Startup Law A to Z: Employment Law

Your startup will not succeed unless you, the founder, build an exceptional team. Great teams are built on top of great culture. Yet any venture-backed startup founder will tell you, myself included, that developing a positive corporate culture is more art than science, requiring constant and creative recalibration as your company grows. What then does this have to do with employment law?

First, building an exceptional team means hiring great people; whether that involves W-9s for consultants, I-9s for employees, lengthy H-1B visa applications, or a new employee handbook, you need to hire the right people in the right way. Second, one bad employment-related legal dispute can have ripple effects throughout an organization, undermining employee morale and executive credibility in one fell swoop, with palpable culture fallout.

Fortunately, when working to promote healthy company culture, founders can look to employment law for some preventive medicine. In fact, transparency through written policies, clearly communicated in advance and followed in practice, can help create the trust and accountability which are foundational to positive company culture. Moreover, in the event employment disputes do arise, well-drafted employment policies actually provide valuable guidance through difficult to navigate situations, while limiting downside risks to the company, as well.

This article, the fourth in Extra Crunch’s exclusive five-part “Startup Law A to Z” series, follows previous articles on customer contracts,  intellectual property (IP) and corporate matters. This series is calculated to provide founders the information needed to assess legal risks in the areas common to most startups.

After reading this article, or other “Startup Law A to Z” articles, should you identify legal risks facing your startup, Extra Crunch resources can help. For example, the Verified Experts of Extra Crunch include some of the most experienced and skilled startup lawyers in practice today. So use these resources to identify attorneys focused on serving companies at your stage and then reach out for further guidance in the particular issues at hand.

Employee vs. independent contractor classification

• Payroll Taxes and Payroll Providers
• Federal Classification: 21-Part Test
• State Classification: Various tests, e.g., Dynamex in California
• Intentional vs. Unintentional Misclassification and Penalties

Minimum wage and hour laws

• Application to founders
• Federal Fair Labor Standards Act (FLSA)
• State Laws

Meal and rest breaks, vacation pay

• Federal Fair Labor Standards Act (FLSA)
• State Laws

Deferred compensation

• Rule 409A
• Founders
• Employees

Sexual harassment, discrimination, and related claims

• Federal:
  • Civil Rights Act of 1964
  • Age Discrimination in Employment Act of 1967 (ADEA)
  • Americans with Disabilities Act of 1990 (ADA)
  • Equal Pay Act of 1963
  • Genetic Information Nondiscrimination Act of 2008
• State Laws
• Employee Handbook
• Documentation and Investigation

Work authorization / immigration

• Form I-9 (Employees) and W-9 (Independent Contractors)
• For Temporary Workers:
• Employee Visas:
• Students:
  • F-1 with OPT STEM Extension
• Other Visas:
  • EB-5
  • E Visas (E-1, E-2, E3)

Employee vs. independent contractor classification

One of the biggest employment law issues that startups get wrong, often willingly, is “employee” versus “independent contractor” classification. For employees, a startup must withhold and pay federal, state, and local income taxes, state disability, and payments under the Federal Unemployment Tax Act and Federal Insurance Contribution Act (i.e. Social Security and Medicare), not to mention contributions for federal and state unemployment and workers compensation insurance. Given this complexity, startups should absolutely hire a payroll provider to help manage the process, such as ADP, Gusto, Paychex or Quickbooks.

Of course, all of this gets expensive. Instead, far too many early-stage startups simply hire “independent contractors” to avoid everything mentioned above, often misclassifying these workers in the process, whether under federal law, state law, or both.