When to Say, "You're Hired!"

Business owners, human-resource specialists, and lawyers offer 12 guidelines on making your first hire

Teresa Ornelas' first hire wasn't that difficult. Barely six months into founding her business, Great Impact Inc., which sells promotional products emblazoned with corporate logos, Ornelas realized that she would need one more hand to help in sales and marketing. But instead of posting a classified ad, she relied on family and hired her sister, who lives in Tempe, Ariz., where Ornelas' startup is based.

Her sister was working as a nurse, and Ornelas believed that her compassion and ability to communicate would add value to her startup. She was right. Her sister landed the first large order -- Christmas gifts for a coffee plantation's 13 offices.

When Ornelas needed a second employee, she hired her sister-in-law, who has an accounting degree. "I consider myself very fortunate that I could hire members of my family who shared my dream," says Ornelas.

But not everyone has the good fortune to have family members they can tap when they are expanding or launching a business. And while it is usually clear you need to consider hiring a first employee when stress soars and productivity declines, it is one of the hardest decisions for most small-business owners to make.

Employees play a critical role in the success of any business, so it seems helpful to try to answer the daunting question: How should you go about hiring your first employee? BusinessWeek Online talked to business owners, human-resource specialists, and lawyers to get their perspective on what people need to keep in mind. Twelve of their guidelines follow:

1. Defining the role.

Yes, initially all small-business owners wear multiple hats -- from CEO and accountant to receptionist and marketing manager. And that's good because, as a small-business owner, you get to know and understand all aspects of your business (and maybe discover some hidden talent you never knew you had along the way ).

But no one can do it all. You have to determine the specific skills and experience you're looking for in an employee. And yes, define a job title along with a list of all the employee's responsibilities.

2. Salary.

Once you've decided that you want to expand your staff, determine what you can afford with your future cash flow and see whether you need a part-time employee, temporary contractor, or full-time staffer. Do some research with human-resource experts and find out a competitive salary for the position.

3. Hidden Costs.

A salary is just the beginning. Don't forget that the new employee will need a computer, Internet access, office furniture, a telephone, supplies, and possibly more.

4. Where to look.

Like Ornelas, it's a pretty good idea to start your search within your circle of friends and family. Many small-business owners hire their spouses, if they're qualified for the job. You can also attend local-business or industry get-togethers and mention that you are looking for somebody who would be interested in working for a small business or startup venture.

Let people know you have an immediate opening, in case they are interested or can pass the word along to someone who might want to consider a job switch. You can also place an ad in the local newspaper or visit Web sites such as Monster.com to search for applicants.

5. Interviewing.

At the first meeting, it's hard to judge if the person sitting in front of you is honest or motivated. But you can certainly ask valid questions that deal with how the candidate dealt with different situations in previous jobs. The candidate's answers will give you an idea of the their ability to handle situations and might even reveal a bit about their character.

And, yes, do check all references concerning education and previous jobs. Once you've made a job offer and it has been accepted, put everything that you negotiate with your new hire in writing -- the salary, job description, and start date. To protect your business, you might also want to consider adding a noncompete clause. "Such a clause will prohibit an employee who leaves from competing with your company or soliciting your customers," says Michael Karpeles, head of the labor and employment group at the law firm Goldberg Kohn in Chicago.

6. Pay and benefits.

Some employees will understand that you might not be able to offer a big salary. However you can offer variable pay that's performance-based. This allows you to keep your fixed costs low and lets your employees share the gains.

For example, a sales person who helps bring in a big new client can get a share of the profits, a computer software writer can grab extra payments for meeting a big deadline. Indeed, at more and more small companies performance awards make up over 50% of salaries, say human resource experts.

And if you want to extend benefits, figure out what you will be offering, since health and life insurance combined with disability insurance can make up as much as 40% of payroll, but are great incentives to help you lure experienced staff members.

7. Growing.

As you grow in both size and sales, hiring decisions can get more complex . "Once you cross $500,000 in annual sales, you need to know which employees are exempt from overtime pay and other such time-keeping details," says Carol Losee, president of Workplace Dimensions, a human-resource consulting and training firm. You need to buy workers' compensation insurance once you have three employees, and some experts advise getting it from the day you hire your first employee.

8. Legal tips.

When you hire employees, you join a wider universe of employers, which means you need to comply with certain rules. For instance, you have to make sure your employees have their immigration paperwork at your desk within three days of hire and fill out an I-9 form with the U.S. Labor Depart., or you could be slapped with a $1,000 fine for noncompliance.

Also, most states require you to report a new hire within 20 days. Remember, you also have to comply with the Occupational Health & Safety Act, which requires a workplace free from health hazards, once you have 11 employees.

And if your business grows to more than 15 employees, you also have to display state and federal posters that inform employees workplace discrimination is illegal. Once you hire over 20 employees, you have to comply with the Consolidated Omnibus Budget Reconciliation Act (COBRA), which requires businesses that provide health-care coverage to offer employees a way to continue their coverage after employment is terminated.

9. Outsourcing.

Don't forget to think about payroll, Social Security, and tax deductions. "Outsourcing payroll to experts who know when and what taxes need to be paid is a good idea," says HR expert Losee. Services like payroll.com, and thecpaexchange.com are widely available.

10. Create an employee handbook.

"Employees can use handbooks to find answers to basic questions instead of wasting a manager's time," says lawyer Karpeles. The policies can focus on harassment-prevention, use of Internet, and company e-mail, code of conduct and ethics, dealing with conflicts of interest, grounds for termination, competing, moonlighting, and dating in the workplace.

Once you've established these policies, train your managers on how to address specific situations when rules are broken. This will help keep turnover low.

11. Documentation.

Make sure you have two files for every employee -- one related to the job and another with medical and confidential information. Set up a performance-review process that will help you and your employees set goals and keep everyone focused on the job. "Besides, documentation is important in case there is a lawsuit by an employee claiming discrimination, because a paper trail will be able to disprove it," says Karpeles.

12. Sell excitement.

You may find it hard to accept that a potential employee doesn't seem to share your passion for the business. So how do you resolve this? You could inspire people with your enthusiasm for your company. "Entrepreneurs sell excitement, opportunity, and fun, and even the notion that you can control your destiny by joining a smaller company," says Gabriel Goncalves, who has started and sold two companies in the past and is now president and CEO of People Answers, a company that uses behavioral analysis to match candidates with jobs.

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