Do your employees work in teams?
Just because you use the word team to describe a group of people who perform similar jobs, like our service team, our sales team or our customer service team, doesn't mean your workers really work in teams. I'm referring to situations where workers collaborate. Where they work together to solve problems or deliver service to customers.
The nature of work is changing. And it's incorporating team work cultures more than it ever has. When I was in college, I was only required to participate in 3 or 4 team projects during my entire degree program. Now, students are assigned 3 or 4 team projects each semester. Does this mean young people are better at it than we were? Well, they've had more practice, but it doesn't necessarily mean they're better. Some people of all ages are more naturally individualistic while others more naturally gravitate to teams.
America has historically been a land of individualists - meaning most of us think people should be self-sufficient. We tend to put loyalty to ourselves before that of others, including our team and our company. But it's not all or nothing. Even the most individualistic of us will commit to a team if we perceive it to be in our best interest. Likewise, individuals who don't see any benefit to contributing to the team will physically or emotionally disengage from that team.
Some of the greatest success stories in team sports are linked to coaches or team leaders who convince superstar athletes to sacrifice individual goals for team goals. Hey, star, would you rather score 36 points and lose or score 18 points and win? We've also witnessed the team member who contributes very little, but expects to benefit from team rewards - like the character, Wally, in the Dilbert cartoon.
How can we know before we hire someone whether they naturally tend to be individualistic or to be more team-oriented? Fortunately, one assessment instrument offered by The Davidson Group does measure the degree to which someone's individualism is a motivator for their behavior. The more naturally team-oriented a candidate is, the less they'll have to adapt or modify their behavior to support team goals.
This assessment can be extremely helpful as a pre-employment tool. Let's say I'm hiring a hunter salesperson. I would probably prefer someone with a high degree of individualism. But if I'm hiring a customer service representative who's going to be part of a team that services customers collectively, I might prefer someone with lower levels of individualism. If I'm investing in either of these important roles, I'd want to know as much about what behaviors I'm likely to observe from my top candidates and what motivates their behaviors as I can before I extend a job offer.
Sunday, October 4, 2015
Top Two HR Compliance Risks
If I owned a small business that employs people, I'd make sure that I am getting the following two things right. The risks associated with mistakes in these areas are greater than the benefits derived from being non-compliant.
1. I'd make sure that each employee is properly classified per the Fair Labor Standards Act and I am paying overtime to whom I am supposed to be paying overtime.
Even if you had this right in 2014, you may not have it right in 2016. The Department of Labor proposed some important changes to overtime laws last summer and closed its comment period on those proposed changes in September. The new rules are expected to become law in the first quarter of 2016. The most significant change is increasing the salary test for exempt workers from just under $24,000 per year to potentially over $50,000 per year. That means any manager or supervisor in your company that makes between $24 and $50k is likely to no longer be exempt from overtime pay if they work more than 40 hours in a work week, no matter what their duties are.
Now is a great time to conduct a wage and hour audit to see if you have any potential risks, and to conduct contingency workforce planning to determine how you are going to handle those positions that may no longer be exempt. The penalties if the Department of Labor finds the problems before you do include payment of back wages and liquidated damages to any affected employees as well as fines.
2. I'd make sure that any relationships I have where I am paying a worker by 1099 are legitimate subcontractor relationships and properly documented as such.
Utilizing 1099 workers to supplement your core workforce can be a legitimate and legal strategy. The key is to look at it the way the Department of Labor and the Department of Revenue look at it, not the way many small business owners look at it.
Both the IRS and the DOL consider the use of 1099 a highly abused practice. So the DOL published a guidance in July 2015 to clarify the rules. Before, you might have been able to make a reasonable case that your 1099 workers could work for your competitors if they wanted to - it's not your fault they choose not to. Now, they're looking at the economics - are your 1099 workers performing similar work for other companies besides yours? If the answer is no, and they are working for your company pretty much exclusively, then the IRS and the DOL are going to conclude that those workers should be classified as employees and you should be deducting and submitting payroll taxes, even if you have a signed subcontractor agreement in place. And that's what they want - employers to be withholding and submitting taxes every payday.
The consequences of being ruled against can be quite severe, ranging from payment of back taxes they feel should have been withheld all the way to jail time in extreme cases. As a part of my risk management plan I would look at each relationship in my company and determine, not whether I think it's legitimate, but whether the DOL is likely to consider it to be legitimate. I'd make sure I have an executed contractor agreement with the legitimate ones and I'd go ahead and hire the questionable ones.
An attorney or an HR business partner can help you decide if you're not sure.
1. I'd make sure that each employee is properly classified per the Fair Labor Standards Act and I am paying overtime to whom I am supposed to be paying overtime.
Even if you had this right in 2014, you may not have it right in 2016. The Department of Labor proposed some important changes to overtime laws last summer and closed its comment period on those proposed changes in September. The new rules are expected to become law in the first quarter of 2016. The most significant change is increasing the salary test for exempt workers from just under $24,000 per year to potentially over $50,000 per year. That means any manager or supervisor in your company that makes between $24 and $50k is likely to no longer be exempt from overtime pay if they work more than 40 hours in a work week, no matter what their duties are.
Now is a great time to conduct a wage and hour audit to see if you have any potential risks, and to conduct contingency workforce planning to determine how you are going to handle those positions that may no longer be exempt. The penalties if the Department of Labor finds the problems before you do include payment of back wages and liquidated damages to any affected employees as well as fines.
2. I'd make sure that any relationships I have where I am paying a worker by 1099 are legitimate subcontractor relationships and properly documented as such.
Utilizing 1099 workers to supplement your core workforce can be a legitimate and legal strategy. The key is to look at it the way the Department of Labor and the Department of Revenue look at it, not the way many small business owners look at it.
Both the IRS and the DOL consider the use of 1099 a highly abused practice. So the DOL published a guidance in July 2015 to clarify the rules. Before, you might have been able to make a reasonable case that your 1099 workers could work for your competitors if they wanted to - it's not your fault they choose not to. Now, they're looking at the economics - are your 1099 workers performing similar work for other companies besides yours? If the answer is no, and they are working for your company pretty much exclusively, then the IRS and the DOL are going to conclude that those workers should be classified as employees and you should be deducting and submitting payroll taxes, even if you have a signed subcontractor agreement in place. And that's what they want - employers to be withholding and submitting taxes every payday.
The consequences of being ruled against can be quite severe, ranging from payment of back taxes they feel should have been withheld all the way to jail time in extreme cases. As a part of my risk management plan I would look at each relationship in my company and determine, not whether I think it's legitimate, but whether the DOL is likely to consider it to be legitimate. I'd make sure I have an executed contractor agreement with the legitimate ones and I'd go ahead and hire the questionable ones.
An attorney or an HR business partner can help you decide if you're not sure.
Tuesday, September 8, 2015
Why Performance Management Matters
Ed Cornelius, one of my favorite grad school professors, told the story of being hired by the Navy to develop a new performance review form. After meeting one-on-one with multiple naval officers to better understand the challenge, Dr. Cornelius went back to the admiral who had engaged him and said, You don't need a new form, you need a new process. The admiral responded, Dr. Cornelius, I hired you to develop a new form. Are you going to develop a new form or shall I engage someone else?
Many organizations are committed to the traditional performance review process. And to be fair, this approach can provide effective performance feedback when upper management commitment is strong and managers are well-trained in how to conduct them. But like the Navy, when these organizations observe it's not working as well as it should, they think the problem is the form.
Meanwhile, many other organizations have concluded that the annual or semi-annual review is largely a waste of time for their cultures. Managers in these organizations hate traditional reviews because they tend to create conflict. Employees hate them because the feedback isn't timely - it might occur months after the actual performance took place - and they sense its primary purpose is to justify smaller than expected pay increases.
Whether or not we should have annual performance reviews is the wrong question. The right question is, How do we provide timely performance feedback that is meaningful to our workers and improves performance?
If an organization lacks a system for generating timely, neutral feedback, I guarantee the only time employees receive feedback is when they do something wrong. My article on Bad Referees covers this natural, human phenomenon in more detail.
Attempting to train supervisors and managers on how to give more positive feedback has mixed results. They typically end up using the feedback sandwich technique. The feedback sandwich wraps two positives around a negative. Such as:
You met our $10,000 monthly goal last month, well done. Too bad you had 7 emergency call-backs - you need to improve the quality of your service in order to cut down on those. But I'm glad to see you're achieving our volume targets.
This widely used technique also has its share of critics. My perspective is that, like the annual review, the feedback sandwich is better than giving no feedback or only negative feedback. But there are better ways.
Take sports, for example. After each game, coaches review key statistics with the players. The quarterback reviews metrics like how many passes he attempted and completed. Defensive players review how many tackles they made and how many plays they found themselves out of position, etc. The coaches even grade the players on their performance based solely on those metrics. Pro golfers track how many fairways they hit and how many putts they stroked during the round to see if they need to spend more time hitting drives or stroking putts during their next practice session.
Today, even small organizations have access to performance data much more quickly than they ever have before. Some systems are able to provide real-time reporting on critical performance metrics. Smart companies are harnessing that data into meaningful feedback that's easy for the employee to understand and is perceived to be fair and neutral. That's why dashboards and report cards are more motivating than annual reviews or the feedback sandwich.
A true HR Business Partner can help your organization develop feedback tools that motivate. Not a new form, but a new process that provides timely, neutral and fair feedback relative to individual, group or company goals.
Many organizations are committed to the traditional performance review process. And to be fair, this approach can provide effective performance feedback when upper management commitment is strong and managers are well-trained in how to conduct them. But like the Navy, when these organizations observe it's not working as well as it should, they think the problem is the form.
Meanwhile, many other organizations have concluded that the annual or semi-annual review is largely a waste of time for their cultures. Managers in these organizations hate traditional reviews because they tend to create conflict. Employees hate them because the feedback isn't timely - it might occur months after the actual performance took place - and they sense its primary purpose is to justify smaller than expected pay increases.
Whether or not we should have annual performance reviews is the wrong question. The right question is, How do we provide timely performance feedback that is meaningful to our workers and improves performance?
If an organization lacks a system for generating timely, neutral feedback, I guarantee the only time employees receive feedback is when they do something wrong. My article on Bad Referees covers this natural, human phenomenon in more detail.
Attempting to train supervisors and managers on how to give more positive feedback has mixed results. They typically end up using the feedback sandwich technique. The feedback sandwich wraps two positives around a negative. Such as:
You met our $10,000 monthly goal last month, well done. Too bad you had 7 emergency call-backs - you need to improve the quality of your service in order to cut down on those. But I'm glad to see you're achieving our volume targets.
This widely used technique also has its share of critics. My perspective is that, like the annual review, the feedback sandwich is better than giving no feedback or only negative feedback. But there are better ways.
Take sports, for example. After each game, coaches review key statistics with the players. The quarterback reviews metrics like how many passes he attempted and completed. Defensive players review how many tackles they made and how many plays they found themselves out of position, etc. The coaches even grade the players on their performance based solely on those metrics. Pro golfers track how many fairways they hit and how many putts they stroked during the round to see if they need to spend more time hitting drives or stroking putts during their next practice session.
Today, even small organizations have access to performance data much more quickly than they ever have before. Some systems are able to provide real-time reporting on critical performance metrics. Smart companies are harnessing that data into meaningful feedback that's easy for the employee to understand and is perceived to be fair and neutral. That's why dashboards and report cards are more motivating than annual reviews or the feedback sandwich.
A true HR Business Partner can help your organization develop feedback tools that motivate. Not a new form, but a new process that provides timely, neutral and fair feedback relative to individual, group or company goals.
This New Hire is Not Working Out
We take a wait and see approach with new hires.
If we need 3, we hire 5 and hope only two wash out.
We place a mirror under their nose. If the mirror fogs up, we hire them.
We don't buy uniforms for new hires until after their 90 day probation is over.
I'm not overly critical of these approaches. After all, I recruited that way myself for the first ten years I was in operations management roles. I figured a vacancy was inconvenient for me, so it was best to hire fast to get the open slot filled, then monitor the new hire closely once they're in place. Any signs of trouble and I would cut my losses.
But eventually I ran some numbers and concluded I was going about it all wrong. There were at least three problems with my own wait and see strategy. First, it's expensive. Payroll is typically a company's largest single expense. Doubling up on it is a costly hedge. Second, it is a self-fulfilling prophecy which becomes embedded in our organizational culture. If we expect a high percentage of new hires to quit, a high percentage of new hires actually do quit. Third, thinking that an employee is going to fully commit and be engaged while we sit back and play wait and see is foolish. Employee engagement doesn't happen that way.
I got tired of this roller coaster and committed to learn more about employee selection, on-boarding and engagement. As a result I began to put more effort into choosing the right person to start with. That meant becoming a better interviewer and asking questions that were better predictors of performance. It also meant incorporating at least one pre-employment assessment. I used to believe paying for a DISC profile on two or three candidates I might not offer jobs to was a waste of money. But I soon discovered that the return on investment of that simple tool was huge. After adopting it my good hire percentage went up significantly. It helped me make wiser hiring decisions, and perhaps more importantly, helped me avoid bad ones.
I also began to put more emphasis on on-boarding. Employees get buyers remorse just like employers do. I made it a mission to make sure that no new hire in my department would regret taking themselves (even temporarily) off the open job market to join our team.
Want a new hire to question their decision? Hand them a stack of faded, used uniforms with stains and holes or rips. Assign them a truck or a workspace that's dirty and cluttered from the last person who occupied it. Don't have a plan - just throw them in the work and hope they're productive. Don't take them to lunch the first day or spend time with them during their first few weeks. Don't help them visualize what success looks like in their new job.
Want them to commit from the outset? Do these two things: put more emphasis on selecting and less on hiring, and demonstrate a sincere commitment to their success by committing resources, including your time, to them from day one. Do that and you'll find that your bottom line is much better off than it was with the conventional wait and see approach.
If we need 3, we hire 5 and hope only two wash out.
We place a mirror under their nose. If the mirror fogs up, we hire them.
We don't buy uniforms for new hires until after their 90 day probation is over.
I'm not overly critical of these approaches. After all, I recruited that way myself for the first ten years I was in operations management roles. I figured a vacancy was inconvenient for me, so it was best to hire fast to get the open slot filled, then monitor the new hire closely once they're in place. Any signs of trouble and I would cut my losses.
But eventually I ran some numbers and concluded I was going about it all wrong. There were at least three problems with my own wait and see strategy. First, it's expensive. Payroll is typically a company's largest single expense. Doubling up on it is a costly hedge. Second, it is a self-fulfilling prophecy which becomes embedded in our organizational culture. If we expect a high percentage of new hires to quit, a high percentage of new hires actually do quit. Third, thinking that an employee is going to fully commit and be engaged while we sit back and play wait and see is foolish. Employee engagement doesn't happen that way.
I got tired of this roller coaster and committed to learn more about employee selection, on-boarding and engagement. As a result I began to put more effort into choosing the right person to start with. That meant becoming a better interviewer and asking questions that were better predictors of performance. It also meant incorporating at least one pre-employment assessment. I used to believe paying for a DISC profile on two or three candidates I might not offer jobs to was a waste of money. But I soon discovered that the return on investment of that simple tool was huge. After adopting it my good hire percentage went up significantly. It helped me make wiser hiring decisions, and perhaps more importantly, helped me avoid bad ones.
I also began to put more emphasis on on-boarding. Employees get buyers remorse just like employers do. I made it a mission to make sure that no new hire in my department would regret taking themselves (even temporarily) off the open job market to join our team.
Want a new hire to question their decision? Hand them a stack of faded, used uniforms with stains and holes or rips. Assign them a truck or a workspace that's dirty and cluttered from the last person who occupied it. Don't have a plan - just throw them in the work and hope they're productive. Don't take them to lunch the first day or spend time with them during their first few weeks. Don't help them visualize what success looks like in their new job.
Want them to commit from the outset? Do these two things: put more emphasis on selecting and less on hiring, and demonstrate a sincere commitment to their success by committing resources, including your time, to them from day one. Do that and you'll find that your bottom line is much better off than it was with the conventional wait and see approach.
Monday, August 3, 2015
The 50 Employee Dilemma
In the past few years I've spoken with hundreds of small business owners. A common theme I hear from a certain group is the desire to stay below 50 employees. That seems to be the magic number for many who have either been there before and shrunk back or are approaching that number for the first time like a medieval knight galloping toward the dark forest.
What is it about the number 50 that makes it so significant? For some it is fear of having to comply with certain legislation, namely the Affordable Care Act and the Family Medical Leave Act. It was after the passage of the ACA back in 2010 when I started noticing the I'm never going to have 50 employees (again) talk. For others it is linked to the realization that there are added complexities related to managing an organization once it gets above 50 employees, and they may not possess the skills or the desire to run an organization that large.
This second group is certainly understandable. James Fischer points out in Navigating the Growth Curve that organizational complexity and management priorities typically change at the 10, 20, 35, 57 and 95 employee marks. This means entrepreneurs that have grown their businesses through each of the first three organizational transitions and are now approaching 50 employees recognize that they will soon be facing another plateau. Busting through this ceiling will require investment and organizational realignment before another growth phase can begin. They may be happy with the results the organization is getting in that 35-57 employee phase and comfortable with their ability to manage an organization that size. They may strategically opt to remain in that space.
It's the first group that may be missing an opportunity. If fear of the ACA is the only thing holding them back, then they should consider this: If they do not offer health insurance, employees who weren't able to get it through a spouse or parent probably opted to remain uninsured. But the ACA includes an individual mandate, which means those employees must have health insurance now or face tax penalties.
Let's take the case of Bob, a single guy age 30 who works for a company with 35 employees that doesn't offer health insurance. Bob is uninsured, but being healthy, he never thought much about the risk. The owner has said he'll never grow to 50 employees because of the ACA. Bob files his 2015 taxes and gets popped with a big fine he wasn't expecting. He finds out the fine will be even larger in 2016. He goes to healthcare.gov and buys insurance to avoid the fine next year. He finds he earns too much to qualify for the cheap, government-subsidized insurance, so he has to pay the entire premium out of pocket. Bob loves working at his company, but he knows that a larger competitor in the area offers health insurance that is partially subsidized by the company. 30 days later, Bob turns-in his two week notice.
Of all the options available to Bob's company to defend against this type of turnover, the best financial alternative might simply be to provide a qualified plan to its employees. Many small companies are going to find that not having a plan is more of a deterrent to recruiting and retention than it used to be and there is basically no competitive advantage to be gained by not offering insurance. So that magic number, 50, is really a windmill not a dragon.
If avoiding this legislation has created an artificial barrier to growth, a company that would otherwise be happy to continue growing should partner with a knowledgable HR professional, commercial insurance agent and finance professional. With their help, it can position itself to bust through the 57 employee plateau and charge ahead toward the next plateau, which won't occur until approximately the 95 employee mark.
What is it about the number 50 that makes it so significant? For some it is fear of having to comply with certain legislation, namely the Affordable Care Act and the Family Medical Leave Act. It was after the passage of the ACA back in 2010 when I started noticing the I'm never going to have 50 employees (again) talk. For others it is linked to the realization that there are added complexities related to managing an organization once it gets above 50 employees, and they may not possess the skills or the desire to run an organization that large.
This second group is certainly understandable. James Fischer points out in Navigating the Growth Curve that organizational complexity and management priorities typically change at the 10, 20, 35, 57 and 95 employee marks. This means entrepreneurs that have grown their businesses through each of the first three organizational transitions and are now approaching 50 employees recognize that they will soon be facing another plateau. Busting through this ceiling will require investment and organizational realignment before another growth phase can begin. They may be happy with the results the organization is getting in that 35-57 employee phase and comfortable with their ability to manage an organization that size. They may strategically opt to remain in that space.
It's the first group that may be missing an opportunity. If fear of the ACA is the only thing holding them back, then they should consider this: If they do not offer health insurance, employees who weren't able to get it through a spouse or parent probably opted to remain uninsured. But the ACA includes an individual mandate, which means those employees must have health insurance now or face tax penalties.
Let's take the case of Bob, a single guy age 30 who works for a company with 35 employees that doesn't offer health insurance. Bob is uninsured, but being healthy, he never thought much about the risk. The owner has said he'll never grow to 50 employees because of the ACA. Bob files his 2015 taxes and gets popped with a big fine he wasn't expecting. He finds out the fine will be even larger in 2016. He goes to healthcare.gov and buys insurance to avoid the fine next year. He finds he earns too much to qualify for the cheap, government-subsidized insurance, so he has to pay the entire premium out of pocket. Bob loves working at his company, but he knows that a larger competitor in the area offers health insurance that is partially subsidized by the company. 30 days later, Bob turns-in his two week notice.
Of all the options available to Bob's company to defend against this type of turnover, the best financial alternative might simply be to provide a qualified plan to its employees. Many small companies are going to find that not having a plan is more of a deterrent to recruiting and retention than it used to be and there is basically no competitive advantage to be gained by not offering insurance. So that magic number, 50, is really a windmill not a dragon.
If avoiding this legislation has created an artificial barrier to growth, a company that would otherwise be happy to continue growing should partner with a knowledgable HR professional, commercial insurance agent and finance professional. With their help, it can position itself to bust through the 57 employee plateau and charge ahead toward the next plateau, which won't occur until approximately the 95 employee mark.
Time to rethink that 1099 strategy?
I had seen their trucks all over town. How many employees do you have?, I asked.
Six employees, he answered, plus 20 service techs that we 1099.
Using 1099 as a way to avoid workers comp risk, unemployment risk, and even payroll tax withholding headaches has been a strategy used by many employers for years. Some owners see this as little more than driving 62 in a 55 zone. Yes, technically I'm speeding, but I doubt I'll get caught. Besides, the rules are pretty vague and I'm confident I can justify it if I'm forced to.
On July 15 the Department of Labor released a guidance that defines independent contractor more narrowly than ever before, making those rules a little less vague. And it signaled its intent to prioritize the enforcement of what it considers to be abuses of this practice. This action also emboldens the IRS and the state enforcement agencies to go after employers who utilize a 1099 workforce strategy.
So, what's the risk if I can't convince them that my 1099s are legit? The penalties start at 1.5% of wages, plus interest, plus 100% of the FICA tax the employer should have paid, plus at least 20% of the FICA tax the employee should have paid, going back three years (no matter whether the contractor paid his/her taxes or not). That's if you properly filed the 1099s. If you messed that up, the fines are even more substantial. If the IRS determines you knew the rules but you intentionally violated them to avoid taxes, they can even file felony charges. If convicted, you could potentially spend a year in prison and pay fines of up to $100,000.
That's no speeding ticket, what should I do? Consult with an HR professional or labor attorney to help you determine which of your 1099 relationships are likely to be considered legitimate by the DOL and/or IRS. They can help you ensure that you have the right documentation in place to demonstrate that the 1099 relationship is appropriate in those cases. They can also help you evaluate alternative workforce strategies for those that will likely be considered illegitimate. If the best alternative is to bring them onboard as employees, they can assist with that migration and any policy implications that result - such as regulations that now may apply to your organization, like FMLA or ACA.
Why do they care? It's all about tax dollars. When you pay an employee on Friday, you withhold taxes and send it in immediately. When you pay a 1099, the government has to wait until that individual files his or her taxes (presumably quarterly) to get its money. A lot of them don't file until the end of the year (if at all). In addition the state and federal unemployment coffers are still strapped as a result of the great recession. 1099 workers often don't pay into the unemployment system like employers do. All levels of government prefer the steady stream of cash that comes from regular payroll withholdings.
It's so much easier simply writing one check and being done with it? Being a small business owner is hard work. The best surround themselves with smart people to help them navigate through these types of changes and manage their risk so they can focus on their customers and their business. Regulatory changes are never going to stop. In this case, you might as well develop an alternative workforce strategy, because a 1099 strategy is rife with unacceptable risk and it's time to rethink its use.
Six employees, he answered, plus 20 service techs that we 1099.
Using 1099 as a way to avoid workers comp risk, unemployment risk, and even payroll tax withholding headaches has been a strategy used by many employers for years. Some owners see this as little more than driving 62 in a 55 zone. Yes, technically I'm speeding, but I doubt I'll get caught. Besides, the rules are pretty vague and I'm confident I can justify it if I'm forced to.
On July 15 the Department of Labor released a guidance that defines independent contractor more narrowly than ever before, making those rules a little less vague. And it signaled its intent to prioritize the enforcement of what it considers to be abuses of this practice. This action also emboldens the IRS and the state enforcement agencies to go after employers who utilize a 1099 workforce strategy.
So, what's the risk if I can't convince them that my 1099s are legit? The penalties start at 1.5% of wages, plus interest, plus 100% of the FICA tax the employer should have paid, plus at least 20% of the FICA tax the employee should have paid, going back three years (no matter whether the contractor paid his/her taxes or not). That's if you properly filed the 1099s. If you messed that up, the fines are even more substantial. If the IRS determines you knew the rules but you intentionally violated them to avoid taxes, they can even file felony charges. If convicted, you could potentially spend a year in prison and pay fines of up to $100,000.
That's no speeding ticket, what should I do? Consult with an HR professional or labor attorney to help you determine which of your 1099 relationships are likely to be considered legitimate by the DOL and/or IRS. They can help you ensure that you have the right documentation in place to demonstrate that the 1099 relationship is appropriate in those cases. They can also help you evaluate alternative workforce strategies for those that will likely be considered illegitimate. If the best alternative is to bring them onboard as employees, they can assist with that migration and any policy implications that result - such as regulations that now may apply to your organization, like FMLA or ACA.
Why do they care? It's all about tax dollars. When you pay an employee on Friday, you withhold taxes and send it in immediately. When you pay a 1099, the government has to wait until that individual files his or her taxes (presumably quarterly) to get its money. A lot of them don't file until the end of the year (if at all). In addition the state and federal unemployment coffers are still strapped as a result of the great recession. 1099 workers often don't pay into the unemployment system like employers do. All levels of government prefer the steady stream of cash that comes from regular payroll withholdings.
It's so much easier simply writing one check and being done with it? Being a small business owner is hard work. The best surround themselves with smart people to help them navigate through these types of changes and manage their risk so they can focus on their customers and their business. Regulatory changes are never going to stop. In this case, you might as well develop an alternative workforce strategy, because a 1099 strategy is rife with unacceptable risk and it's time to rethink its use.
Monday, July 13, 2015
Protecting Owners from Themselves
The CEO was standing in my office steaming mad. I had just sent him a summary of our most recent employee engagement survey results. He wasn't angry at the results. They were excellent - demonstrating that the investments we were making to build a solid employment brand were working. He was upset about one particular comment made by a single employee. He demanded to know who the employee was.
Even though I would have had a difficult time determining who might have made the comment even if I wanted to, I simply said "no." He was a little taken aback, but he continued with his argument, "We can't have someone who feels that way working here, they'll poison their co-workers. We must get rid of them." I said "You're right, but if they truly feel this way, they'll make themselves known through their performance or through other behaviors. If we tell our employees that the survey is anonymous and they begin to suspect it isn't, we will no longer get honest feedback. We can't sacrifice the trust we've built to simply flesh out one disgruntled employee." When he calmed down, he agreed that I was right.
When I think back over my years as an HR leader, protecting business owners and division managers from themselves was one of my more valuable contributions to those organizations. Owners and managers have a lot of pressure on them. They must make difficult decisions, often quickly and without all the data they would prefer to have. When those decisions will impact the workforce, consulting an HR leader who understands the big picture can help the owner frame business challenges and potential solutions in ways that achieve the buiness objectives with the least negative impact on employee engagement and performance. For example:
Company X needed to reduce its workforce due to the loss of a key client. The CEO considered across the board pay cuts and temporarily eliminating the 401k match as ways to protect cash flow and spread the pain evenly. His HR leader pointed out that the big winners with that strategy are the poorest performing employees and the biggest losers are his "A" players. On the HR leader's advice they opted instead to keep the benefits structure in place and lay off 20% of the workforce, carefully chosen to have the least impact on productivity and avoid discriminating against any protected class.
The CEO of Company Z wanted to fire an employee immediately as a result of a mistake. The HR leader saw the potential impacts of that snap decision, including establishing the precedent that a mistake results in immediate termination, the impact the termination might have on the rest of the team, and costs associated with losing the unemployment hearing. The HR leader asked, "Would you fire our top sales rep if they did the same thing?" The CEO admitted it would be difficult. The HR leader suggested the CEO allow him to document the mistake and develop a performance improvement plan for the employee instead.
When Jack Welch was CEO at GE, he had that type of relationship with Bill Conaty, GE's head of HR. Jack often took Bill with him to visit plants around the world to help him think through people and leadership issues. Of course if you happen to be CEO of a Fortune 500 firm, it's easy to drag your trusted advisors along. But what about the CEO of the small and mid-sized organization?
Unfortunately, many small business owners find themselves on an island making decisions such as these without the counsel that the large company CEO enjoys. But the smart ones surround themselves with trusted outside advisors, including a part-time HR leader, who possesses the confidence to help protect them from themselves.
Even though I would have had a difficult time determining who might have made the comment even if I wanted to, I simply said "no." He was a little taken aback, but he continued with his argument, "We can't have someone who feels that way working here, they'll poison their co-workers. We must get rid of them." I said "You're right, but if they truly feel this way, they'll make themselves known through their performance or through other behaviors. If we tell our employees that the survey is anonymous and they begin to suspect it isn't, we will no longer get honest feedback. We can't sacrifice the trust we've built to simply flesh out one disgruntled employee." When he calmed down, he agreed that I was right.
When I think back over my years as an HR leader, protecting business owners and division managers from themselves was one of my more valuable contributions to those organizations. Owners and managers have a lot of pressure on them. They must make difficult decisions, often quickly and without all the data they would prefer to have. When those decisions will impact the workforce, consulting an HR leader who understands the big picture can help the owner frame business challenges and potential solutions in ways that achieve the buiness objectives with the least negative impact on employee engagement and performance. For example:
Company X needed to reduce its workforce due to the loss of a key client. The CEO considered across the board pay cuts and temporarily eliminating the 401k match as ways to protect cash flow and spread the pain evenly. His HR leader pointed out that the big winners with that strategy are the poorest performing employees and the biggest losers are his "A" players. On the HR leader's advice they opted instead to keep the benefits structure in place and lay off 20% of the workforce, carefully chosen to have the least impact on productivity and avoid discriminating against any protected class.
The CEO of Company Z wanted to fire an employee immediately as a result of a mistake. The HR leader saw the potential impacts of that snap decision, including establishing the precedent that a mistake results in immediate termination, the impact the termination might have on the rest of the team, and costs associated with losing the unemployment hearing. The HR leader asked, "Would you fire our top sales rep if they did the same thing?" The CEO admitted it would be difficult. The HR leader suggested the CEO allow him to document the mistake and develop a performance improvement plan for the employee instead.
When Jack Welch was CEO at GE, he had that type of relationship with Bill Conaty, GE's head of HR. Jack often took Bill with him to visit plants around the world to help him think through people and leadership issues. Of course if you happen to be CEO of a Fortune 500 firm, it's easy to drag your trusted advisors along. But what about the CEO of the small and mid-sized organization?
Unfortunately, many small business owners find themselves on an island making decisions such as these without the counsel that the large company CEO enjoys. But the smart ones surround themselves with trusted outside advisors, including a part-time HR leader, who possesses the confidence to help protect them from themselves.
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