Employers today face constant hurdles in their day-to-day operations, and startups are no different. The liability for employment violations is not limited to large manufacturers or businesses; emerging businesses and companies in their infancy are likewise vulnerable and need to be aware of the laws so they can take appropriate action to ensure that they are protected. Startups should be aware of two issues in particular: 1) wage and hour requirements and 2) protecting intellectual property and company goodwill.
Wage and Hour Regulations for Startups
Employers of all sizes (including startups) need to be aware of the wage and hour requirements contained in the Fair Labor Standards Act (FLSA). The FLSA applies to employers whose annual sales total $500,000 or more, or who are engaged in interstate commerce. Practically speaking, this means that the FLSA applies to almost every employer. The FLSA governs overtime pay and minimum wages, which apply to employees who are “non-exempt.” Generally speaking, an employee is non-exempt (i.e., the employer is required to pay overtime and at least minimum wage) if he is not salaried, or, if the employee is salaried, the job does not have certain administrative or professional requirements (e.g., supervising two or more people, discretion in decision making, etc.). In contrast, employers are not required to pay overtime to exempt employees (those who are paid at least a certain salary and have certain job duties).
Paying your non-exempt employees at least the federal minimum wage is easy. You likely already comply with this rule as long as you pay your employees at least $7.25 for each hour worked. But be sure to check your state’s laws as well. The FLSA is the floor, not the ceiling. Many states impose their own minimum wage that is in excess of $7.25 per hour (e.g., $12.00 in Washington).
Overtime issues are more complicated. In its simplest terms, the FLSA requires that employers pay their non-exempt employees 1.5 times their regular rate for each hour they work over 40 in a given work week. But what is the “regular rate,” and what is a “work week?” A common misconception is that the regular rate is simply the standard hourly rate (e.g., $15.00 per hour) that an employer pays a given employee. It is not. The regular rate must include other forms of compensation, such as commissions and non-discretionary bonuses. Including this extra compensation will naturally affect the amount of overtime that an employee is entitled to receive.
The workweek is likewise different than most assume, as it is not simply Monday through Friday. Rather, the workweek from which you determine an employee’s overtime is a seven-day period (e.g., Sunday at 12:00 a.m. to Saturday at 11:59 p.m.) over which an employee may work. As an employer, you should set out your workweek (whatever it may be) in your policies and, if at any time during the workweek (with some exceptions) a non-exempt employee works more than 40 hours, be aware that the employee is entitled to overtime compensation.
Misclassifying an employee as exempt when he is non-exempt (and the subsequent failure to pay appropriate overtime) can result in severe legal problems in the form of back wages and attorneys’ fees, among other things. Classifying an employee as exempt is a fact-based inquiry based on an analysis of that employee’s salary and job duties. For guidance on whether you have properly classified your employees as exempt or non-exempt, contact one of our employment attorneys at Chambliss.
Protecting Your Startup’s Intellectual Property and Company Goodwill
The last thing a startup wants is to come up with a great new idea, only to have a disgruntled employee leave and take valuable intellectual property (IP) or customers with him. To protect the company from such situations, employers should use noncompetition and confidentiality/IP assignment agreements.
Confidentiality agreements serve to prohibit the disclosure of confidential and proprietary information. And IP assignment agreements, when properly drafted, can ensure that the intellectual property and other products that employees create during their time working for you (the lifeblood of any startup) stays with your company rather than walking out the door with your former employee. These agreements (particularly when used in conjunction with noncompetition agreements, as discussed below) help protect startups from the harmful effects of current or former employees who leak or take information that is ultimately vital to the startups’ success. For more on startup confidentiality agreements, read our post “Reaping Innovative Rewards With a Well-Sown NDA.”
Noncompetition agreements prevent former employees from leaving and helping a competitor. There are limitations to such agreements, as they must be narrowly tailored (in duration and geographic scope) to protect the employer’s legitimate business interests. For example, an agreement that prevents a former employee from working with any competitor within the entire United States for a period of 10 years, while the employer is only a local hair salon in Chattanooga, will likely not be enforceable. But a properly tailored agreement, based on the facts and circumstances surrounding a particular employer and its legitimate business interests, can and should be utilized by startups to help protect their interests. Any company interested in utilizing a noncompetition or confidentiality agreement should seek legal counsel to ensure that its agreement provides appropriate legal protection. For more on non-compete agreements, read our post “Limiting Competition and Protecting Your Company: Non-Compete Agreements 101.“
Startup companies are a vital part of a growing community. They bring innovation, jobs, and growth. But in order for startups to be successful, they must take the appropriate steps to comply with the law and protect their ideas.
