When establishing a new startup company there are a multitude of things to keep in mind (and add to your to-do list). The problem for so many startup entrepreneurs is that… well, you don’t know what you don’t know. Employment law may be something that doesn’t seem like an immediate necessity when kickstarting your startup, but let us assure you, it is. Let’s review...
Between 1997 and 2018 there were a total of 1,889,631 complaints filed to the Equal Employment Opportunity Commission. If you don’t want your business to be included in that number, check out these 5 tips on employment law.
Know the difference between an employee and an independent contractor
It’s critical that your business recognizes the difference between a W-2 employee and a 1099 independent contractor. Incorrectly classified workers could open up your business to audit by the Employment Development Department (EDD). While employees and contractors may do similar jobs, they are legally classified and paid differently and follow criteria set out in January 2020 in Assembly Bill 5, “the Gig Work Law”.
For W-2 employees, employers withhold income tax, Social Security, and Medicare from the wages that they’re paid. When paying independent contractors, employers are not required to withhold these funds from their paychecks. The benefit of hiring employees is being able to designate when, where, and for how long they work. Contractors, on the other hand, have full control over their work hours, methods, and timing of deliverables.
In terms of legal differences, businesses must legally register themselves to be able to issue W-2s and hire employees by applying for an EIN. When hiring an independent contractor, on the other hand, employers will issue a 1099 form at tax time. It’s important to know the difference between these though because if they were to be incorrectly classified, you could find yourself the target of an audit by the EDD.
If a worker is wrongly classified as a contractor, your business may be required to pay back wages and taxes that should have been paid initially had they been correctly classified as an employee. In addition to paying back what should have been initially paid, your business may be liable to fees and penalties associated with the mistake, including possible insurance fraud investigation.
Keep your trade secrets SECRET
The United States Patent and Trademark Office defines a trade secret as “information that has either actual or potential independent economic value by virtue of not being generally known, has value to others who cannot legitimately obtain the information, and is subject to reasonable efforts to maintain its secrecy.” If any of these three elements are not present, the trade secret will no longer be protected.
Some examples of a trade secret include Coca Cola’s secret recipe, Google’s search algorithm, and a company’s proprietary process or software. A trade secret may make or break a company’s competitive advantage in their industry. Failing to correctly protect your company’s secrets could be detrimental to the success of your business.
Know who are exempt employees
It’s important that your business carefully distinguishes between exempt and non-exempt employees. Non-exempt employees are paid hourly and are eligible for overtime pay over a standard 40-hour workweek. On the other hand, exempt employees are paid on a salaried basis and are not eligible for overtime.
While specifics vary from state to state, the Fair Labor Standards Act classifies exempt employees as any job that falls into the following categories:
professional, administrative, executive, outside sales, and computer-related positions. Failure to correctly classify employees may result in substantial penalties.
Draft your workplace policies and procedures to protect your business
Drafting specific workplace policies can be beneficial in avoiding challenges down the line. Solidifying certain procedures when establishing your business sets standards for your employees from the beginning rather than waiting for an issue to arise before determining how to deal with it.
Some critical policies that should be established for your company may include the following:
- Code of conduct
- Recruitment policy
- Internet and email policy
- Mobile phone policy
- Non-smoking policy
- Drug and alcohol policy
- Health and safety policy
- Anti-discrimination and harassment policy
- Grievance handling policy
- Discipline and termination policy
- Use of social media policy
Failure to establish specific policies and procedures for your company may run your company into challenges down the road. For instance, your company may be held liable for the misconduct by an employee. By setting formal workplace policies, your company clearly communicates its policies to the company’s employees. In the unfortunate event of a lawsuit for employee misconduct, this can mitigate liability by showing your company did not condone the employee’s conduct.
Consider whether Employment Practices Liability Insurance is right for you
Employment Practices Liability Insurance (EPLI) may protect your business if a claim is made against you by an employee that feels their rights have been violated. You may not think that this is an issue for your business yet but you’re better safe than sorry because once a claim is filed against you, it’s too late for protection.
EPLI protects against various types of employment lawsuits including:
- Sexual harassment
- Wrongful termination
- Breach of employment contract
- Negligent evaluation
- Failure to employ or promote
- Wrongful discipline
- Deprivation of career opportunity
- Wrongful infliction of emotional distress
- Mismanagement of employee benefit plans
The cost of EPLI plans varies from business to business and is based on risk factors including whether or not your business has been sued in the past. Taking into consideration the potential legal fees associated with an employment lawsuit, the investment in an Employment Practices Liability Insurance plan for your business may be a good call.
Overall, employment law can be a daunting topic when hiring for your startup, but how else are you expected to grow your business without the support of a few extra sets of hands? While hiring employees may add risk to your business, partnering with an attorney to ensure your business is protected from these risks can help you avoid them. Our team of experts at @VirtualCounsel is ready to help support you through the process and ensure your business is protected and ready to grow.