two major faults with performance appraisals will appear. These are called the "halo" and "horns" effect.
Simply, an employee performs marginally for 11 months and then, just prior to the formal evaluation, does something outstanding. The tendency is to rate the individual as "good" or "excellent" because of this more current behavior, termed the "recency effect" in psychological circles and the "halo effect" in Human Resources.
The opposite of the halo is the horns effect in which an individual performs superbly for 10 or 11 months and then errs in one way or another. The overall performance is evaluated as "marginal" or even "unsatisfactory" because of this one event.
For these and other reasons, performance should be evaluated and documented, both positively and negatively, on an ongoing basis. Be extremely careful in any policy stating the timing of evaluations. In 2002, there were at least two cases of employees suing for not having been given a review when "promised" in the handbook.
While one is admonished to document performance, it is also important that the documentation be clear and without indicating personal bias. One should not write impressions of behavior, i.e., "Joe is a slob," but rather factual incidents of behavior, i.e., "Joe came into work on 12-17-02, unshaven and generally unkempt." I use this latter example as a side note: if this is not Joe's normal pattern of behavior, then it is up to the manager to find out why there has been a change in behavior, attitude, actions. Perhaps the employee is having work or non-work related problems with which the manager might be able to help. Employees should be helped to succeed.
Waiting too Long to Discharge: Though it is usually in the best interests of a company to see that an employee succeed, there is also a time to cut one's losses. You can limit the company's liability by following a progressive discipline process, but you do not have to go through the three or four normal steps (counseling, probation, suspension, termination) over a long period of time. If you have done everything to "save" an individual, but the behavior remains, it is time to terminate the employment relationship.
Some years ago, I was hosting an online conference on CompuServe, and a business owner asked the following question: "I have an employee, one of the best in our sales force, who is late at least twice a week. It doesn't affect his work. Our customers love him. I've counseled him, but he keeps coming into work late. What can I do to get him into work on time?"
I had several responses. First, I advised that the employee be suspended without pay for two or three days and be put on formal notice that continued tardiness could lead to termination. Then I advised that, if this did not correct the behavior, the employee should be terminated. Regardless of how much the "customers love him," implied consent of tardiness has a deleterious effect on other employees. There is never an excuse for not getting up earlier to be at work on time.
The business owner left the forum without any response. We all know how difficult it is to fire an employee, but it comes with the territory of management and ownership. In this example, an employee who steals time, steals money.
These are some of the ways in which a company can limit its employment liabilities. Succinctly, preventative actions are positive actions.