The same employment laws which apply to all employers apply to start-ups. However, businesses in the start-up phase usually do not have the resources of an established business. As a result, they often run afoul of employment laws. This can be a real burden for a start-up business. Let's think about a few common employment issues facing start-ups.
Documentation. Basic documentation is not expensive but can help a start-up avoid serious problems later. An experienced employment lawyer can put together a basic employee handbook quickly with policies such as anti-harassment, equal employment opportunity, and wage/hour compliance. Similarly, intellectual property agreements are usually not complicated but are critical to protecting the business' intellectual property—often its most important asset. Caution: do not copy handbooks or other documentation from other companies or forms found on the internet because they may not be suitable for this your business' situation and may cause more problems than they solve. The minimal investment required for a well drafted document is worth it.
Deferred Compensation. Many start-ups strike deals with key employees to defer their salaries, bonuses, or other compensation while the business is struggling to get up and running. However, deferring compensation often runs afoul of wage and hour laws, such as minimum wage and overtime laws. As discussed in a previous blog post, Duty of Loyalty, the best way to address this is to pay a minimum salary (if the employee qualifies as exempt) or hourly wage and then pay the employee a bonus to make up for it upon the start-up's achievement of certain goals such as profitability, product launch, or funding goals. For the benefit of the start-up and the employee, this should be set forth clearly in a written agreement.
Independent Contractors. Start-ups often retain talent as independent contractors (sometimes erroneously referred to as "1099 employees") because they do not have the resources to hire them as full-time employees or cannot convince them to become full-time employees in the risky start-up phase. This is ok to do as long as it done right. However, misclassification is common and severe penalties can be imposed by the Department of Labor and lawsuits by workers can be equally harmful. Start-up management should make sure that the independent contractor is in an independent trade or occupation, controls the means and manner in which the services are provided, complies with all state and federal law requirements—and should have a good written independent contractor agreement (see previous blog post, Commissions and Non-Discretionary Bonuses).
It is understandable that the leaders of a start-up are preoccupied with other more pressing issues than compliance with employment laws, such as product development, funding, and hiring the talented employees which are necessary to make the business successful. However, it behooves them to spend some of their precious time and resources considering employment issues early in the life of the business.
Originally Published 28 April 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
