Introduction
One of the most exciting moments for any small business owner is to employ their first employee. It indicates that the business is expanding, growing and that people have confidence in its future. But, hiring in the wrong way without fully comprehending the legal, financial and operational issues involved can cause expensive issues that are hard to rectify.
There are many reasons why founders put off hiring, such as the financial burden of hiring, government laws and regulations, tax issues, and employment contracts. Others hasten through the process, as they are feeling pressured and need an urgent solution. Both have the potential of hurting the business. Earlier hires are more expensive and too late to hire means the company will not grow as much and productivity will suffer.
The most important thing is to follow a meticulous approach, while keeping the costs affordable and meeting the regulations. Whether it’s defining the role properly or establishing the payroll systems and induction process, each decision can impact on the employee’s success and the business’s success. This guide outlines key considerations for small business owners before hiring their first employee, with a particular emphasis on Nigeria and other developing countries where laws governing employment and statutory deductions can be confusing to small business owners.
If you’re trying to take a different way with the first hire, this extensive article will help you get it right and establish a repeatable hiring process that can help sustain your growth.
Your First Hire Have a Significant Impact on your Company.
Your first hire will shape the culture of your business, how your customers experience it and how your business runs more than just about any other hire you make. Early employees are likely to wear many hats, be directly engaging with customers and helping to set up systems and routines that the future team members will follow. The wrong person in the job can cause financial losses, productivity issues and legal liability, risks that are often not something that small businesses can take on.
When deciding to put up a job ad, ask yourself if you really need to hire someone on full time employment. An instant problem can be solved at a lower cost by a contractor, freelancer, virtual assistant or a part-time worker. Analyze your workload thoroughly, and determine which tasks are repetitive and are taking up time and are not helping you to build revenue. When they continually put more work on you than you are able to do and are directly impacting growth opportunities, it may be time to hire.
It’s also worth considering your business needs to be able to cover the cost of your employment for at least six to twelve months. Wages are just a part of the costs of hiring. The cost of a hired employee comes in a variety of forms: recruitment costs, onboarding time, equipment, software subscription, taxes, pension contribution, training expenses and more. Taking measures to prepare for these costs before you put an offer in to a job helps you avoid job loss and ensures that you have cash flow available for these costs.
Step 1: Before you start looking for candidates make sure to define the role.
A common mistake made by employers is to hire a person, rather than solve a business problem. They post open jobs like “operations assistant” or “general staff” but don’t specify what the candidate is expected to do or level of performance. This will result in confusion at the time of recruitment and frustration once recruited.
List the things you do that somebody else could do. Bring all activities together and establish the desired results of the job. Don’t get caught up in the title; rather, the measurable objectives. If assistance is required to answer customer questions, deal with stock control and place orders, for instance, make it clear what duties you are responsible for and how much time is needed for each task.
There should be a description of the purpose of the job, key responsibilities, necessary skills and knowledge, reporting relationships, working hours, pay band and job requirements. It should also indicate if it is a remote, hybrid, or office-based position. This stage will bring in more qualified candidates and minimize turnover, as job seekers know they have the right job up front.
Don’t overwhelm your first employee with too high expectations. Early hires will be assigned to a number of tasks, but if there are too many unrelated tasks, productivity and employee satisfaction will drop. Knowing that the more critical requirements of the business should be given top priority and allow for expansion as the business grows.
Step 2: Ensure that you are determining between an employee and an independent contractor.
Misclassification of workers is one of the most frequent compliance errors by small businesses. The practice of employers designating full-time employees as independent contractors is sometimes used to evade taxes, pension and payroll requirements. These are, however, under more and more regulatory pressure.
You’re usually in charge of your employees and they’re under your direction and control. You set their hours, outfitted them with tools and equipment, oversee their work and incorporate them into your business. Independent contractors, on the other hand, typically set their own hours, schedule and work with a number of different employers, and work with their own equipment.
Back taxes, penalties, unpaid benefits, and legal issues are consequences of misclassification. When considering a working arrangement, please check local labor regulations and discuss with a qualified Lawyer or Accountant if required. Contractor arrangements may provide cost savings on short-term basis but the risks of non-conformance on long-term basis do not compensate for these savings.
When a long-term commitment is needed, direct supervision is necessary, and constant support is required, it is likely that an employee is the better choice. A contractor may offer a more economical option if you have a specific project that requires a specialist to do it.
Step 3: Establish an Achievable Hiring Budget
When you’re figuring out a salary to post, don’t just think about what you can afford to pay every month, rather think about the cost of employing the individual. One guideline is to expect to spend 1.25 to 1.5 times the employee’s gross salary in employment costs, including the statutory contributions, equipment, training and administrative costs.
The first step is to determine the revenue or output that the employee should produce. Figure out how their work will relieve you of time, be more helpful to customers or boost sales. After that, look at those benefits in comparison with the overall cost of employment to make sure it is cost effective.
If, for instance, you believe that an employee will be able to give your business more customer orders or you can bring in new clients, try to gauge the results in terms of revenues in the next six to twelve months. This can help to put cost of hire into perspective as an investment.
Be sure to factor in any expenses that are incurred on a one-time basis, like laptops, desks, software licenses, uniforms, and onboarding materials. Many businesses are not aware of these costs, and see cash flow problems in the first few months of employment.
Step 4: finalize a Written Employment Contract.
Avoid using verbal agreements for hiring employees. Using a written contract will help protect both parties by setting rules and boundaries in clear terms, eliminating confusion. A formal contract not only shows professionalism, it can also help prevent disputes, even if you are not required by labour laws to use a formal contract in your jurisdiction.
Job tasks, pay, pay frequency, hours, leaves, confidentiality requirements, termination procedures, probation requirements, and dispute resolution provisions should be clearly spelled out in your employment contract. It should also provide an understanding of IP ownership and acceptable use of company equipment (where appropriate).
Make sure the contract adheres to any relevant labor laws, as far as minimum wage provisions, overtime regulations, annual leave, maternity provisions and notice periods are concerned. Risks may be unnecessarily imposed on your business if you use generic templates downloaded from the Internet, as the rules differ across countries and industries.
Carefully read the contract and take the advice of a legal expert before giving it to candidates. It’s much cheaper to get a lawyer to review the contracts than to deal with the legal issues that arise in your employment relationship.
Step 5: Sign up for Payroll and familiarize yourself with Statutory Deductions
Once you hire an employee, there are additional responsibilities you have beyond paying the wages. Various statutory contributions must be deducted, remitted and recorded by the employer.
It is important that employers become familiar with certain obligations in Nigeria that include Pay As You Earn (PAYE) tax, employee compensation requirements and pension contributions. PAYE tax should be withheld from employees’ wages and paid to the appropriate state tax office on time. Employers are also required to keep payroll records and submit payroll returns once a year. Also, the employers who are eligible are obliged to make a contribution to the contributory pension scheme, currently 10 per cent of pensionable earnings from the employer and 8 per cent of the employee’s pensionable earnings. Employers must also provide group life insurance coverage of their employees. (PwC Tax Summaries)
Further, if your business is large and complex enough, you might have other duties, such as those to the Nigeria Social Insurance Trust Fund, the Industrial Training Fund and others specific to your industry or sector. The same kinds of commitments are imposed in many emerging markets, but it’s not the same rate of contribution and the same reporting deadline.
The best way to remain compliant is to use payroll software or work with an experienced accountant that is familiar with local regulations. An automated payroll system minimizes calculation mistakes, creates pay slips, monitors deadlines and keeps accurate records.
Step 6: Create a simple, yet effective onboarding process
New hires that have a seamless onboarding process are more likely to be productive more quickly and less likely to leave early. Unfortunately, many small businesses don’t bother with onboarding because they believe that it is only for large businesses.
Standardize an orientation process with a checklist of administrative, operational and cultural components. Set up the work area, tools and computers and ensure that their email account and software has been set up before the first day. Provide important documents, including an employee handbook, organizational policies and reporting processes.
In the first week, introduce concepts of business objectives, customer needs, channels of communication and performance criteria. Introduce employee to team members, train employee for their job, and set up regular check-in to discuss questions/concerns.
Onboarding should not stop after the first day. Try to develop a 30, 60 and 90 day plan with training goals, deliverables, and opportunities. This is a step by step procedure that helps the employee to realize what success is about and instills confidence during the transition.
Step 7: Implement a Probation Period with Clear Performance Metrics.
A probation period allows the employer and employee to test the working relationship to determine if it suits them. But probation will only succeed if the expectations are clearly stated at the outset.
Typically, probation periods of anywhere from three to six months are set up by most small businesses, which may vary based on the job position and the laws that apply. The performance should be judged during this time frame, based on objective criteria, not subjective.
Some examples of probation metrics are response time, sales goals, customer satisfaction, error rate, project completion, teamwork, and attendance. Put these expectations in writing and talk this through in the orientation process.
Have proper performance evaluations regularly during the probationary period. Give positive feedback, praise and acknowledge success and identify areas for improvement. Detailed documentation will safeguard your company in case of termination of the employment contract during the probationary period and will assist employees in understanding how to succeed.
Do not use probation as a way to indefinitely extend probation or as a substitute for good performance management. Communication and feedback will still be key elements in the employee lifecycle.
Step 8: keep accurate employment records.
One of the biggest areas of compliance that is overlooked by small businesses is their documentation of their employees. The lack of records poses problems in the event of audit, tax examination or any employment-related issue.
Keep records of each employee signed contracts and identification, tax information, payroll records, performance evaluations, leave requests, disciplinary actions, training certificates, and more. Keep records in a secure place and only make available to authorized personnel.
Digital record keeping systems make record keeping easy and secure. Cloud-based solutions also provide greater ease of access to the information when required and provide protection from data loss or damage of physical documents.
Know what local data protection demands are before gathering and saving employee information. You’re entrusted with personal information of your employees, and safeguarding these are not just a legal obligation but also an ethical one.
Establish a retention policy for the length of time records are to be kept after the employee leaves. Standards of documentation decrease risk and the appearance of professionalism.
Step 9: Avoid the most common compliance pitfalls.
SMEs often find themselves in non-compliant situations which could have been avoided by taking care of the employment relationship.
The most typical errors are salary payments made in cash without documentation, improper compliance with statutory remittances, and the use of incomplete working contracts, misclassifying workers, not keeping track of leave counts, and terminating employees without adhering to the proper procedures.
A poor practice is to make the hire because it is the cheapest option, rather than the best one. The consequences of underpaying staff include low morale, high employee turnover, as well as the cost and effort of hiring them again when they leave. The downside of paying less than the market rate is that people may be less inclined to work for you, there will be more turnovers and the time and money investment of hiring them back again will more than likely outweigh the savings you make by underpaying.
Compliance must NOT be considered a burden. Rather, it’s a risk management plan that helps to safeguard your company’s reputation and promote sustainable growth. Develop straightforward procedures, make good decisions, and consult experts if there are no clear regulations.
The aim is not to remove all the risks; it’s to set up systems that lead to your business staying compliant as it grows.
Conclusion
When you’re ready to expand your company, hiring your first employee is a crucial milestone that, when done right, can take your business to the next level. The process gets a lot more manageable when it is broken down into steps that focus on the following areas: role definition, budgeting, contracts, payroll, onboarding and performance management.
When business owners think beyond salary, and establish clear systems before making an offer, they’re successful in making the first hire. It can seem like a lot of work to take the time to comply, document, and onboard, but it will save you from expensive mistakes later on.
Keep in mind that your first worker is not a vacant position being filled in. They are an important part of your business’s future. These nine steps are a way to hire with confidence, stay compliant, and create a team that can help your business grow for the long-term.
Get more well researched information on how to Hire Your First Employee Legally here.
