California Computer Exemption - 2012

If you currently apply the overtime exemption under the California Computer Professional definition, be prepared for a cost increase in 2012. This exemption, which essentially allows companies to pay certain computer professionals on a salary basis if various criteria are met, is scheduled to see a 2.5% increase in the minimum salary requirement on January 1, 2012. This means that, in addition to the other requirements, you will need to pay your computer professional at least $81,026.25 next year in order to qualify, an increase of almost $2,000 over the current minimum. Of course, the cost to you as an employer is higher once you factor in payroll taxes and workers comp premiums on the additional pay, so it may be worth taking another look at the need for the exemption before committing to the pay increase. If your computer professional is working regular hours already, then you may not be getting much value out of paying him or her on a salary basis.

Spreading The Word

In the endless sea of startups, one of the toughest challenges is finding a way to stand out from the crowd enough to get the magical "buzz" factor in gear. Without a strong network of contacts, finding a way to get people to try out your new site could get frustrating. Most often, we look to our friends and family to help us get to critical mass, but unless they can help you spread the message to the masses effectively, that's all you'll have in the end. I recently came across a really interesting concept that addresses this issue in a very clever way. Wahooly has established a base of highly influential users (bloggers, twitter fiends, industry pundits) that can help get out the word for your new startup. They're gathering applications from which they will select 200 companies to present to their users, who will generate buzz in exchange for a small piece of the action. For example, a company can offer 5% equity to be shared between 5,000 Wahooly users, who's influence could reach huge audiences and immediately draw mass attention to the site. This investment in the company motivates the Wahooly users to pull out all the stops when sharing the news with their networks because they don't get rewarded if it doesn't succeed. You can also use the Wahooly base as your initial beta users, giving you instant mass and valuable feedback. All in all, it's worth checking out as a means of accelerating the development of your business refinement of your site. Here's a link to learn more about Wahooly.

Evaluating HR Options - Speed, Cost & Quality (Part 3)

In our final part of this series, we'll consider the needs for quality in your human resources administration, then tie all of the factors together in a few typical solutions. When you're thinking of the quality of your HR, the main thing to remember is that there's no specific level or amount that's going to completely eliminate your risk as an employer. The true value of quality will reveal itself when things do go wrong and you find yourself prepared and organized to meet the challenge before you!

• Quality - How good does it have to be?
• Payroll:  Standard payroll processing is fairly straightforward, allowing some to do it themselves with the right software. When you have more complex needs though, like multiple worker classifications in different locations, then you'll want to consider more than just the mechanics of payroll and make sure it's paired with high caliber compliance experts as well. There are variations in the laws between states and sometimes even counties or cities, which can be overwhelming.
• Benefits: Traditionally, benefits are meant to help employers attract and retain top talent. These days, cost seems to have undermined this objective as companies strip down their plans to make them more affordable, which is beginning to frustrate their employees. One commonly overlooked area can help mitigate this effect though. 67% of employees that understood their benefits are more likely to be well received, particularly if the plan features have been diminished. The educational campaign needed to achieve this result comes from using benefits professionals that can do more than just explain what the copays and deductibles are.
• Compliance: The amount and complexity of the regulations you are governed by as an employer depends on your size, but you're on the hook even with your first employee. Working with templates may be oversimplifying things as they rarely cover the sheer mass of filings and forms that need to be maintained. Due to the constantly changing legal landscape, the language in your policies needs to be regularly monitored to make sure it's up to date. The more complex your employee structure is (independent contractors, exempt employees, multiple locations, etc.), the more experience you'll want someone to have in the area of compliance.

Whether your a new startup company or considering human resources for the first time, there are three main options for you: do it yourself, hire someone internally or hire a firm externally.

DIY - Using templates and help lines to manage your HR administration.

1. Speed - Since you'll be doing payroll and billing reconciliation for the benefits, it's going to take you more time to attend to the compliance duties you've taken on, so do as much prep work as you can in advance when you do have time.
2. Cost - All this option will cost you is maybe the access fee to the toolkit and a call center for HR help, so this will probably be the least expensive way to manage your human resources administration.
3. Quality - Unless if you happen to have some formal training in the field, you're putting your fate in the hands of the toolkit you're using, which may not be refreshed very often. At the very least, it will be up to you to constantly check to see if the updates are available, and that can get complicated if you're not sure which parts apply to you and your business.

Hire Staff - Obtaining one or more professionals that will serve as your HR department internally.

1. Speed - The average ratio of HR to staff is about 3 for the first 100 people, then about 1 per additional hundred. The high initial number is needed to make sure you have sufficient people to act as backups and provide areas of specialty. 3 people will work quickly enough to keep turnaround times low on most items because they can handle multiple tasks at once.
2. Cost - 3 entry level HR specialists will probably run you at least $100k/year in total compensation, so this will be the most expensive option on the table.
3. Quality - There's only so much expertise you can acquire working internally because you may not have experienced all of the things that could go wrong to know what to do. HR staff that come from a consulting background are more likely to have a well rounded experience, but be ready to pay top dollar to snag them for your own.

Outsource - Contract with an HR firm to provide you with human resources administration.

1. Speed - With their larger size and specialized staff, the firm is more likely to have efficiencies in place that get most tasks done quickly, especially when they require interaction with red tape factories like insurance companies and government agencies.
2. Cost - Because the outsourcing firm will serve as a cauldron of expertise and be able to take on many of the time consuming duties like payroll and benefits administration, you'll probably only need just one internal HR contact for them to work with. This would save you at least $60k/year and a good chunk of that will remain even after paying the firm for its services. You would also gain access to insurance programs commonly at lower rates because of their aggregated policies across their clients. However, if your company only has one location and your staff gets to more than 400 employees, you may find that the economies of scale no longer have the same value they did when you were smaller. In those cases, you can probably begin shifting to an internal HR structure.
3. Quality - Unless you hired HR commandos under option 2, you're probably not going to find a more seasoned team to keep you out of trouble than the outsourcing firm. You usually get specialists focused on the each of the separate HR disciplines who will be at the top of their game and have a constant pulse check on the latest developments.

As you can see, it all depends on what you need and what your means are. Sometimes rolling up your sleeves is all you can afford to do, other times you may be so big that an internal HR department is justified, but when you're looking to focus only on your business and grow, the outsourcing option is a good bet!

Evaluating HR Options - Speed, Cost & Quality (Part 2)

Now that we have evaluated our need for speed, we can begin considering the costs of human resource administration. Determining a budget for these aspects of business operations largely depends on what your expectations and needs are. However, as we'll see below, you don't necessarily get what you paid for in HR. Sometimes (sadly not always) a less expensive option can also be more efficient!

• Cost - How much should I spend on it?
• Payroll: Depending on your needs, you might either do this in-house or outsource it. Contrary to what you might think, it's usually more expensive to have someone process your payroll internally. Even a single entry level payroll administrator could cost you around  $35k/year! However, most companies will roll these duties into another position to save money. The real question is whether you can afford to have this responsibility fall on someone who will probably look at payroll as something they need to "get out of the way" from time to time. The penalties for mistakes can add up quickly because they will probably be repeated on several payrolls before they are identified and resolved. Outsourcing most likely gets you a specialist in payroll for a small fee in the neighborhood of $7-10k/year for a company of about 10 employees.
• Benefits: The main area of benefits costs employers are aware of are the premiums they're billed from the insurance carrier. However, there's also a substantial cost in conducting staff meetings and administering the billing and enrollment relationship with the carriers, especially when offering many choices to your employees. If you employ staff that are in high demand positions, like executives or engineers, the least expensive insurance plan may not be attractive enough for you to bring in top talent for your business.
• Compliance: Just being an employer places you at risk for labor issues, particularly in more complex states like California. Typically, the more experienced, diverse and specialized your compliance team is, the more it will cost you. The amount you allocate to this area will largely depend on your comfort level with risk. Most startup companies face a domino effect of consequences due to litigation because of the effect it has on their funding sources and in the press, so making sure you have as much expertise as you can afford goes a long way towards having peace of mind enough to focus all your attention on your product.

Evaluating HR Options - Speed, Cost & Quality (Part 1)

The old adage from car racing of: "speed, cost, quality... pick two!" wonderfully illustrates the challenges many business owners face when developing their plans for growth as well as evaluating the services of third party vendors. Very rarely will you have two options where there's a hands down winner across all three categories, so it's important to decide what is most valuable to you. When considering your choices for human resources administration, this decision will have far reaching consequences if you're not careful. Over the next three days, we'll take a closer look at these factors applied across the core HR duties of payroll, benefits and compliance.

• Speed - How quickly do I need things done?
• Payroll: Delays in payroll processing could get messy if checks are not issued when due. Depending on your pay cycle, you will have 7-10 days to issue checks after the cycle has ended. When dealing with terminations, you may even need to provide them a check on that same day!
• Benefits: Enrollment applications are usually done in advance of the effective date because most employers have a waiting period, so speed may be less relevant in this area if you're organized.
• Compliance: Timing can be critical when dealing with legal issues as deadlines can vary and huge penalties could apply. Although there may be lulls in the activity of this area, when something happens, you need to act fast.

Alternative Work Week Schedules (AWWS)

The typical workday is 8am to 5pm, with a 1 hour lunch around noon, resulting in 8 hours for work. So what happens when you need someone to work until 5:30pm? Well, either you can have them start a half hour later or you'll need to pay them overtime for the extra 30 minutes. If you really need that 8am start time though, the extra 30 minutes per day of overtime could add up fast, especially if you have more than one employee this applies to. One solution to the need for extended hours is known as the Alternative Work Week Schedule or Compressed/Flexible Workweek. This basically allows the employee to work their 40 hours/week in a way other than the traditional 5 day week without incurring overtime until after 10 hours are worked in a single day. For example, you could a 4 day week at 10 hours per day without running into overtime issues.

Establishing an AWWS is not something to be taken lightly though. There are very clearly defined steps that must be taken in order to have one, so make sure you have an HR professional in the loop to keep you in compliance during this process. Here are the basic elements:

1. Creating the policy - The employer can choose to implement a single schedule or offer employees the choice of a menu of schedules to pick from. The alternative schedule must include the regularly recurring number of days and hours, which employees it will apply to and how it will affect their wages and benefits. A notice of any meetings discussing the AWWS can also be included and must be provided at least 14 days before it can be voted on. While not a requirement, it's usually a good idea to think about how this alternative schedule will be affected by holidays.
2. The secret ballot - One common misunderstanding regarding an AWWS is that it is at the sole discretion of the employer. In fact, the employer can only present this alternative schedule to the affected employees, who must then be allowed to vote on it by a secret ballot before any work is done during business hours. The employer must hold the ballot on the worksite of the affected employees and bear the cost of conducting the ballot. The AWWS must be passed by a 2/3 vote.
3. Reporting the ballot results - The results of the secret ballot must be reported by the employer to the Division of Labor Statistics and Research within 30 days after the results are final. The report will be a public document and must include the final tally of the vote, the size of the unit, and the nature of the business of the employer.
4. Implementing the AWWS - You must wait at least 30 days after the results of the ballot are reported before you can have employees work under the AWWS. This time can be helpful in allowing supervisors to begin organizing their teams to ensure coverage is available on all of the days of the week.

At the very least, this process takes 6 weeks to complete, so think very carefully about the need to have an AWWS before investing this much time and energy into it. Also, once the AWWS has been approved, it can always be repealed by a 1/3 petition by the affected employees, which would require yet another secret ballot to be conducted. 

Overall, the alternative schedules can be a valuable tool to manage the costs of overtime when the business hours extend beyond a traditional 5 day, 40 hour workweek. However, an AWWS is probably not a good solution in situations where you are simply understaffed, but must provide output in specific time frames, requiring long hours each day. The alternative schedule is very likely to be repealed in these cases, so there's not much sense in going through the trouble of setting one up to begin with. You may be better off looking to other forms of mitigating overtime costs, like whether any of your staff may qualify as exempt or streamlining processes to improve efficiency. HR professionals are trained to consider all of these solutions when addressing the needs of the employer while keeping the workplace compliant, because understanding why you're ruling out an option is just as important as finding the right solution.

Independent Contractors

In the early stages of establishing a new company, employers often experience a period of sticker shock when seeing what is factored into the the total costs of hiring an employee. From recruitment fees to workers comp and payroll taxes, the costs stacked on top of the wages can add up quickly. However, when properly handled, the use of independent contractors can be a very clear and concise way to get work done. Since an independent contractor is a non-employee, businesses can take advantage of this fact to avoid paying payroll taxes, benefits and workers comp.

The number one misconception about independent contractors, or "1099 workers" as they're sometimes called, is that the employer can choose to pay anyone in this manner. In reality, the determination of who can be called an independent contractor is managed by a number of government agencies, like the Employment Development Department (EDD), which is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE), which is concerned with whether the wage, hour and workers’ compensation insurance laws apply. So what is an independent contractor? There are a number of factors that are considered, but basically think of it as someone who makes a living doing a particular task for multiple clients that isn't part of the core business of those clients, like a legal consultant for a flower shop. Here's a more thorough list of what is considered:

• Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
• Whether or not the work is a part of the regular business of the principal or alleged employer;
• Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
• The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
• Whether the service rendered requires a special skill;
• The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
• The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
• The length of time for which the services are to be performed;
• The degree of permanence of the working relationship;
• The method of payment, whether by time or by the job; and
• Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

The most important thing to notice in the list of criteria is that the court does not feel that intention is very relevant in determining the outcome. Instead, the classification of who is an independent contractor is based on objective tests. In other words, the status of independent contractor isn't something that can be changed by intention or agreement between the parties.

The California Supreme Court applied this "economic realities" test in S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. The main factor in that case centered around the question of who was basically in control of the worker and the work being done. If the business could decide what work is to be done and how it is to be done, then the facts would lean in favor of the worker being an employee instead of an independent contractor. In other words, if you do things like have a set schedule, required format or method for the work, then you might actually have an employee on your hands. That employee would then be entitled to all the rights of other employees, like overtime and payroll tax contributions from their employer. That means you could be on the hook for some hefty back-payments and possible penalties!

What do you do then if you've already got "1099 workers" but aren't sure whether you're in compliance? The bad news is that correcting the misclassifications won't erase your exposure to all of the liabilities for the time that they were improperly paid, but you will be able to prevent that liability from growing. Moreover, the IRS has recently instituted a Voluntary Classification Settlement Program to limit their past federal employment tax liability for current workers they are treating as non-employees by reclassifying them for future periods and paying a small percentage of the taxes owed in the current period.

HR Checklist: Pre-Angel Investment

At this stage, startups are maybe just a concept that's been put into a powerpoint presentation to pitch to Angel Investors. You might be thinking that there wouldn't be any need to think about HR this early. However, if you get what you're looking for, namely funding, you're going to need to dedicate as much of your focus on turning your concept into a reality instead of researching employment laws all day. Doing a little homework at this phase may even help with your presentation to investors by showing that you're thinking ahead about managing risk and addressing the challenges of growing your budding enterprise. Here are a few items to bear in mind before you dive headfirst into becoming an employer:


Talent Acquisition (aka Recruiting)

Although most startups have a core of founders that are prepared to wear multiple hats to get things off the ground, there will come a time when specialist professionals will be needed to keep moving forward. Since that doesn't usually happen until later rounds of funding, for now just think about how many people you'll need to get a working model of your concept up and running. Recruiting firms can charge upwards of 30% of the annual salary of a position, so if you don't have all the people you need in the core group, it could burn through your funding pretty quickly. Alternatively, you could look into bringing in contractors on a project level basis or talk them into joining the team in exchange for a little equity.

Benefits

Unless you have another way to obtain coverage, like through a spouse or your day job, your probably going to have to look into a way to get a group insurance policy for your startup to offer health benefits to your employees. The issue most entrepreneurs run into is that these policies are only for employees and don't extend to owners, meaning you'll need to get individual insurance for most everyone who has an equity stake in the company. The premiums in that market space vary wildly and can get pricey real fast, especially if you have health conditions. Because of this it can be tempting to forego offering insurance at all, but studies have shown that aside from pay, benefits are one of the most important factors for candidates considering an offer for employment. You could save yourself valuable company equity by thinking ahead and putting some of these programs into place.

Wage & Hour Compliance

If you think you're going to need to hire even one person as a payrolled employee, you must be prepared for the litany of rules and regulations that you are subject to under state and federal law. There are strict guidelines for the manner and amount someone must be paid, mandatory meal and rest periods, regulatory postings you'll have to keep updated, etc. The penalties for breaking these rules are severe. For example, having to shell out $1,100 for each time you failed to pay someone overtime when it's due can chew through funding in a hurry and possibly cost you the confidence of your investors! Before you bring in that first employee, make sure you have a professional HR consultant or firm onboard to keep you out of trouble.

Exempt vs. Non-Exempt

To most new business owners, employees typically fall into two pay categories, hourly or salaried. However, these terms fall under the much more complex classification standards of FLSA Exemptions. The Fair Labor Standards Act (FLSA) sets forth the criteria under which it is determined whether an employee is entitled to the benefits of overtime or if the employer is allowed to make that position exempt from that benefit. In a nutshell, when an employee's position satisfies certain requirements, it can be considered exempt and the employer may pay that employee on a salary basis. In other words, certain positions can be paid according to a fixed rate per pay period and wouldn't be entitled to receive additional compensation in the form of overtime if they worked past a certain number of hours.

It's often thought that classifying employees as exempt is better for the company's bottom line. However, most employers don't realize that paying someone on a salary basis comes with its own set of rules. For example, an exempt employee is entitled to receive a fixed minimum compensation regardless of the quality or quantity of work performed in that period. In other words, you're not allowed to reduce an exempt employee's pay because they spent less time working in one pay period over another. On the other hand, a non-exempt employee will only receive wages for the hours that they work, helping keep a tighter leash against paying for downtime.

The consequences for making a mistake on classification can be far worse than just an inefficient use of employee labor though. Criminal fines can be up to $10,000, with repeat offenders possibly being sent to prison. Civil penalties can reach $1,100 per violation, which would mean taking the number of employees affected multiplied by the number of times the wrong classification resulted in a violation. It goes without saying that taking shortcuts in this area can be a financial disaster. However, the damage can go much farther in the startup world, where investors are notoriously sensitive to ventures surrounded by bad press.

In the end, you're much better off having a professional help you make these classifications before you even have your first payroll processed so you can grow without fear and fulfill your aspirations of funding rounds and IPOs!

HR Isn't Important For Small Companies... Right?

It's a sentiment shared by many as they make their first foray into launching a new venture. Sadly, at the stage where your entire focus should be on developing your company, a flood of forms, registrations and insurance policies vie for your attention. Business owners are quickly consumed by tasks and responsibilities that are a far cry from what they had expected. This often gets delegated to the office manager who must contend with making sense of the thousands of complex labor regulations in addition to looking after the daily operations of the company.

The average business with less than 100 employees will have about 3 HR personnel on staff, costing about $60-$70k in total compensation each. If you've just received your Series A funding, you may want to think twice before dropping nearly a quarter million of it on HR. A much more cost effective alternative would involve hiring an outsourced HR solution, because even though it would allocate specialized staff to your business, it doesn't penalize you for staff downtime between HR events, like benefits enrollment and new hire onboarding. In my next posting, I'll go over some choices for outsourced HR and talk about how you can find one that's a good fit for your company.

Why Startup HR?

Many people have ideas, some go the extra mile to make those ideas reality. What most of them don't expect is the unending downpour of paperwork needed to stay compliant with today's complex labor laws, especially in the state of California. Worse yet, many aren't even aware of the requirements they are subject to when they start their businesses! Startup HR is a blog that aims to help new entrepreneurs focus on growing their businesses while minimizing their employment risks.

I've been an HR professional for over 7 years and worked with literally hundreds of companies in evaluating and addressing their employment risks, often finding opportunities for reducing wasteful spending while establishing a more robust program at the same time.