HR departments are critical. Make sure you have the help you need

Government agencies such as the Occupational Safety and Health Administration, Department of Labor, IRS and others, aren’t making life easier for smaller businesses. New laws are created regularly and companies must comply or face significant penalties. That’s why it’s increasingly important to have a strong human resources department that’s capable of keeping up with the changes.

“It used to be the larger companies that were looking for help with HR, but increased regulation and the way in which they’re enforced has caused that need to go down market to companies with as few as 15 employees,” says Jim McElwain, a Regional Sales Manager at Paychex.

He says some agencies are becoming less reactive and more proactive, hiring more agents to spot-check businesses rather than waiting for complaints to be registered.

“This approach is scaring many business owners that aren’t confident in their HR capabilities. They need a partner to help them stay compliant,” he says.

Smart Business spoke with McElwain about options for companies struggling to keep up with ever-changing regulations.

What elements of human resources do you find are often overlooked?

Companies that start out with only a few employees usually have just one HR concern: making payroll. But once they start hiring, their problems multiply.

Many companies are not trained to interview effectively, making it difficult both to hire the best person for the job and also operate within the law, avoiding questions that could lead to damaging discrimination lawsuits. On-boarding brings with it a slew of forms to complete, such as W-4 and I-9. Once new employees are on staff, businesses can struggle with how to discipline, and firing someone without proper documentation can lead to a successful unemployment claim by the terminated employee, which drives up unemployment insurance rates. These are just some of the legal nuisances in all the fundamental day-to-day business operations that companies must understand and address.

How might having an inexperienced HR department affect a business?

Putting someone in charge of HR functions who knows little to nothing about the laws that guide employment practices creates a risky situation. Rule changes are frequent and require diligent attention to keep up. Sometimes, especially in companies with fewer than 100 people, that knowledge doesn’t exist in the building and hiring for it can be cost-prohibitive.

Fortunately, there are HR outsourcing services for companies that are too big not to have HR help but are too small to afford a qualified person.

How can companies without knowledgable HR staff reduce the risk of noncompliance?

There are many services available from HR outsourcers, some of which are a la carte and others that are bundled into packages. This can be an affordable way to stay in compliance and avoid lawsuits and penalties.

In some arrangements, an HR generalist is assigned to a specific company and meets face-to-face as much as is needed to consult, train supervisors, and help with interviewing, discipline and termination of employees.

What misconceptions do business owners have about an HR outsource relationship?

Many business owners think they can manage HR functions themselves in addition to filling other roles in the company. That leads to a lack of proper attention given to important and often legally required actions.

Without a knowledgeable HR staff, business owners fail to understand overtime laws, when an employee can be paid a salary instead of an hourly wage, and when someone can be classified as a subcontractor instead of an employee. This can lead to serious legal trouble.

So many people that go into business understand their product or service without understanding their legal responsibilities to employees. But it’s not easy. Government agencies continually make it more complicated for business owners to run their companies in accordance with the law. And as these agencies become more proactive, businesses stand a greater risk of incurring fines unless they have knowledgeable assistance in their HR departments.

Insights Human Resources is brought to you by Paychex

Regulation is a bit off target as a way of helping the investment scene

I recently read a Wall Street Journal commentary that claimed the Federal Reserve’s failure to understand what caused the 2007-08 financial crisis ushered in policies that have slowed growth we see today.

The author, Peter Wallison, a senior fellow at the American Enterprise Institute, states that it was the sub-prime mortgage backed security market that caused the crisis, but the new legislation, the 2010 Dodd-Frank Act, had a much broader mandate to closing “the gaps in financial regulation.” The impact of the Dodd-Frank Act has been most acutely felt by small banks, who have historically been the largest providers of capital to small businesses, due to higher regulatory costs and higher underwriting standards on par with large banks who historically lend to more financially sound large companies.

A regular occurrence

As a business owner, a small business private equity investor and an advocate for entrepreneurship, I have seen the challenges small businesses face in receiving credit from banks. Most banking officers will concede that their hands are tied by bank industry regulation, citing the Dodd-Frank Act, in making underwriting decisions.

For those of us who have the good fortune of working with entrepreneurs and small business owners, it is easy to agree with the causal relationship offered by Wallison because we see it regularly.

I do want to discuss, however, the newly approved crowdfunding rules. It is ironic that the government has stepped in to the financial markets in two different arenas, banking regulation and securities law, to correct what they perceive to be problems with existing regulation.

To me, the consequences have been that small businesses that used to rely on small bank loans for funding, which are relatively low cost in comparison to the high cost of crowdfunding, included sharing ownership of your business with third-party investors. There is no higher cost of capital than sharing ownership.

Reconsider the approach

The government has effectively made small business ownership more difficult and less rewarding when it changed the cost of capital paradigm by shifting small business from small banks to small equity investors using crowdfunding.

Small banks generally will lend to small business at or around the “prime rate” which is a published benchmark rate widely used in the banking industry at a 3.25 percent annual rate today, plus 1 percent or 2 percent. In private equity investments (crowdfunding), investors return expectations are typically more than 30 percent annual rate.

This cost of capital is a major barrier in a small business’s ability to add capacity and create new jobs that will get America growing at a more robust rate and get wage growth out of neutral gear.

I believe that the financial services industry needs to have oversight, and I also believe that small businesses need to have credit to grow, so my comments are not a categorical rejection of government’s important role in transparency and fairness.

I am a strong advocate for both, but I believe the government needs to reconsider its approach in both the Dodd-Frank Act and new crowdfunding legislation.

Jeffrey Kadlic is co-founder and managing partner of Evolution Capital Partners LLC, a private equity fund investing growth equity nationwide in Second Stage Companies. Jeffrey is an alumnus of Crain’s Forty under 40 and an EY Entrepreneur Of The Year finalist.

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