What legal steps to take when hiring employees

Hiring Employees? Here’s What You Need to Know Legally

Imagine this: Your business is growing, and you’re finally ready to bring on your first employees. It’s an exciting milestone, but before you start sending out job offers, there are essential legal steps you need to take. Hiring isn’t just about finding the right talent—it’s also about ensuring compliance with employment laws to protect your business and your employees.

Whether you’re hiring your first team member or expanding an established business, understanding the legal framework can save you from costly mistakes. Let’s walk through the key legal steps every employer should follow when bringing new employees on board.

1. Determine Employment Status: Employee vs. Independent Contractor

Not all workers are classified the same way. Before hiring, decide whether the worker will be an employee or an independent contractor.

• Employees: Work under your control, follow company policies, and receive benefits like health insurance and paid leave.
• Independent Contractors: Work independently, set their own hours, and provide their own tools.

Misclassifying workers can result in penalties, back taxes, and lawsuits. According to the IRS, an independent contractor should maintain significant control over how they complete their work (IRS Guidelines).

2. Obtain an Employer Identification Number (EIN)

Before hiring employees, you’ll need an Employer Identification Number (EIN) from the IRS. This number is used for tax reporting and payroll purposes.

• You can apply for an EIN online through the IRS website.
• If you already have an EIN for business purposes, you don’t need a new one for hiring employees.

3. Register With State and Federal Tax Agencies

Employers are required to withhold and pay payroll taxes. Here’s what you need to do:

• Federal Taxes: Register with the IRS to withhold federal income tax, Social Security, and Medicare taxes.
• State Taxes: Check your state’s tax agency for state income tax withholding and unemployment insurance requirements.
• Employment Eligibility Verification (Form I-9): Verify that your employees are legally allowed to work in the U.S. (USCIS I-9 Form).

Failing to withhold the correct taxes can result in serious financial penalties from the IRS and state tax agencies.

4. Set Up Payroll and Benefits Compliance

Handling payroll correctly is crucial to avoid legal trouble. Employers must:

• Pay at least the federal or state minimum wage (whichever is higher).
• Ensure proper overtime pay for non-exempt employees.
• Deduct payroll taxes accurately.
• Comply with workers’ compensation laws, which vary by state.

Additionally, if you offer employee benefits like health insurance or retirement plans, you must comply with laws like the Affordable Care Act (ACA) and ERISA (Employee Retirement Income Security Act).

5. Create and Distribute Legal Employment Documents

Before an employee starts working, have them complete the necessary paperwork:

• Form W-4 (Employee’s Withholding Certificate) – Determines federal income tax withholding.
• Form I-9 (Employment Eligibility Verification) – Verifies work authorization.
• Employment Contract or Offer Letter – Clearly states job title, salary, and expectations.
• Employee Handbook – Outlines company policies, benefits, and workplace rules.

Having clear documentation protects both the employer and employee in case of disputes.

6. Follow Anti-Discrimination and Labor Laws

Employers must comply with federal and state laws that protect employees from discrimination and unfair treatment:

• Equal Employment Opportunity (EEO) Laws – Prevent discrimination based on race, gender, age, disability, and other protected categories (EEOC).
• Fair Labor Standards Act (FLSA) – Governs minimum wage, overtime, and child labor laws.
• Americans with Disabilities Act (ADA) – Requires reasonable accommodations for employees with disabilities.
• Family and Medical Leave Act (FMLA) – Provides eligible employees with unpaid, job-protected leave for medical and family reasons.

Failure to follow these laws can lead to lawsuits and government penalties.

7. Obtain Workers’ Compensation Insurance

Most states require employers to provide workers’ compensation insurance. This coverage helps employees who suffer work-related injuries or illnesses.

• Check your state’s requirements (Department of Labor).
• Even if not required, carrying workers’ comp insurance protects your business from costly legal claims.

8. Post Required Workplace Notices

Employers must display certain labor law posters in the workplace, including:

• OSHA Workplace Safety Notices
• Minimum Wage Posters (federal and state)
• Employee Rights Notices

These notices inform employees of their rights and are required by law. You can download free posters from the U.S. Department of Labor.

9. Understand At-Will Employment and Termination Laws

Most states follow at-will employment, meaning employers can terminate employees at any time, for any legal reason. However:

• Termination cannot be based on discrimination or retaliation.
• Employment contracts may override at-will provisions.
• Some states require final paychecks to be issued immediately upon termination.

Understanding these laws helps prevent wrongful termination claims.

Final Thoughts: Protect Your Business When Hiring Employees

Hiring employees is a big step for any business, but failing to follow legal requirements can lead to expensive mistakes. By understanding employment laws, properly classifying workers, setting up payroll correctly, and ensuring compliance with anti-discrimination laws, you can build a strong and legally sound workforce.

Need help navigating employment laws? Consider consulting an HR specialist or employment attorney to ensure you’re meeting all legal requirements.

Frequently Asked Questions (FAQs)

1. What is the first step to legally hiring employees? The first step is obtaining an Employer Identification Number (EIN) from the IRS and ensuring compliance with federal and state tax laws.

2. Can I hire independent contractors instead of employees? Yes, but you must properly classify them. Misclassifying workers can result in penalties from the IRS and Department of Labor.

3. Do I need a written employment contract? While not always required, a written offer letter or contract helps outline job expectations, salary, and company policies.

4. How do I verify a new employee’s work authorization? All new employees must complete Form I-9, and employers must verify identification documents.

5. What happens if I don’t follow labor laws? Failure to comply with employment laws can result in fines, lawsuits, and government penalties. Staying informed and compliant is key.