Employment Issues Your Startup Should Not Ignore

Editor’s note: Ian Carleton Schaefer is a Member of the Firm in the Labor & Employment Department of Epstein Becker & Green’s New York Office. He co-chairs the Firm’s Technology, Media and Telecommunications Industry Group. Nancy L. Gunzenhauser is an Associate of the Labor & Employment Department and a member of the TMT group.

Startups of all sizes face challenges in finding folks who want to work for them and share their vision. Hiring is tough, and welcoming these people into your organization can present “sleeper” employment law challenges and pitfalls that often go overlooked, much to the detriment of the bottom line.

Earning wages

Too often, startups attract talent by offering equity in the quickly growing business, either in lieu of or in addition to an employee’s wages.

Unfortunately, providing stock and/or options in a company does not always adequately compensate employees under federal and state minimum-wage laws. Wage and hour lawsuits — which are up 438 percent since the year 2000, according to the Federal Judicial Center — are among the most popular and most expensive to litigate and defend.

If you’re paying your people in stock in lieu of wages, you’re breaking the law.  Period.

Further, failure to pay overtime for employees who are not exempt from overtime (i.e. those who are ineligible for overtime by making at least $455/week and whose job duties fall into one of several exemptions, including executive, administrative, computer professionals) has become another minefield for startups.

There are also state law differences to remember. Overtime in Silicon Alley (for hours worked in excess of 40 for non-exempt employees) is calculated differently than overtime in Silicon Valley (which also requires the payment of daily overtime for hours worked in excess of eight in one day). So it’s essential that workers are classified and paid properly to avoid substantial financial ramifications.

One of the biggest mistakes that startups make is improperly classifying their workers as independent contractors instead of employees. Whether a startup calls them “consultants,” “contractors,” “freelancers” or even “interns,” there can be serious consequences from an employment law perspective.

The determination of who is a “contractor” and who is an “employee” is governed by both the parties’ own understanding of the relationship and federal and state wage-hour laws. This guides whether someone is an employee or contractor based on multi-factor tests, and these tests vary based on jurisdiction.

Not surprisingly then, the consequences to a startup for mischaracterizing an employee as an independent contractor, including minimum wage, overtime and payroll tax violations, can be significant if not devastating.

The best way to avoid these pitfalls is to simply create an accurate job description. A good job description establishes the expectations of the job, helps the employer (and their counsel) “reality check” the position to properly classify the job, and can be used as a benchmark to evaluate applicant’s “fit” and a worker’s performance.

Restrictive Covenants

Intellectual property and trade secrets are among the most valuable assets many startups have.  Unfortunately, many startups fail to legally protect these essential business assets through ineffective confidentiality agreements, non-competes, non-solicitations and NDAs to effectuate this end (collectively “Restrictive Covenants”).

When preparing these agreements, too few founders and startups ask the critical questions: “Are my Restrictive Covenants really doing what we want them to do? “Are they truly reasonable, and will they be upheld?”

Since Restrictive Covenants are generally not self-enforcing, startups should also candidly ask themselves: “Am I willing to commit the time, money and resources to enforce these provisions in court?”

Since every state treats these types of agreements differently, it is essential that your Restrictive Covenants are properly drafted with counsel, are tailored (one size probably does not fit all) and take into account where the company may seek to enforce those agreements.

Employment policies

Most startups are not concerned with creating robust employment policies when the number of employees is small. All startups, no matter what the size, should at least have two: a sexual harassment and equal employment opportunity policy.

Under federal law (and many state and city law also counterparts), an employer can demonstrate that having a sexual harassment policy with a complaint procedure is a defense to a sexual harassment or other discrimination claim. Since several local anti-discrimination laws apply to employers with only a single employee, having an EEO policy is essential for every startup.

A sexual harassment policy is relatively simple to create and post. Establishing these policies and procedures is valuable for compliance with the laws, protecting a startup from potential litigation, staving off bad press and demonstrating to capital sources that your personnel infrastructure is sound.

Planning for the end

Just like other relationships, sometimes they just don’t work out. When employees leave, it is important for startups to focus on protecting assets, including protecting against potential claims and preserving IP.

Sometimes it behooves an employer to enter into a separation agreement with a departing employee, where an employee waives his or her right to bring a lawsuit in exchange for an amount of money or other consideration. While more costly upfront, such a maneuver can save costs long-term. Startups should also focus on protecting their physical and intellectual property when employees leave the business.

Employees who use devices to access company information should either have the device returned (if company-owned) or wiped (if personally owned) to protect company data. If the departing employee has access to or managed your company’s social media accounts, ensure that all passwords are either returned or changed so that the former employee cannot claim the followers or connections belong to her personally.

While it may defy common sense and a company’s best intentions, it is often best to plan for the end at the beginning.