Bringing on new employees is often a very exciting time for a company. However, bringing on an employee also brings with it potential employment issues, which, if not handled correctly, can lead to significant problems for a young company.
The following are three common areas where such issues can arise and some helpful tips to consider for each.
When hiring an employee, a company should prepare an offer letter outlining the terms of the proposed position. Employers should be sure this offer letter clearly states that the relationship being formed is “at will.” An employer can fire an “at will” employee for any reason or no reason, with or without notice, as long as the termination is not based on unlawful discrimination or does not otherwise violate the law.
A company must also comply with immigration requirements. Within three days of beginning work, an employee must complete and the company must retain a Form I-9 for each individual hired in the United States (citizens and non-citzens). Form I-9 can be obtained at http://uscis.gov/graphics/formsfee/forms/i-9.htm.
A company must also comply with federal and state anti-discrimination laws and protection of minor laws, as applicable. It is illegal for an employer to discriminate on the basis of a protected category, such as race, color, sex, national origin, religion, age, disability, pregnancy, veteran status, citizenship, sexual orientation or any other category protected by federal, state or local law. Whether federal or state laws apply to a company is often determined based on the number of employees a company has. As a result, certain laws may not apply when a company is in its very early stages, but will apply as the company grows.
Lastly, a company should ensure all new hires sign its standard nondisclosure, non-competition/non-solicitation and invention assignment agreement(s) no later than the date employment commences. This practice is extremely important in order to protect a company’s sensitive information and intellectual property. A company should maintain copies of all such agreements.
Once an employee begins work, a company must be sure to comply with minimum wage and withholding obligations, both at the state and federal level. Under the federal overtime provisions, which are contained in the Fair Labor Standards Act (FLSA), all non-exempt employees covered by the FLSA, must receive overtime pay for hours worked over 40 in a work week at a rate of not less than 1.5 times the regular rate. Overtime, however, is not required if an employee is “exempt.” Examples of employee types that would be considered “exempt” include executive, managerial and professional employees, outside sales employees, certain seasonal workers and certain commissioned sales people.
In addition, a company must provide workers compensation insurance for all employees (note that some exceptions apply in the case of sole proprietorships and partnerships). A company must also comply with the Occupational Safety and Health Act (OSHA) and maintain a safe and healthful work environment (visit www.osha.gov or (617) 565-9860 for guidelines).
Lastly, one of the most important and complex questions a company faces when expanding its team is whether team members should be classified as employees or contractors. Companies operating in the sharing economy, in particular, have faced many challenges over this issue, given the less traditional way their services are provided.
Determining whether an individual service provider is properly categorized as a contractor or an employee is often challenging because the distinction involves a facts and circumstances analysis that depends on a number of factors. Please see 6 Factors to Consider When Determining if Someone is an Employee or Contractor for greater detail about this important area.
Because contractors are not subject to minimum wage/overtime laws, employers are not required to withhold taxes for contractors and employers are not required to provide contractors with employee benefits. Some companies may try to save money or simplify employment arrangements by calling people contractors without giving the classification much consideration. However, the IRS and state departments of revenue can impose significant monetary fines on employers that misclassify someone as a contractor. VCs are also sensitive to this issue and may ask companies to make representations that a company has properly classified its employees in connection with financing transactions.
Due to the wide scope and complex nature of employment issues and the potential for significant penalties if a company violates employment laws, consulting with a lawyer or advisor early and often about these matters is a good practice.