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Small business human resources basics

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The SmallBusiness.com WIKI Guide to Small business human resources basics is a collaborative project created by users of the SmallBusiness.com WIKI. It provides an overview of basics related to this topic. Find more guides at The SmallBusiness.com WIKI Guides Hub.

Finding Employees

Once you have identified the skills needed for the positions you want to fill, there are many sources that can help you recruit job applicants.

Public Services

Each state in the U.S. has an employment service (often called Job Service, Public Employment, Unemployment Bureau, or Employment Security Agency). All are affiliated with the United States Employment and Training Administration (ETA), and local offices are ready to help businesses recruit employees. The employment service will screen applicants with aptitude tests if they are available for the skills you specify.

Fee-Based Searches

Employment agencies specialize in finding industry or skill-specific employees. The primary advantages are the professional screening services provided by such agencies, including background checks and aptitude tests. Employers typically pay a considerable fee to the agency for its services.

Online job sites such as Monster.com are still the fastest growing method for employer-employee matchmaking. These specialized sites, along with the online classified sections from major newspapers, often provide the largest pool of prospective employees. However, most online sites do not offer the professional screening services offered by employment agencies. Additionally, businesses advertising on such sites are often inundated with applicants.


Colleges and universities usually have a distributive education program in which students work for you part-time or volunteer as interns while they learn about your business. Interns typically expect to learn skills or useful information relevant to their chosen field of study. Prior to contacting a school regarding interns, make sure that you have a clear idea of how an intern will benefit from working with you. If you're looking for someone to do clerical work with little or no opportunity for learning on the job, it's generally best to hire low cost help instead.

"Help Wanted"

If you have a traditional storefront and are seeking generalists, one of the oldest and most reliable recruitment tools is a simple sign in your window. The most obvious advantage to this recruitment method is that it is free. There are serious disadvantages, however, including attracting unqualified applicants with a vast variety of skill sets, and the difficulty of talking to prospective applicants while conducting business.

Alternative Staffing Solutions

How do you cope with unexpected personnel shortages? Many businesses face this question because of seasonal peaking, inventory, special projects, several employees simultaneously on sick leave, or an unexpected increase in business.

Entrepreneurs must also cope with the rising costs of employee benefits, as well as all the payroll record keeping required by local, state, and federal government. This section discusses alternatives available to meet these staffing challenges. Options include temporary help services, employee leasing, professional employer organizations, and service contracting.

Temporary Help Services

Most businesses need extra help sometimes, and temporary shortages are especially difficult for smaller businesses. A temporary personnel service hires employees and assigns them to companies requesting help. The service is responsible for payroll, bookkeeping, tax deductions, workers' compensation, fringe benefits, and all other employee costs. Most national temporary personnel companies also offer performance guarantees and fidelity bonding at no added cost.

Workers supplied by a temporary service firm are quickly available. Usually they can start the day after a request is made, and sometimes the same day. Although the rate paid to a temporary service firm is higher than that paid to a permanent employee, the costs of recruiting, record-keeping, training, overtime, and idle periods are much less.

Evaluate temporary personnel services using these factors:

  • Reliability: Is the service well established, with a history of success and financial stability?
  • Recruiting: The firm with an aggressive recruiting program is more likely to have the most skilled and reliable employees.
  • Testing and evaluation: How does it test and evaluate personnel? Training programs: Does the company train personnel in modern office methods, word processing, records management, and other important skills?
  • Quality control: Does the company check the quality of work of its temporary employees? A temporary service will ask for information about the department the employee will be working in, duration of the assignment, working hours, dress code, smoking rules, and other important information. If possible, send samples of the work. Be sure to give the exact location of your business, transportation available, parking information, and the name and title of the person to whom the temporary employee will report.
  • Niche or Specialty: Does the staffing firm specialize in the type of employee or business sector that you are in? How well do they know your industry?

Temporary help services are not appropriate for all needs. Businesses needing a temporary worker for six months or longer should hire a full-time employee. For jobs that require extensive supervision, it may be cheaper to pay overtime to a regular employee than to use a temporary worker.

Employee Leasing

Employee leasing is sometimes confusing because it may refer to activities similar to employing temporary personnel or it may be similar to the co-employment arrangement of professional employer organizations (see below). If you are depending upon the leasing company to provide personnel, (including identifying, skill sorting, hiring and assigning them to your business) and these workers would return to the leasing company for reassignment should your need for them end, then the service is basically the same as temporary services. If, on the other hand, you are depending upon another company to supply the management of human resources, employee benefits, payroll and workers’ compensation for all of your work force, then this is a co-employment or professional employer organization arrangement as described below.

Professional Employer Organizations (PEOs) or Co-employment

In a professional employer organization arrangement, the PEO will co-employ your existing work force and will become a legal employer responsible for payroll, record-keeping, benefits and services, and participation in hiring, evaluation and firing. In the PEO arrangement, employer responsibilities are shared or allocated, with the PEO focusing on the management of human resources, employee benefits, payroll, workers’ compensation and related employment-related issues, while you focus on the core operations of your business.


  • Savings of time that was formerly spent on employment-related paperwork and meetings with various outside agents (health insurance agent, payroll company and others).
  • Improved access to employee benefits.
  • Help with employment law compliance issues, personnel policies and employee handbooks.
  • Records that are uniform and easily audited.
  • Claims management for workers' compensation and unemployment.
  • Professional advice on human resource issues.


  • Employer retains responsibility for productivity and conduct.
  • Certain labor union contracts or state laws might keep certain employers from using co-employment arrangements.
  • Co-employers require the value of one full payroll in an escrow or trust account in addition to regular payroll costs.
  • Additional federal protections may be available to workers as part of the PEO's large labor force that is co-employed by multiple small businesses. This can impose new requirements and costs on the small business.

Service Contracting

Because of the infrequency of the need or the specialized nature of the work, many business needs are better met by contracting for the service rather than hiring permanent employees.

Services often contracted include:

  • Security
  • Janitorial
  • Waste management
  • Equipment/mechanical maintenance
  • Merchandise delivery
  • Payroll accounting
  • Printing
  • Data processing
  • Messenger
  • Grounds upkeep
  • Interior decorating
  • Building upkeep (remodeling, roofing, painting)
  • Specialized services (installation, servicing and cleaning of appliances, carpeting, and furniture)

In these situations you enter a contract with a business to perform specific services, during a specific period or at a specific time, for a specific price. The terms of the contract cite responsibility for providing any materials or equipment necessary to perform the service and other requirements for successful completion. It is the contracting firm's responsibility to provide staff, pay them, and supervise them.

When contracting for services, it is wise to require:

  • References from other companies that have used the contractor and will comment on the quality of contract performance.
  • Certificates of insurance demonstrating that the contractor has adequate liability and other coverage for its employees.
  • Copies of required licenses for performance of certain services.
  • Appropriate warranty or guarantee on the quality of the work.
  • Clear payment schedule including possible retainage (holding back of a portion of payments) pending satisfactory completion of a project.

Proposals for services usually are presented and detailed on standard forms designed by the contractor. It is wise to have your legal counsel review the terms of the documents before you sign them, to avoid any misunderstanding of your obligations. Such a review also may suggest amendments benefiting you that are also acceptable to the contractor.

Employees Taxes

If you have employees, you are responsible for paying various federal, state, and local taxes. Some of these apply to employers, some are levied upon employees, and some apply to both. You are also responsible for the timely payment or deposit of any employment taxes that are withheld or that you are responsible for paying as an employer. As an employer you should be familiar with the following payroll taxes:

  • Withholding Taxes (Federal, state and local)
  • Social Security Taxes
  • Federal Unemployment Taxes
  • State Unemployment Taxes

A more thorough discussion of your employee tax obligations as a business owner can be found on the IRS' business pages.

Employment Law

Business.gov contains information on the laws and regulations that govern the hiring process under the following subject categories:

Employee or Contractor

Independent contractors are individuals who are in business for themselves and hire out their labor to clients. Often, business owners prefer to hire independent contractors rather than maintain employees because of the contractor's unique advantages. By hiring an independent contractor, the small business owner does not have to pay the employer's portion of the Social Security tax, unemployment taxes, workers' compensation insurance premiums, or employee benefits -- thereby saving 30% or more in employee costs.

Employers are cautioned to be extremely careful not to misclassify a worker as an independent contractor. Such misclassification can lead to the employer being held responsible for uncollected income taxes, Social Security taxes, unemployment taxes, and penalties for not having adequate workers' compensation coverage.

Different federal and state government agencies have different ways of assessing whether a worker is an employee or an independent contractor. Among those agencies are the IRS, the U.S. Department of Labor, state taxing authorities, and state unemployment and workers' compensation agencies. One commonly recognized assessment is the IRS' 20 factor test.

Employee Benefits

Employee benefits have a significant financial and administrative impact on a business. The educated American work force has come to expect a comprehensive benefits program; the absence or inadequacy of such a program can seriously hinder a company's ability to attract and retain the best personnel. Designing the right benefit plan for your employees is a complex task that includes taxes, legal aspects, funding, and selection of vendors or administrators.

What is an Employee Benefit Plan? An employee benefit plan protects employees and their families from economic hardship brought about by sickness, disability, death, or unemployment; it provides retirement income to employees and their families; and it provides a system of leave or time off from work.

A comprehensive benefit plan can include health insurance, disability insurance, life insurance, retirement plan, flexible compensation (cafeteria plans), and leave from work. Broadly defined, a benefit plan can include other components such as bonuses, service awards, reimbursement of employee educational expenses, and other benefits appropriate to employee responsibility.

Why Offer Your Employees Benefits? Here are some of the reasons employers offer benefits:

  • To attract and hold capable personnel.
  • To keep up with competition.
  • To foster good morale.
  • To provide opportunities for advancement and promotion as older workers retire.

A combination of benefits programs is the most effective and efficient means of meeting employees' economic security needs. For many employers, a benefit plan is an integral part of total compensation, because employers either pay the entire cost of a benefit plan or have employees contribute a small portion of premium costs for their coverage.

See also

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