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Small Business HR Mistakes (Part 1) – What You Don’t Know Can Cost You

In the world of small medium enterprises (SMEs), it is not uncommon to find companies operating without HR expertise despite employing upto hundreds of staff in some cases. These organizations are often lacking resources and pressed for time while juggling multiple roles – from accounting, to marketing to human resources.  Consequently, HR mistakes are bound to happen. 

As the saying goes – “you don’t know, what you don’t know”.   Ignorance may be bliss in other parts of life, but when it comes to the employment setting, mistakes can prove costly. 
To understand the HR risk areas to avoid, let’s examine some common errors SMEs make unknowingly at the beginning of the employment cycle.
1.  Rushing to hire yesterday

Hiring in haste is a costly mistake.  Rushing to fill vacancies not only impacts the quality of hires into an organization, but human rights liabilities can also exist if the hiring process is:

  –  not consistently applied to all candidates;
  –  not objectively aligned to job requirements; and/or
  –  not documented.
Due diligence is necessary to help companies limit costly errors associated with a bad hire.   Studies have shown turnover costs can range anywhere between 50% to 2 times the annual salary depending on the position.   With this in mind, it is better to invest in the time and money upfront to hire right rather than pay for headaches down the road. 
Tip:  Plan and document the hiring process.  Take the time to establish an objective system from sourcing to onboarding for your company (hopefully before the need to hire is imminent).  Turnover is costly.  Finding the right fit and retention is the goal.  If you don’t have internal expertise to help you do this effectively, outsource the work or engage a certified HR professional to develop a program that works for your organization.      
2.  No written contract    
Verbal agreements are legal but without something documented it is hard to prove what was or was not said at the time of hire.  Disagreements and misinterpretations are common.  This can be especially troublesome when the employment relationship comes to an end, years if not decades later.  In which case, the people involved in the initial hiring are likely gone – unable to provide support for the company should a legal dispute arise.  
In the absence of a written agreement, judges have also been known to fill in the blanks and insert terms you may not have intended.  Any ambiguity in an employment contract (verbal or written) is typically interpreted in favor of employees.  As a result, this can significantly increase your risks and financial exposure without limit. 
TipGet professional help to customize an employment agreement that will effectively limit your risks and protect your company interests.        
3.  Employment contract signed after starting
Did you know that once an employee starts the job, whatever contract you have them sign on their first day or anytime thereafter is likely unenforceable?   The reason is because there is no longer an opportunity to exchange something of value between the parties since technically, the employee already got the job.  This is called “consideration” and is one of the conditions that must exist for a contract to be valid.   Therefore, unless a new benefit is to be considered, many employers are unaware that the contractual agreement signed after starting may not hold water if challenged.       
Tip:  Have the employee review and sign the written agreement before any confirmation of employment is made.  If the employer wishes for the employee to sign on a new agreement during employment, be sure to provide a new benefit for the employee to consider (i.e.  pay raise, paid days off, cash, promotion, bonus plan etc.).
4.  No explicit probationary clause
There is a common misconception where employers think a probationary period applies to all employees automatically.  However, this is not the case.  A probationary clause must be explicitly written into the employment contract for it to apply.   Otherwise, it’s either the high standard of just cause need to be established or reasonable notice obligations apply in order for you to end the employment of a newly hired employee.        
TipCheck your employment agreement template to ensure you have this clause inserted to give you the leverage to terminate for unsuitability as set out in the Employment Standards Act.
5.  Using the same contract template for all hires
Different employment terms apply to different job levels and classifications.  Permanent full-time positions are fully governed and protected by employment laws while temporary and contingent workers are to a lesser degree.  There’s also differences between non-management versus management positions.  These factors all necessitate distinct contractual terms to be considered and included in the agreement.     

However, what often happens in the SME world is that the same contract template is used for all type of hires with only a few sentences tweaked here and there.  This poses significant risks because without understanding the employment terms that should or should not apply in the scenario, you could inadvertently increase your obligations and liabilities as an employer.  

For example, when you use the template for a permanent employee for that of a contract worker – benefits, vacation and severance obligations may not apply but if the terms were not customized or removed, these costs may be increased as a result.             
Tip:  Invest in a contract template that is specifically customized for different employment arrangements (i.e. permanent vs temporary, non-management vs management).  Legal and HR professionals can help you decide what terms will best protect your interests for the type of employment relationship you are contemplating and draft accordingly.      
6.  Misclassifying Employees

This is one area where government agencies are closely scrutinizing these days.  Some costly traps both large and small companies have fallen into involve misclassifications pertaining to:

  –  employees versus independent contractors
  –  non-management workers versus managers (by title)
A detailed examination into the nature of the relationship is necessary and there are specific criteria used by the regulators to distinguish between an employee and an independent contractor – I will review these factors in a future post.   The determination is not always black and white.  Often times, there’s lots of grey which makes it more complex and challenging.      
However, when a misclassification is found, employers can be required to retroactively pay all source deductions that should have been deducted from an employee’s wages including CPP, EI, income tax along with interest and penalties.  The Ministry of Labour can also order payment for vacation, overtime, holiday or termination pay in addition to any audits conducted by the CRA.       
With respect to the other scenario where a non-management employee may be incorrectly classified as a manager, the risk there relates to overtime entitlement.  Specifically, retroactive overtime payments can also be ordered if it was regularly worked and the job is in fact determined to be non-managerial in nature. 
These financial consequences exist regardless of an employer’s intent.  Depending on how many employees are involved, the costs associated with misclassifications can devastate any small company.
TipEnsure workers are classified correctly based on the definitions and criteria set out by both the Ministry of Labour and the Canada Revenue Agency (CRA) to reduce your risks.   An employer guideis available via the CRA website to help SMEs make such determinations.  If you are still unsure, seek professional advice regarding your specific scenario.
These are all the areas that employers should take heed.  One misstep can severely impact your bottom-line.  As the saying goes, knowledge is king”!  Being informed will help you avoid these common errors and save you the headaches and money down the road.    
If you find the information shared in this blog series helpful, stay tuned for our next post where we’ll be looking at those HR mistakes small businesses make “during” the employment relationship once an employee is on-boarded. 

The content shared in this blog post is for general information only and does not constitute legal advice. 
At Strategywise HR, we understand the HR challenges SMEs face and the workplace laws that affect you.  If workplace issues are keeping you up at night, or you are simply looking for a professional sounding board to determine the best course of action for your situation, please contact us for a free consultation.  Our focus is in helping SMEs make informed people decisions that reduce risk and costly exposures. 

2 thoughts on “Small Business HR Mistakes (Part 1) – What You Don’t Know Can Cost You”

  1. Great article Belle. Clearly, you are well aware of the challenges SME's face. Using the same contract template for all hires is one that I've seen a lot of lately…spells trouble.

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