So you’re a startup. You’ve decided to take your world-changing idea and move it out of your dorm room/garage/favorite-table-at-Starbucks and start a legitimate business. So what next?
If you plan on staying in business for the foreseeable future, you might want to make sure you’re compliant with employment laws since lawsuits can cost businesses hundreds of thousands of dollars. Indeed, the average cost for single-employee lawsuits – excluding any money paid for settlement – is around $100,000 and on the rise. The following list outlines 10 key areas in employment law that startups should be thinking about, but often are not.
1. Federal, State, and Local Laws. You’ve heard of minimum wage, overtime, meal breaks, etc. And if you’re like most people these days, you turn to the internet, search “minimum wage”, and read the first thing you see. But there are federal, state, and local laws that usually cover the same topic differently. Although subtle, those differences could spell trouble if you’re not following all of them properly.
Take minimum wage for example. The federal minimum wage is $7.25 per hour. In California, it’s currently $8.00. Narrower still, in the City and County of San Francisco, it’s $10.74, and in San Jose, $10.15.
Bottom line? What you don’t know can hurt you. Federal law, which is most likely to pop up first on a simple Google search, may not tell the full story of what you’re legally required to do as an employer. Make sure to dig deeper into state and local laws. A good resource for federal law is the United States Department of Labor. California-based companies can look at State of California Department of Industrial Relations webpage.
2. Job Postings. Before you even meet a potential hire, your job posting may potentially subject you to a claim for discrimination or other violation of the law.
In the startup world, a common potential mistake is to request “US Citizens only” in job postings. Obtaining visas for employees can take time, money and resources – all of which you’re trying to conserve. The request is innocent enough, but employers cannot limit job applicants or hires to U.S. citizens, unless they are required to do so by federal, state, or local laws or federal contracts.
What you can and should ask is whether an applicant is currently authorized to work in the United States or will require sponsorship for employment. Under the anti-discrimination provision, nonimmigrant visa holders cannot claim a violation of the law for failure to hire based on their need for sponsorship.
3. On-Boarding Paperwork. So you’re ready to make your first new hire (or your second, or your tenth – congrats). You’ve verbally or electronically explained pay rate and start date to your new hire, but you’re still missing important documentation.
All employers in the United States are required to complete an “I-9.” Form I-9 is used for verifying the identity and employment authorization of individuals hired for employment in the United States. Otherwise, you can be subject to significant fines and penalties. You can download Form I-9 here.
You should also issue a Form W-4, so that so that you can withhold the correct federal income tax from your employee’s pay. You can download Form W-4 here.
4. Culture vs. Compliance. Remember, you’re in business now, and you have to keep it professional. I know many of you want to keep your culture fun and relaxed, but without some formal policies and protections for your employees, you may inadvertently open your business up to some serious consequences such as claims for discrimination or unequal treatment.
Age discrimination is a prominent issue facing startups, and then trend to sue is only climbing. According to the EEOC, claims of this type have increased more than 31% between 1997 and 2013. Be careful to avoid using language and terms in job postings and during interviews that could be construed as a bias towards hiring younger employees, such as “we’re a young, energetic company.”
Sexual harassment is another pain point common in laid-back environments, and you should never assume your employees will know what behaviors constitute as sexual harassment. In 2013, the Equal Employment Opportunity Commission received 27,687 “sex-based” charges costing companies millions of dollars in settlements and legal fees. Federal and state laws say employers must do everything possible to prevent harassment and discrimination from occurring, even requiring you to distribute literature on the issue and/or hold management and employee trainings.
Prevent sexual harassment and discrimination in your startup by distributing company-wide handbooks and personnel guides that spell out your company’s policies. Have labor counsel review the materials before issuance to ensure that all necessary elements are included. Then set the tone in the office by practicing what you preach so others may follow your lead. Nobody wants you to stop having fun, but nobody wants to see you get sued either. I promise, there is a happy medium.
5. Employee Manuals. Employee manuals don’t have to be the super corporate antithesis of your startup. In fact, your employee handbook can be a reflection of the culture of your brand, written with your unique tone expressed throughout. What’s important is that it contains policies regarding leave laws, zero tolerance for harassment and discrimination, benefits, an “at-will” definition and acceptable workplace behavior at the minimum.
If you don’t provide these policies/notices to employees, you may be violating required federal, state or local notices. Without a handbook, an employee who later decides to sue may use your absence of policy as evidence that you weren’t following the law. Setting a good foundation for what you expect from your employees, and what your employees can expect from you, will help protect against future problems.
6. Classifying Employees. I often hear startup leaders say, “My employees are exempt. I pay them a salary.” Not so fast! Paying your employees a salary does not make them exempt from overtime or other requirements.
Whether an employee should be classified as exempt or nonexempt varies between state and federal law, and between roles and positions. For example, compare how California treats the issue of exempting employees in the computer software field versus how the federal Department of Labor analyzes the issue. As to how states have been expanding the computer professional exemption, check out these recent decisions in California and New York.
Misclassifying employees as exempt when they’re not can lead to disastrous results. The Wall Street Journal’s Law Blog reports that wage-and-hour lawsuits—including misclassification—increased by around 10 percent in 2013. And this is no joke. Your company could be exposed to potential class action lawsuits seeking to recover unpaid wages and overtime, penalties, and attorneys’ fees. Talk to your employment attorney to make sure your employees are properly classified.
7. Use of Independent Contractors. It may seem like a good idea to avoid the whole “exempt” issue, avoid paying overtime, and simplify your life. You think you’ve found the loophole and have decided to hire “independent contractors.” But, like the exemption issue, calling a worker one thing, does not make them so. Even with a signed agreement in hand, it does not mean they’re not your employee.
The IRS uses a “20-factor test” to assess the degree of control the company exercises over work performed by an independent contractor. If the company exercises too much control, the worker is an employee. A similar test is used for status under workers’ compensation laws.
With the myriad of laws, it is possible for a worker to be classified as an independent contractor under one law, but an employee under another. This is all the more reason to make sure you are properly evaluating worker status. Read how California examines the issue here.
8. Hiring of Interns. This may crush your plans for compensating interns with just places to crash and endless pizza, but there is really no such thing as an “unpaid internship” anymore. Interns should have pay, training, and/or college credit.
Generally, you are expected to pay for all time an employee works. Under federal law, an exception to this rule may apply if the intern’s training meets certain criteria. State or local laws may impose even stricter or additional criteria on internships. So check with your employment attorney to see if your internships qualify, as lawsuits for “unpaid internships” are on the rise.
9. Paying Your Employees. Writing a check to your employees once a month or handing them cash will not be a sufficient system for paying your workers. State and federal laws require certain information to appear on pay records, and that you state how frequently and by what means you plan to pay. Failure to provide this required info can later form the basis for a class action lawsuit.
10. As You Grow, So Will Your Legal Obligations. As your startup grows, so will your obligations to your employees. Several federal and state laws that were once not applicable to you, may become mandatory. For example, employers with 50 or more employees must provide a certain amount of Family Leave and adhere to the laws in the Affordable Care Act. As you grow, stay connected with your employment law office to stay on track with the increased legal responsibilities.
If the above points have you thoroughly confused and a bit stressed, there’s no need to panic. While the myriad of employment laws can make the idea of launching your startup seem daunting, a skilled and educated employment lawyer can help you navigate these treacherous waters. And making sure you find the right labor and employment lawyer to assist you with your business is as critical as making sure you have the right patent or contract lawyer working for you. Doing so will save you time and money – and will help you lay important groundwork to continue growing, hiring and moving forward.
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