Building a team is crucial to a startup’s success, and mistakes can be costly. Selecting the right personalities and skills is difficult enough, let alone navigating the complicated universe of federal and state employment law. Startups routinely get it wrong, and the consequences can be financially devastating. Here are 3 common mistakes startups make during the hiring process that should be avoided at all costs:
Misclassifying an Employee as an Independent Contractor
Misclassification is the mistake we attorneys see most often, and is one of the hottest topics playing out in the courts today. Startups can save significantly on insurance, taxes, and payroll by hiring independent contractors instead of employees, so there is an incentive to classify the relationship as such. However, simply calling someone an independent contractor is insufficient. A true independent contractor is someone who is brought in to assist with a specific project or role, and who controls when, how, and where his or her work is performed. Often, independent contractors work on a part-time or short-term basis and regularly do the same or similar work for other companies. If this is not the case, the startup likely has an employee, and must comply with the federal and state laws that govern employment relationships.
Offering Employees Equity in Lieu of Cash Compensation
Restricted stock or option grants can be an excellent way to attract employees willing to work for less salary in exchange for potentially much greater financial gain as the startup grows. However, equity grants on their own do not satisfy wage and hour laws, regardless of the current fair market value or expected future return. If a startup hires an employee, that employee must be paid at least the applicable minimum wage (including overtime) or exempt salary on a regular basis, and failure to do so can lead to steep penalties under both federal and state wage and hour laws. Bootstrapped startups that cannot afford regular payroll should consult an attorney about alternatives, including properly classified independent contractors.
Failing to Have New Hires Sign Carefully Tailored Employment Agreements
Early stage startups often recruit and hire employees to serve a specific function, but use generic titles such as Chief Marketing Officer, Sales Director, or Executive Assistant. What one company expects from an employee bearing such a job title may vary greatly from what another company expects, and conflicts often arise if those expectations are not clearly defined from the outset of the relationship. Therefore, a new hire should always be presented with an offer letter or employment agreement that contains a well-defined job description, the amount of cash, bonus, and equity compensation that the employee can expect to receive, and the basic terms that will govern the employment relationship. Doing so helps to set expectations and, if necessary, streamline the removal of non-performing employees.
Startups should also ensure that every new hire signs a Confidential Information and Invention Assignment (also known as a Proprietary Information and Inventions Assignment), which protects the Startup’s intellectual property and other confidential information in the event the employee leaves the company.
By avoiding these common mistakes, your startup can protect itself from costly legal disputes that inevitably arise when an employment relationship sours. Smith Shapourian Mignano LLP is available to answer any questions or concerns you may have regarding these and related employment issues.
This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.