In a startup culture where everyone gives 110% and works 80+ hours per week, just one misclassified employee can cost a company hundreds of thousands of dollars...
So, you think you have the next greatest idea for a startup that will knock the socks off of the current big players in your space? We know you’re excited to spend endless nights and countless hours to get your company off the ground, but before you plunge in head first, let’s talk about the five common employment-
related mistakes startup entrepreneurs make when launching their business:
Bad Idea #1: Let’s classify everyone as an independent contractor.
Just calling someone a consultant or contractor does not magically make them fall into such a category. The same goes for your friend who requested to be classified as “a 1099”. While this may seem like an attractive way to save a few dollars now (by avoiding paying unemployment taxes, workers compensation, etc.), it can become very costly later on. A worker’s job duties, responsibilities, and relationship must meet certain standards under both federal and state law in order to ensure proper classification as either a bona fide employee or a true independent contractor. Misclassification litigation is expensive and can be fatal to your company’s very existence. Think of the recent Homejoy (a home-cleaning marketplace who relied heavily on independent contractors) debacle.
Bad Idea #2: Let’s just give our employees equity in our awesome company and not pay them anything.
Simply put, this is a bad idea. Paying in equity does not comply with California Labor Code section 212, which requires employers to ensure that paychecks may be cashed without delay and without a fee or a discount. The Labor Code also frowns upon salary deferrals. And finally, Labor Code section 207 requires employees to be paid generally twice per month. Failing to pay your employees could result in a trip to see the Labor Commissioner, an award in favor of the employee you didn’t pay, and assessed fines and penalties.
Bad Idea #3: Since we have to classify most everyone as employees, let’s just make them all exempt employees.
Uh-oh. You just stepped on another landmine. Companies need to differentiate between exempt and non-exempt employees, the latter of which are entitled to overtime pay and rest/meal periods. In a startup culture where everyone gives 110 percent and works 80-plus hours per week, just one misclassified employee can cost a company hundreds of thousands of dollars. Getting it right from the get-go will save you a large headache... oh, and a lot of money that can be spent elsewhere like recruitment, expansion, and your new fancy employee cafeteria.
Bad Idea #4: Ummmm, we don’t have a Confidentiality and Inventions Assignment Agreement in place and we have no policy about employees bringing over/using electronic data from their prior employer. Should we?
If you have developed a unique product, service, or technology, chances are you are not yet in the same echelon as Elon Musk and therefore, need to keep a lid on the company’s confidential information or trade secrets. Not only do you, as a founder or investor, have a stake in ensuring protection of the company’s IP, but you also want to avoid receiving a nastygram from Company ABC claiming that one of your new hires has misappropriated ABC’s trade secrets and is using them at your company (you know, when Joe Employee used that thumb drive to upload certain documents he maintained at his prior employer into your computer system!).
Not only do you, as a founder or investor, have a stake in ensuring protection of the company’s IP, but you also want to avoid receiving a nastygram from Company ABC claiming that one of your new hires has misappropriated ABC’s trade secrets...
Having confidentiality and inventions assignment agreements and certain restrictive covenants (i.e., non-solicitation) for your employees as well as implementing appropriate policies and practices regarding third party’s confidential information (all of which should be part of your onboarding process) are crucial to ensuring your company’s longevity and reputation.
Bad Idea #5: Why bother putting a commission plan in writing?
Because not putting it in writing actually violates California Labor Code section 2751. In California (and several other states, including New York), employers are required to provide salespeople with written commission plans. It doesn’t stop there though. These commission plans must be signed by both employer and employee and include the method for calculating and paying the commissions. It’s only a matter of time before a dispute over a commission arises and if you have an unambiguous and compliant commission plan, those disputes will undoubtedly be minimized.
Let’s face it - employment laws are tricky and constantly change, causing some of the savviest of businesses to find themselves in hot water. Startups should be prudent in understanding federal, state, and local employment laws from the beginning to avoid these common pitfalls. Thoughtful awareness and attention to these key employment considerations will help position your company for success in the future. And as you grow, there are more and more employment laws to take into consideration, which is why having an experienced employment attorney or an HR representative in your corner will come in handy.
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[Nicole Harvat Armstrong is Special Counsel at law firm Carr McClellan P.C. She serves as an in-house liaison and trusted advisor to HR, in-house legal, and executive management teams of software and financial technology companies; food/beverage companies and restaurants; and non-profit organizations. Her clients range from early stage startup to Fortune 200 companies.]
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