Setting Up HR – In-House or PEO

Posted on Posted in COO, Getting Started, HR

Human resources encompasses a broad array of business functions. There is the obvious sourcing, hiring and firing of employees. However, retaining employees, training employees, managing benefits, setting compensation policy, overseeing contractors, new hire orientation, managing corporate culture and a host of other functions also fall into the domain or share a dotted line to the HR function.

One of the first questions a startup venture needs to address – at least as soon as the founders hire their first employee or contractor – is who will be responsible for the HR function. Getting this right is critical to the success of a venture, as it is the first five to ten people in an organization that will establish the company’s culture for years to come. If your company has a COO, then HR will clearly fall under his or her domain.

There are two main aspects to HR. First, there is the impression of the company as an entity and an environment that new hires and contractors will perceive and ultimately retain, based on their interactions with existing personnel. Next, there are the activities performed by HR personnel including generation and maintenance of paperwork, recruiting, planning and execution of HR functions (benefits, company events, performance reviews, on-boarding, etc.), to name a few.

A third aspect, of overarching importance, is the legal ramifications of virtually every component of HR. When HR matters turn into a legal problem, it becomes an expensive and time-robbing experience. Therefore, the HR function should not be taken lightly or for granted by startup entrepreneurs.

So, where should an entrepreneur start with HR? What are the top five or so things to devote time and energy to without diverting too much mindshare from the company’s vision? Here is a proposed list:

– New Hire Package
– Contactor’s Engagement Package
– Plan for regular reviews
– Template for job requisitions
– On-Boarding procedures

Each of these will be covered in greater detail in subsequent posts, but here is a brief summary of each:

New Hire Package: Job Requisition or description, resume of the candidate, job application for the candidate, EEO forms, background check authorization, welcome letter, offer letter, inventions and proprietary information agreement, arbitration agreement, reference check information, other pre-hire communications, candidate submitted papers, W-4 and I-9 forms, emergency medical form, property pass.

Contractors Engagement Package: Project description, resume or brochure of candidate or contractor firm, background check authorization, non-disclosure agreement, contractor agreement with inventions and proprietary information agreement, W-9 or W-8 form, reference check information, certificate of general liability and or workers compensation insurance.

Plan for regular reviews: Employee hire date tracker and tickler system, documentation of each employee or contractor’s unique objectives and criteria for the tracking period, definition of key criteria for all employees or contractors, ranking system, review procedure checklist for supervisors and employees, template for presentation of review information to be used during the actual review meeting.

Template for job requisitions: Master document with fonts, logo graphics and layout of key sections. Key sections include job title, summary with work location specified, job description, requirements of the position, required experience of candidate, educational requirements, company description, contact information, legal and EEO footer.

On-Boarding procedures and checklist: Employee or contractor’s cube or office location, list of computer and other equipment, list of software, office supplies, business cards, phone extension, IT requirements (username, email alias, group membership, permission levels, homepage, VPN access, etc.), keys and/or access tokens, cell phone, orientation meetings, description of first day or week’s activities.

Even though one may disagree whether or not these are the correct top five, the salient point is that there are a lot of items to consider. Remember also, that I have not even listed payroll and benefits.

One might take a position that their organization is simply too small or too young to worry about getting exactly HR right, but that would be a cavalier position and will surely come back to bite an entrepreneur when it comes time for dismissing an employee, or worse, when intellectual property goes walking out the door with no recourse for stopping it.

Does this mean that every start up needs an HR manager at the outset? Absolutely not! In fact, I would argue that a startup venture should not hire an HR manager until there are at least 50 employees and perhaps as late as 100 to 150 employees. Even if a startup could afford the luxury and salary of an HR manager, it would cost an additional $50,000 to $100,000 per year to maintain that employee’s legal knowledge, or to subsidize their lack of legal expertise with outside accountants and attorneys.

Instead, a startup organization’s HR should fall under the domain of the company’s COO and he or she should outsource the HR, payroll and benefits to a professional employer organization, or PEO. Doing so, leverages the COO’s time, reduces internal headcount and greatly simplifies the logistics of growing a startup. This one decision alone could be a key enabler for rapidly ramping a young organization.

There are so many benefits to working with a PEO that it almost seems like a “no brainer” decision. For example, think of hiring a PEO as an insurance policy. It provides virtually full indemnification for all legal matters around hiring and firing as well as complying with local, state and federal requirements for tax and benefits withholdings. Just like an insurance policy allows you to pass off liability for an accident, a PEO allows you to simply refer all discharge, workman’s comp, unemployment insurance, disability and 401(k) problems to another party.

Employment and payroll tax laws change every year. There is no way that one person can keep up with it without extensive continuing education requiring a large expenditure of time and money. Even then, it’s almost impossible for one person to be a subject matter expert on both employment and payroll. Add in 401(k) retirement plans and it’s simply impossible for a startup to maintain the expertise in-house. A PEO is comprised of a team of employment, payroll and benefits professionals who each maintain their annual certification in their particular area of expertise. It is their job to keep up with current law and they can afford to stay current because each professional is leveraged across all of the PEO’s client companies.

With a good PEO, a simple email is usually all it takes to deal with the legal ramifications of a problem employee. A CEO never has to deal with the matter at all other than being kept abreast of issues when he or she holds their weekly meeting with the COO.

Additionally, the right PEO allows a startup to hire employees in any state, facilitating a virtual organization and allowing for a scale that would otherwise be impossible to achieve. In other words, with a PEO your hiring pool is no longer constrained to your local market.

Even with a PEO, it’s still up to the startup to manage the day-to-day activities of all employees and contractors. However, the CEO and managers need only to deal with real business matters that have direct impact on products and customers. The COO and his assistant can easily handle all the rest by leveraging the PEO (i.e. hiring, firing, benefits, 401(k), payroll, PTO, etc).

The PEO will not establish the company’s internal culture or environment, but it will allow a company to “feel” like a larger and more stable organization which will be a huge factor in attracting top talent to a nascent company. Employees will appreciate having access to the PEO’s online system for managing changes to their W-4s, setting up direct deposit to their bank, establishing allocations for 401(k), and managing Section 125 or Section 132 dollars.

There is no way to grow your startup without dealing with HR matters. How you deal with it will make all the difference in the quality of employees and contractors that your company can attract and retain. You can do it in-house if you have the resources and expertise, or you can outsource it to a PEO. Keep in mind that each HR function requires a checklist of activities to perform and documents to maintain. Keep those documents organized and secured in terms of filing system and access control in order to comply with state and federal requirements. Good HR is like a security blanket for employees. It not something that anyone will thank you for, but it will add to an overall sense of comfort for management and employees, and will be one more of those things that makes everyone happy to come into work every day.

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