5 Most Important HR Terms for Small Business Owners to Know, Understand, and Use in Their Business

Ask any business owner what one of the top challenges they have in running their business and, by far, HR or people will be in the top of responses you get. Business owners say that doing the work of their business is the easy part but people, and dealing with all the things that surround people as employees, is difficult. That being said, if you can master the following five HR terms, understand and utilize them, you might find the challenges a little less stressful.

You don’t have to have an HR department to understand and use meaningful HR concepts.By no means are these terms inclusive of everything you need to know and take care of as an employer. However, if you master these five, your business will reap some great benefits.

  1. Employee vs. Contractor

Classification of workers is one of the biggest errors an employer can make. An audit by the IRS or Dept. of Labor can uncover misclassification that can be very costly for businesses of all sizes. So know the difference and abide by the regulations for each type.

An employee is someone who performs services for a company following guidelines for when, where, and how to do the work. The company is responsible for withholding income taxes, withhold, report, and make deposits for Social Security and Medicare taxes, as well as pay unemployment taxes on the wages paid to an employee. There are strict reporting and deposit requirements.

A contractor is a person or organization that provides services or goods to a business under a contractual agreement. None of the withholding, reporting, or deposit requirements apply to a contractor.

There may be financial and reporting benefits to working with contractors, but it really depends on the kind of work and the way you want it done whether or not an employee or a contractor is the right sort of arrangement for your company. Misclassifying workers, especially for financial gain, is highly frowned upon and the penalties and fines are substantial.

  1. Exempt and Non-exempt Employees

The difference between the two types of employees is critical for small business owners.

Exempt employees are excluded from minimum wage, overtime regulations, and other protections under the Fair Labor Standards Act.

A non-exempt employee is required to be paid minimum wage and overtime pay for any time worked in excess of 40 hours per week. There are other guidelines in accordance with the Fair Labor Standards Act as well.

A claim against your business for non-payment of overtime can be a significant disruption. In some cases, it might lead to the need for legal representation and court appearances, and, can result in costs that can become a financial burden. You would be dealing with legal ramifications in these cases, so knowing the difference between the two types of employees, and paying them according, including overtime, is recommended.

  1. Background Check

Some, especially beginning small business owners, might think a background check is a silly thing to undertake when hiring people. But consider that you are putting your business – your livelihood – at risk each time you include someone new into your organization. And you don’t have to have an HR department to make it a practice of running a background check.

While not 100% effective (nothing is that effective) you will probably be able to identify problem areas or past behavior that might not be aligned with your business values. The old adage, you can’t tell a book by its cover, comes to mind. No one hires a person believing they would embezzle funds, steal from the warehouse, drive company vehicles recklessly, or assault co-workers or clients. A background check might have brought to light red flags that might prevent you from inviting problems into your business.

  1. At-will Employment

 At-will employment means that an employee can be fired at any time for any reason. Likewise, employees can leave at any time for any reason. Generally, all states recognize at-will employment (except Montana, at this writing), but some states put limitations or qualifications on it.

For instance, Indiana does not consider employment an implied contract. This comes into play in wrongful termination claims. In an article from the Bureau of Labor Statistics (BLS), the following explains the basic of implied contract in regards to employment:

“Another widely recognized exception prohibits terminations after an implied contract for employment has been established; such a contract can be created through employer representations of continued employment, in the form of either oral assurances or expectations created by employer handbooks, policies, or other written assurances.”

  1. Employee Handbook

It might seem ridiculous to have an employee handbook if you have only one or two employees and no real HR department. There are no laws or regulations requiring employee handbooks but it might be one of the best things you can do for your business and your employees.

An employee handbook should outline all benefits and policies for employees. There are many rules and regulations regarding benefits offered to employees, issues about discrimination, and harassment. You can lay out all the policies and how they are handled in your business to prevent claims of preferential treatment or discrimination. In addition, written policies in handbooks document what is, and is not, acceptable in your workplace as well as the repercussions for non-compliance.

In other words, a handbook lays down the rules. Be aware, however, that your compliance with the document is required as well, so make sure you can live with the consequences of a key employee breaking the rules.

These five HR terms are more than just words. They are important to the health of your business in a variety of ways as mentioned above. People are always going to surprise, disappoint, enrage, and touch us. That’s the humanity of it. But armed with knowledge you can cope with it all.

Many of these terms have to do with payroll, which is one of the most important elements of your business if you have employees. Have a problem with your payroll and you have upset employees and we all know upset employees cause problems in performance and the work environment.

Because payroll is such an important task, the clients atThe Payroll Department tell us, payroll is best left to professionals and experts. For more than 20 years we have processed payroll for small businesses in several states. It’s our job to provide accuracy, help our clients to stay in compliance with laws and regulations, and keep employees paid on time pay period after pay period.


We do our part to keep your employees happy! Contact us today to find out more about how we can help you take care of the people in your business.


-Elaine of The Payroll Department Blog Team


Posted in: Operating a Small Business, Payroll

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