Understandably, entrepreneurs’ main concerns are shipping great products and making sure they can meet the next payroll. As your company grows, regardless of what industry you are in, tech, biotech, or a restaurant, it is critical that the founder devote some time and effort into ensuring employment law compliance. Investors will demand this during the due diligence (as they do not want their money used for defending employment law claims), and employment litigation can be a costly and time-consuming event that could ruin a company’s chances of success early in the start-up process. Below are five mistakes start-ups cannot afford to make.
1. Classifying all employees as independent contractors
To qualify as an independent contractor, the employer has the burden of proof to establish that the worker is actually an independent contractor and not an employee. California passed AB 5 that takes effect on January 1, 2020 and implements the ABC test to determine whether a worker can be classified as an independent contractor. AB 5’s primary focus was on the gig economy’s use of independent contractors, but all start-ups should take note and approach this issue with caution. In addition to owing unpaid minimum wages and potential unpaid overtime, the employer also faces steep penalties for misclassifying independent contractors.
2. Treating all employees as exempt employees and not paying overtime.
An employee cannot agree to work without being paid overtime unless they qualify as an exempt employee. To qualify as an exempt employee, generally, the employee must perform certain duties, and must be paid a certain threshold in wages (usually at least two times the equivalent pay of minimum wage based on a 40-hour week).
3. Not having a handbook and written policies.
Even if startup companies have no money, the Labor Code still applies. They still have to pay more than minimum wage, provide and record meal and rest breaks, issue wage notices to new employees, and otherwise comply with California law. A handbook, new hire packet, and standardized set of written policies is a good place to start.
4. Not providing a clear offer letter with at-will provisions and clear understanding of who owns social media accounts and passwords.
Companies should be providing a writing setting forth the employee’s compensation, stock option rights, at-will status, as well as who owns the rights to social media accounts and the passwords to access the accounts. It is much better to have this set out early in order to avoid costly litigation and disruption in your business later.
5. Not having the right employment law counsel.
Startup owners should have a relationship with an attorney that actually practices California employment law. Have an agreement with counsel that enables the company to ask quick questions as they arise – if your lawyer is invested in the relationship, quick calls often time are not billed. However, make this easier on your lawyer, do the work before you call, and just have the lawyer’s input to double check that the decision you have made, or the letter you drafted is good-to-go. Otherwise, calling your lawyer and asking him to draft the letter will take time (usually more time than the client could have done it in) and will increase the cost of legal services.