Financial Sins of Startups and Small Businesses: Mis-Classifying Workers and Other HR Mistakes

I post tons of articles that I find around the web to help you all move your businesses forward. Often, people write in asking me to elaborate on those articles so I started a series to do just that. I recently posted an article from Entrepreneur about common financial sins entrepreneurs make. The next of the big financial sins is the mis-classification of employees.

Some of the biggest mistakes that new entrepreneurs make are mistakes that, if they’re honest, they know they’re making while they’re making them but they just feel so busy and over-whelmed that things slip through the cracks. Other super common mistakes, however, are made completely accidentally, without the entrepreneur even knowing a major mistake is being made. These unknown mistakes aren’t any less harmful because you didn’t realize what you were doing, however, and one of the huge ones that the IRS, the Depatrment of Labor, and others are cracking down on lately is the improper classification of workers and other major HR no-nos in your business.

There are a few big oopsies that happen over and over again here, so let’s take a look one by one.

First up is the issue of classifying certain of your workers as independent contractors when they should be classified as employees. You all know I’m a big fan of bootstrapping and utilizing independent contractors is one technique to help entrepreneurs accomplish that. However, it’s important to remember that, while the use of independent contractors can be of great benefit to businesses in certain situations, you need to make sure that these independent contractors are actually independent contractors and not employees whom you’re just avoiding classifying as such.  This is such a big issue lately that I actually did another post just about distinguishing between employees and independent contractors. Stick around until the end of the video or head over to CateCosta.com, if you’re not already there, to get the link.

Next up is the improper use of unpaid interns. Again, as a huge advocate of bootstrapping I’ve talked about the value you can get from unpaid interns in the past. However, it’s important to realize, before you launch an internship program, that there are strict rules you need to follow in order to not run afoul of employment law when doing so. If you want to implement such a program, your best bet is to speak to an employment lawyer so you’re clear on all the rules in your state. The basics, however, are that the internship needs to be about the intern learning and gaining experience, not about your business benefitting. If you don’t have the time or inclination to mentor and nurture interns, if you don’t want to do the paperwork necessary for them to get university credit for their time as interns, or if you expect them to contribute to the team in a way that an employee would, an unpaid internship program is not right for your business.

Thirdly, there are bunches of other major HR no-nos that you need to be sure to avoid in your business:

  • Follow the rules in the hiring process so that there will be no issues of discrimination
  • Follow the rules in the firing process for the same reason
  • Take any reports of or complaints about issues in the workplace very seriously and follow the mandated procedures to protect your workforce
  • Abide by OSHA requirements
  • Don’t be slow or stingy about paying out workers who leave the company for unused sick or vacation leave

The list could go on and on, but the message should be clear: follow the rules and you’ll avoid future headaches.

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