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Expensive Mistakes Small Businesses Make When Hiring Employees

When you run a small business, having the right team in place can mean the difference between success and failure. But when budgets are lean and there isn’t a big HR department to lean on for best practices, expensive hiring mistakes are often made.


Errors in the hiring process can cost a company big. From compromising your hard earned reputation and sullying company culture, to major lawsuits with the potential to bankrupt your business, hiring mistakes have the potential to cause major problems for you as a small business owner.


Know these common mistakes and how to avoid them, and you’ll have a fighting chance of putting together your dream team without much hassle.

Misclassification of Employees

Employees are treated differently than independent contractors, so it‘s critical you know which one you’re dealing with. There are serious implications for accidentally (or purposely) treating an employee as an independent contractor, including penalties, fines, and other costly tax-related consequences.


The Fair Labor Standards Act determines what makes a person an employee or not, and understanding the difference will help you withhold the right taxes, stay in compliance with overtime pay regulations, and keep your business running smoothly.


If your HR department consists of just you, and you’re too busy running your day-to-day operations to become an employment law expert, consider outsourcing the task to a service that can help you stay in compliance with the laws around classifying employees. There are tons of great companies designed for this specific purpose, and help small businesses manage HR without the oversight of a dedicated in-house professional.

Failure to Carry Workers Compensation Coverage

As tempting as it might forgo certain types of small business insurance to save a few bucks, those few dollars you might save won’t be worth the massive cost later if you get busted for not carrying workers' comp insurance. Worker's compensation is required in most states as soon as you have even one employee.  


This small business insurance product is designed to help cover lost wages and medical expenses if an employee is injured or becomes very ill. It‘s not only smart to have a lifeline that protects your staff from being buried in debt, it’s a must-have if your state requires it.


It doesn‘t take long to get covered and isn‘t nearly as expensive as being caught without it. So, if you think you might hire even a single employee in the foreseeable future, look for affordable workers’ comp insurance and get compliant ASAP.

Not Preparing for Turnover & Onboarding Costs

High turnover rates and onboarding costs can be a nightmare for any business, but have a tendency to hit small businesses especially hard. Knowing what it will cost to bring a new employee on (in terms of training, benefits, etc.) and estimating costs of losing an employee can help you keep some cushion between you and the cost of having employees.


keep in mind that these costs will change as your business grows—so you’ll want to revisit them frequently as needed.

Ignoring the Importance of Culture Fit

An applicant may seem like the “ideal” candidate for the job on-paper, but if he or she doesn’t fit neatly into the culture you’ve been honing for your business, the relationship isn’t likely to work out long-term.


You may end up needing to find a replacement, which will slow down operations and cost you money in onboarding. Even worse, an employee who sneaks under the radar and ends up being a bad culture fit has the toxic power to poison your workplace if you let it. Be very careful to vet new employees before they officially become part of the team.


Focus on finding the person with the right experience to do a great job, but more importantly, one who embodies the values and characteristics you define as imperative to maintaining your desired workplace culture. After this new employee will become part of your company’s culture, and help define what its future looks like.

Skipping Background and Reference Checks

Properly researching and vetting potential new hires is another area where small businesses owners often ignore best practices in an effort to cut costs. After all, background checks are expensive, and you might not need security clearance calibur employees if you’re running a restaurant.


But if you’re running a daycare, you’d better believe the integrity of your new hire’s background is relevant, and really important to your customers.


Reference checks on the other hand cost nothing more than your time, and should be a standard item on your new hire checklist.


Always ask for both professional and personal references when hiring a new employee and follow up with every single one before making a job offer. Even something as small as a two-minute phone call to verify a reference can help you avoid costly issues down the road.


These are just a few of the most common mistakes small business owners make when hiring employees. The good news is they are mostly avoidable. Sometimes it makes sense to spend a little more upfront, play by the insurance rules, and take a few minutes to consider each applicant before bringing them onboard. Outsource when you need to, and take the time to build a team you know you can count on for the long haul.






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