The New Year is just around the corner and many entrepreneurs are preparing to turn their ideas into a money-making venture. As a successful entrepreneur can attest, one of the key denominators in determining whether your start up will be successful centers on the human capital. As the founder, it falls on you to hire and manage the team that will assist you in taking your start up to the next level.
Read on for 5 employment law pitfalls all start-ups should avoid…
1. Improperly Classifying Employees. If you’ve been watching the news in California, you know this is a hot topic. From Uber to Google, companies are facing claims from workers who disagree with their status as an “independent contractor” and not an employee. Because of the lean nature of a start up, many will retain “consultants,” “contractors,” “freelancers,” or even “interns” in order to help execute their business plan. Unless these individuals meet a very tough multi-factor test, it is unlikely that the courts will actually classify them as independent contractors, meaning you are potentially left with a costly class action lawsuit on your hands. If it’s a close question at all, then they are an “employee” and need to be legally treated as such.
2. Paying Certain Employees with Equity. In between funding rounds, a start-up may find that it does not have the consistent cash flow to pay an employee a standard salary. The solution, it seems, lies in equity. But is offering equity to employees always the right option? Not for hourly employees on minimum wage (as a general matter, stock and options in a company do not properly count for purposes of minimum wage calculations) and/or those non-exempt employees working overtime.
3. Not Properly Protecting Company Secrets. Your trade secrets may be one of the keys to your future success. In order to protect them, consider restrictive covenants; which include confidentiality agreements, non-competes, non-solicitations and NDAs. Not all restrictive covenants will stand up in a court of law, making it is crucial that yours are properly drafted and/or reviewed by an experienced business lawyer.
4. Failing to Create a Thorough Employee Handbook. Most new businesses are not concerned with creating robust employment policies when there are only a handful of employees on the payroll. Regardless of size or financial means, all start-ups should at least have two employee policies: a sexual harassment and equal employment opportunity policy. This will serve as a defense down the road should an employee file a harassment claim.
5. Mismanaging Employees Who Leave Your Start-Up. When an employee leaves, either voluntarily or involuntarily, your focus should be on protecting assets. This can be through a separation agreement, written social media ownership policy, as well as a reminder of the significance of any restrictive covenants in place.
To discuss the various legal issues your start up may face, contact experienced business lawyer Drew E. Pomerance today.