Congratulations on your new business! While you have many things on your mind, it is important to remember that you are subject to California employment laws. As you likely already know, these laws are some of the most employee friendly in the country. To allow you to spend your time and money on building your business, you need to steer clear of employment law issues and avoid costly lawsuits. A good starting point is reviewing the top 5 employment-related mistakes often made by start-ups.

1. Deferring Compensation

All employees, including founders of an LLC, must earn at least minimum wage for all hours worked. While some forms of compensation can be deferred, such as bonuses, you should ensure that nonexempt employees are at least paid the minimum wage on regular paydays. As of January 1, 2022, the California minimum wage is $14.00 for employers of 25 employees or less and $15.00 for larger employers. The minimum wage is projected to increase again on January 1, 2023. Additionally, certain municipalities have a minimum wage higher than the state’s. So if you have employees working in your offices or even remotely from other locations, be sure to pay them the correct minimum wage. Failure to do so can carry steep penalties.

Additionally, it is important to remember than not every employee who is paid a salary is exempt from timekeeping and overtime requirements. For an employee to be exempt from overtime and other wage and hour laws, they not only must be paid a regular salary, but that salary has to be at least two times the minimum wage. In 2022, that means they must earn more than $58,240 annually if you have 25 employees or less, and more than $62,400 if working for a larger employer. In addition, exempt employees must also pass a duties test, which in most cases means they must exercise “discretion and independent judgment” over 50% of the time.

2. Treating Everyone Like an Independent Contractor Or Unpaid Intern

While the ABC test may conjure images of the Jackson 5, it is also a significant issue when it comes to classifying employees in California. It may seem enticing to classify everyone who works for you as an independent contractor, however, to be legal you must satisfy the ABC test: (A) the worker must be free from your control and direction in the performance of their work, (B) they must perform work outside of the usual course of your business, and (C) they must be customarily engaged in an independently established trade. Subject to a few exceptions, this is the test workers must pass to be considered an independent contractor. If they cannot meet this test, and you classify them as an independent contractor anyways, it can lead to tax liability, back wage liability, and penalties.

Having interns is fine if you otherwise treat them as employees when it comes to wage and hour compliance. If you decide to have unpaid interns, there are only limited circumstances when that is authorized. Here is the test: (1) the internship must provide training similar to vocational school, (2) training must be for the benefit of the intern, (3) the intern cannot displace a regular employee, but must work under their close supervision, (4) the employer derives no immediate advantage from the intern’s activities; (5) the interns are not necessarily entitled to a job at the end of the internship; and (6) the employer and the intern understand that the intern is not entitled to wages during the internship. Failing to meet this standard can result in owing wages and penalties to the misclassified intern.

3. Not Having Written Bonus/Commission Plans

Under California law, commission plans must be in writing and signed by the employee. While there is no such specific requirement for bonus plans, to avoid difficult claims, the plans should set out how the bonus/commission is calculated, whether the bonus is discretionary, when the bonus or commission vests, when it is paid, and whether the company can claw it back.

4. Not Having Written Employment Policies

Similar to commission and bonus plans, you should consider implementing employee policies covering your employees, such as: at-will employment, harassment and discrimination prevention polices, sick leave, vacation, meal and rest periods and timekeeping requirements. Some of these policies are required by California law, while others will greatly reduce confusion and disputes when certain situations come up for employees. For instance, if you have remote employees a specific policy and/or agreement for those employees is highly recommended. As further incentive to develop these policies, a very common claim is failure to provide compliant meal and rest periods, an area where well written policies can really make a difference in avoiding or defending against claims. To help you in this task, we have created a model handbook for new and established businesses, which many of our clients have found helpful.

5. Foregoing Confidentiality and Invention Assignment Agreements

Often many new companies grow so fast they rely on generic agreements which fail to provide important protections. As a general proposition, all new hires, current employees, advisors, and contractors should sign confidentiality and invention assignment agreements. While non-competes are generally unenforceable in California, these agreements are the best way to prevent former employees from being able to compete with the company since it prevents them from using proprietary information after they depart. These are generally standard agreements which can easily be customized to fit the needs of your company.