Articles Posted in Employment

Now that you’ve committed to starting your new business, developed a solid business plan, obtained necessary financing, decided on a business entity and entered into a commercial lease, it’s time to consider the hiring of employees. Whether or not to hire employees is a critical decision all new San Diego business owners must make. Depending on the type of business, some entrepreneurs may decide that they are able to move forward without the need for employees with the understanding they will revisit the issue in the future. If after careful consideration, you decide that you need to hire an employee or employees, the following is a summary of important steps to take. There are a number of state and federal regulations to navigate making it important for all businesses to carefully evaluate their legal responsibilities. See “New and Growing San Diego Businesses – Hiring Employees“, Parts One through Three for a additional analysis.

97150_more_lessons_on_the_laptop__1.jpgObtain an Employer Identification Number (EIN No.): Often, new businesses obtain an EIN No. without thinking much about it. When forming a formal business entity such as a corporation or limited liability company or when opening a back account after obtaining a DBA, it is common for business owners to obtain an EIN No. for use in opening a bank account under the business’ name. If one hasn’t been obtained for whatever reason, then you will need to get an EIN No. (Employer Tax ID) from the IRS. It is a simple process and can be completed on-line using IRS Form SS-4.

Set Up a Payroll System for Withholding Taxes: Employers are required to withhold taxes from employee income as well as Social Security and Medicare taxes. These withholdings are then paid to the IRS. There may also be requirements for State tax withholdings (check with your state tax agency – in California it’s the California Franchise Tax Board at California Tax Service Center). You will need to obtain a completed Form W-4 from each employee prior to start of employment. This form which requests employee withholding information (number of dependents claimed, etc.) is then provided to the IRS. At the end of each year, employers then report employee income and withholdings using Form W-2 (wage and tax statement). This form should be provided to employees by the end of January and sent to the IRS by the end of February the following year. Employment records need to be kept for at least four years.

Setting up a payroll system provides employers with the tools necessary to calculate employee incomes and withholdings, make tax payments to the IRS, prepare financial statements and prepare tax returns. The payroll system thus becomes part of the business’ accounting system. For some businesses, it may make sense to outsource payroll to companies that already have efficient systems in place to manage payroll for companies. Review the IRS’s Employer’s Tax Guide for a more detailed explanation of federal tax filing requirements.

Register With the California Labor Department: In addition to tax withholdings, employers are required to pay state unemployment compensation taxes.

Verify Employee Eligibility: The U.S. Citizenship and Immigration Services (USCIS) requires all employers to verify each employee’s eligibility to work in the United States. Verification starts with Form I-9 which can be found online at The form is to be filled out by the employer within three days of the hire date and kept by the employer for three years from the hire date or one year from termination, whichever is later. However, it does not have to be filed with USCIS or the IRS. Rather, the employer is required to maintain all From I-9s in a separate file making them available for inspection upon request.

Form I-9 lists acceptable documents employers may rely upon in determining eligibility. Employers may only ask for the documents identified. Employers then use the information provided obtained to electronically verify (E-Verify) eligibility. by registering with E-Verify.

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Firing an employee is never a pleasant task. Yet it is a normal part of any business’ operations whether a national corporation or a small San Diego business. Learning the best way to fire an employee begins with an understanding of the employment relationship. Most San Diego business owners understand that employment in California is presumed to be “at-will” (employees may be terminated for any reason or for no reason at all, also termed “without cause”). If a business can fire any employee it wants any time for any reason, then why bother writing an article on how to fire employees? It sounds easy enough. Putting aside the moral hesitation associated with depriving someone of their livelihood, many business owners remain reluctant to fire an employee without first consulting with a business attorney for fear of being sued for wrongful termination. Although employers are permitted to fire at-will employees without any stated reason, there are legitimate concerns employers should consider before doing so.

949108_untitled.jpgFirst, laws against discrimination and retaliation subject employers to considerable risk. Even an at-will employee cannot be fired because if his age, gender, race, sexual orientation, physical limitations, marital status or religion. To do so is illegal. It is also illegal to fire an employee, at-will or otherwise, in retaliation for seeking redress. The risks of these types of claims are significant. Employers that follow consistent termination procedures and provide reasons for termination, whether for cause or for other business reasons, reduce their risk that discrimination claims will be successful.

Second, an employer may be wrong about the employee’s at-will status. In some cases, the answer is obvious. The employee has a written contract. However, in cases where employee manuals and historical procedures are in place that evidence a good cause requirement for termination, courts may infer that an employee is not at-will (that an implied contract exists). In essence, the employee is permitted to rely on the employer’s written policies and historical practices. Offer letters, employment applications and employee manuals that emphasize at-will status reduces uncertainty in this area. Nonetheless, a consistent termination policy is recommended. In addition to reducing the risk of successful wrongful termination claims, a consistent termination policy signifies to other employees that they can expect to be treated fairly.

A termination policy typically includes procedures for progressive discipline and documentation of employee actions. Consistent and progressive disciplinary procedures require open lines of communication and provide employees with an opportunity to correct their ways. The procedures themselves show fairness and document the employer’s reasons for termination. With a consistent termination policy and a basic understanding of at-will employment, the employer is better equipped to handle the ultimate task of firing an employee.

So back to the original question: how do you fire an employee? The steps are relatively simple (assuming there have been no violations of labor laws).

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Organizing a workforce for your San Diego business presents formidable challenges.  One of those challenges is deciding whether to hire staff as independent contractors or as regular employees.  Obviously, there are fiscal advantages to hiring independent contractors.  For those workers classified as “employees”, withholdings, payroll taxes, worker’s compensation, and compliance with labor laws generally add about 18% to your payroll costs, and this is exclusive of employee benefits.  Hiring independent contractors is an appealing alternative, but it’s not as simple as treating all workers as “independent contractors”.  Federal and State law dictates whether a worker is an “independent contractor” or an “employee”.  


When the time comes to hire staff, it is crucial that businesses ensure that workers are properly classified under Federal and State law.  Even large corporations have fallen victim to the assumption that classification of its workers as independent contractors was appropriate.  Microsoft Corporation, Hewlett-Packard, Time Warner, Allstate and FedEx have all borne the cost of litigation regarding the misclassification of workers.  Since 2007, estimates of settlements in worker misclassification cases approach one billion dollars.  Nonetheless, employers continue to opt for the “independent contractor” classification while treating staff as employees opening themselves to significant tax liabilities, interest and penalties.  

Part of the problem lies in the ambiguity in existing regulation lending to subjective determinations.  In California, the Employment Development Department offers the following guidelines for the definition of an “employee”:  the employer has the right to discharge the worker at will; the work is usually done under supervision; the worker does not provide the tools, equipment, or place of work; the worker is paid based on time worked or piece rate; the worker has little or no meaningful discretion on how to do the job; and the worker does the same kind of work as that which is the principal production of the company.

Under these guidelines, it is easy for unwary employers to convince themselves that they are properly classifying workers as independent contractors.  This is often done through rose colored glasses without fully understanding the consequences of misclassification.  If the I.R.S. or state tax agency determines that a business’ workers are misclassified as independent contractors, the business will be subject to back taxes, interest and penalties which can be significant.   In most cases, especially for smaller businesses, the issue of misclassification never arises.  Workers classified as “independent contractors” fear challenging their employer’s determination. Nonetheless, employers that currently classify workers as independent contractors should reevaluate the classification, particularly as tax agencies are increasingly viewing the use of independent contractors with suspicion.  If there is any doubt, employers can seek the advice of a business attorney and/or file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Tax Withholding.

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In California, post employment non-competition clauses are generally unenforceable. The prohibition of such clauses stems from the state’s strong public policy favoring freedom of employment and competition, and there can be little doubt that savvy California businesses are aware of this. Yet businesses in San Diego and throughout the state routinely include non-competition clauses in their employment contracts, especially those with upper management. Businesses likely feel justified in including non-compete language because they know it is legal in nearly every other state in the country. In addition, many businesses have legitimate concerns regarding the protection of trade secrets. Companies invest in the creation of customer lists, customer loyalty, and in methods and procedures for maintaining and building a customer base, and they want to protect their investment.


Most employees don’t intend to steal their former employer’s secrets. They are simply interested in taking advantage of employment opportunities. The problem arises because of the difficulties in distinguishing between a former employee’s inappropriate use of trade secrets and that same employee’s utilization of personal skill and experience for the new employer. Competitors often solicit business from the same customer pool and use similar mechanisms to seek out and maintain a customer base. Who can say for certain that the former employee isn’t soliciting clients consistent with the new employer’s standard operating procedures? Whatever the case, California has chosen to err on the side of competition.

Employers, on the other hand, have chosen to err on the side of inclusion. Despite their illegality, businesses still include non-compete clauses in their employment contracts. Most prospective employees are unaware of California’s employment laws and are unlikely to consult an attorney, and employers know that in most cases their employees will honor non-compete agreements upon the termination of their employment.  Moreover, employers merge non-compete language with trade secret language. If a former employee chooses to go to work for a competitor, employers will look past the non-compete language and allege theft of trade secrets. California courts have long recognized a “trade secrets” exception to the prohibition on non-compete clauses. By alleging theft of trade secrets, employers reduce the risk of having the case dismissed early for failure to state a cause of action, and increase the pressure on the former employee now faced with prolonged and costly litigation. Sometimes, the new employer will absorb the cost, but not often.

In a continuing series on hiring foreign workers, this article explores the different types of visas available. For most San Diego businesses, the idea of hiring foreign workers seems like an overwhelming task even with an immigration attorney on their side. See Hiring Foreign Workers – Initial Considerations for San Diego Businesses. However, businesses of all sizes are making the decision to hire foreign workers more and more these days despite daunting immigration policies. Once the commitment is made, the next step is deciding which visa to sponsor a foreign worker under. The decision depends on the employer’s needs, the pool of prospective foreign workers, whether the work is seasonal or not and the length of time the work is expected to last.


In some cases, a particular foreign candidate offers a unique skill above and beyond that which is normal for the trade making it virtually impossible to fill the position with a qualified domestic applicant. In other cases, there is a shortage of a particular type of worker such as an electronic engineer or a nurse. In the former, the employer may desire to immediately sponsor the prospective employee for permanent employment under United States immigration law even if it proves a bit more difficult. In the later case, employers may want to sponsor the foreign worker under a temporary employment visa, and later re-evaluate the decision to sponsor the worker under a permanent immigration visa. The specific legal requirements for United States employment visas, both temporary and permanent, and the necessary recruiting efforts will be discussed in more detail in following articles under this series.

Hiring a foreign worker for a permanent employment position requires sponsorship under one of five employment based visas (EB visas). EB-1 priority workers are aliens with extraordinary ability in sciences, arts, education, business or athletics, outstanding professors or researchers and managers and executives subject to international transfer to the United States. EB-2 professionals are professionals with advanced degrees or persons with exceptional ability in the sciences, arts or business or qualified physicians who will practice in underserved U.S. areas. EB-3 workers are skilled workers (with a minimum of 2 years training and experience), professionals (with bachelor’s degrees) and unskilled workers. EB-4 special immigrants are religious workers and U.S. government employees and former employees abroad. EB-5 immigrant investors are aliens seeking to engage in new commercial enterprises. Often, an alien’s qualifications may fit more than one of the above immigration visa categories and choosing which visa to sponsor under will most often depend on the backlog of available visas in each category and per country limits. There is currently a six month backlog on labor certification for EB-3 visas. If a professional with a bachelor’s degree is also a person with exceptional ability in the sciences, arts or business, sponsoring under an EB-2 visa may be the better option.

Parts One and Two of this article focused on the factors new and growing San Diego businesses weigh when considering whether or not to hire their first employees. Part Three focuses on the important task of developing an employee policy. Regardless of the stage any San Diego business finds itself in, ensuring that new and existing employees understand what is expected of them in any given situation is critical for effective management. A clear and unambiguous employee policy minimizes costly miscommunication and conflict between employees, management, vendors and customers.


Some argue that companies could or even should wait until the second or third employee before developing a written policy because new and growing businesses have other priorities and little time to spend on a formal employee handbook. This is a pragmatic view which undoubtedly appeals to many entrepreneurs. However, forward looking businesses will draft some sort of written employee policy for its very first employee.

Whether a handout a few pages long or a detailed handbook prepared by attorneys and a fully staffed human resource department, a good employee policy will contain a number of important features: it will be written in clear and unambiguous language (preferably at a 5th grade reading level with each policy set forth on a separate page); it will address key employment issues such as health, safety and other government regulations (State and Federal), employee theft, and company expectations regarding performance and conduct; it will address anticipated problem areas such as internet use, outside email contact, phone procedures, customer contact and media contact; it will set forth a disciplinary policy; it will hold all employees to the same standards; and lastly but by no means any less important, it will highlight company benefits and quality of life. Businesses should avoid a tedious written policy that creates an impression that the company will be stuffy and unyielding. The employee policy should articulate standards prospective employees can understand while simultaneously stressing the company’s appealing attributes.

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In many industries, the need for foreign workers and an intimate familiarity with United States immigration policy has existed for decades. Large corporations, particularly those in information technology, have in-house attorneys and human resource departments that have developed systems to handle the processing of foreign employees. For these corporations, the question whether or not to hire foreign workers is an easy one. It’s a “been there, done that” scenario. When a department head decides a qualified foreign employee exists for a position they have been unable to fill domestically, the corporate wheels are set in motion to sponsor that worker for a temporary working visa or for permanent employment in the United States. These companies are familiar with the steps necessary to sponsor foreign workers for the various U.S. Visas, including obtaining labor certification for permanent employees.


The decision is much more difficult for smaller businesses interested in hiring foreign workers. Often, new and growing businesses are presented with an unexpected opportunity to hire a foreign worker. Their first impulse is to shy away from the prospect no matter how appealing. Unfamiliarity with immigration policies, fear of excessive legal expense, government red tape and uncertainty overwhelm the small business owner. Business owners should take a pragmatic approach understanding first that United States policy is to admit foreign workers only where it does not come at the expense of U.S. citizens willing and able to take the same position at the prevailing wage. Thus, cheap labor shouldn’t be a consideration. Instead, businesses should weigh the need to fill a particular position with a foreign candidate against the costs associated with sponsoring that worker. Costs include attorney fees, filing fees, costs associated with advertising for qualified domestic workers to fill the position and delay in bringing the prospective employee on board. If the employer values the qualifications of the prospective employee enough (often a subjective consideration), paying an immigration attorney to start the process may be a cost effective option.

Consulting a San Diego immigration attorney is the best first step. An immigration attorney will walk the prospective employer through the process explaining the necessary steps, the time it will take to complete those steps, and the associated cost.

U.S. immigration laws provide a number of different tools allowing local businesses to hire foreign workers on a temporary, seasonal or permanent basis. The laws are varied and complex, and the process (from determining a business’ needs to matching those needs with the right prospective employee to complying with all federal immigration requirements) can seem insurmountable at first glance. A San Diego immigration attorney helps to navigate the maze, but hiring an attorney only adds to the complexity in the mind of the average business person. Yet, businesses of all sizes continue to hire foreign workers and at a growing rate. This is despite the current recession and immigration controversy.

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The first step of course is to determine whether a business has a need for foreign workers. U.S. immigration laws directed at employment are designed to prevent employers from hiring foreign workers at the expense of U.S. workers. Thus, the fact that a business may be able to hire cheap labor from another country does not, from a U.S. immigration law perspective, satisfy the “need” component. Rather, a business’ need for a foreign worker is based on that business’ inability to find U.S. workers qualified and willing to take an employment position at the prevailing wage. Once a business determines the need for a foreign worker, it must of course go out and find him or her. Most businesses turn to one of the hundreds of international recruiting firms easily found on the web.

Satisfying the federal government that an employment position will not come at the expense of a U.S. worker depends on the type of position a business is trying to fill. The following is a summary of the different types of employment visas: H-1B Visas, the most common non-immigrant based visa, for specialty occupations such as architects, engineers, educators, accountants or legal professionals; H-2A Visas for temporary agricultural workers; H-2B Visas for seasonal non-agricultural workers; H-3 Visa for training in education of handicapped children; L-1 Visas for intra-company transferees; TN Visas for non-immigrant professionals from Canada and Mexico under NAFTA; and EB Visas, immigration visas, for permanent employment opportunities in the United States. There are five categories of EB Visas ranging from foreign nationals of extraordinary abilities to unskilled workers.

Part One of this article focused on making the decision to hire employees and the costs of doing so.  Part Two provides a brief overview of the numerous Federal and California State laws and regulations governing employers.  It is important that businesses become familiar with these laws as they contemplate hiring their first employees.  Minimum wage, Social Security and Medicare, tax forms and withholdings, workers’ compensation, eligibility to work in the United States and other labor laws are all important considerations.
As businesses look to hiring employees, their first consideration is cost.  Wage is of course the largest component of employment costs, and in California the minimum wage is $8.00 per hour.  This is the minimum wage cost prospective employers face.  In addition to the employee’s wage, the employer is responsible for paying an equal contribution to the employee’s Federal Social Security and Medicare payments.  This is the same payment individual business owners pay as their self-employment tax.  Currently, the combined tax is 15.3% of the employee’s wage (12.4% for Social Security and 2.9% for Medicare) of which the employer is responsible for half.
EmployeesPart2.jpgOnce a decision is made to hire, businesses are required to ensure that the employees they hire are legally eligible to work in the United States.  Each new employee is required complete a Form I-9, “Employment Eligibility Verification”, and present their Social Security card.  It is recommended that employers take photo copies of the Social Security card for future reference and proof of documentation.  If for any reason, a prospective employee doesn’t have a Social Security card, the employer should ask that they obtain one as soon as possible
Employers are also required to withhold taxes from the employee’s pay.  The amount of tax withheld is determined by the employee’s W-4 form which is provided to the employee by the employer.  The employee identifies his or her tax status and desired number of exemptions which the employer uses, along with state and federal tax withholding tables, to calculate withholdings.  At the end of each year, the employer reports the employee’s income and total amount of withholdings to the IRS and the California State Franchise Tax Board via a W-2 form which is also provided to the employee for his personal tax return.

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Eventually the day comes when every new San Diego business owner asks the question “Is it time to hire my first employee?” The prospect is exciting and often serves as a catalyst for business growth. For some, the right time is when business operations begin to negatively affect personal life. Most business owners face a number of challenges requiring long hours and considerable energy eventually leaving little time for family and friends. For many business owners, living a healthy, active life style and spending quality time with family and friends is invaluable. For others, the sheer volume of day to day operations leaves them with no choice. Either bring one or more employees on board to assist with operations or suffer inefficiencies and loss of profit. Still others see the present high unemployment rate as a time for bargains. Whatever the reason, when the time comes to seriously entertain hiring employees, business owners must carefully consider numerous issues including compensation, employee benefits, hiring practices, compliance with state and federal law and development of a company employee policy.


Before hiring that first employee, a business must have adequate revenue in order to maintain solvency and respectable profit margins. Cash flow, not fixed cash, is a key factor in determining whether a business can hire that first employee. To make this determination, the business owner must first decide what constitutes a fair wage. What constitutes a fair wage takes into account both what the employer can afford and what is commensurate with the job requirements and expectations. The employer must also consider whether to provide employee benefits. Medical coverage, retirement plans, paid holidays and vacation policies all come at a cost to the employer, but also serve as an additional incentive to prospective employees. The cost of advertising for the position is an additional short term consideration. If the business doesn’t have the necessary “cash flow” to bring on a new employee, the business might consider other options like outsourcing important tasks. Accounting tasks for instance can be outsourced at a reasonable cost.

Finding the right candidates for the new position requires good strategy and a little common sense. Business owners must attract qualified employees. Salary, benefits, the business environment and other perks, the quality of the business itself and how the position is advertised for all have an impact on prospective employees. Newspaper advertisements, periodicals, websites like and recruiting companies are all excellent tools. References from friends or industry colleagues are also effective ways to recruit employees. Before moving forward, the employer should put himself in the shoes of the prospective employee. A thoughtful consideration of what best enhances the business’ appeal to prospective candidates assists the employer in anticipating employee preferences. The goal is to attract the best and brightest candidates and to ultimately choose the right fit for your business. The first few employees play a major role in the growth and developmental of any new business, and help define a business’ relationship with clients and customers during its formative years.

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