Top Ten Employment Law Tips for Startups

By guest author: Chrys Martin

Start-ups and emerging companies are frequently the targets of lawsuits by employees and former employees. Investors and board members can be personally liable in certain situations and these claims can result in losses that can ruin an investor’s investment and cripple a start-up (for a good blog post on this point, see this blog post by Dan Rosen). Entrepreneurs need to know the important steps they must take before hiring employees or independent contractors to stay in compliance with the law.

The following are ten tips for start-ups to help minimize the threat of litigation and protect their intellectual property assets.

TIP ONE – BE CAREFUL HIRING INDEPENDENT CONTRACTORS

Most people who perform work for a company have to be classified as employees. Only those who meet stringent legal tests can be hired and paid as Independent Contractors. Generally, the person must have an independently established business, do work for others, be paid on other than a salary or hourly basis, be free from direction and control of the employer, provide their own tools and workspace, etc. If these tests are not met, the contractor will be considered legally to be an employee and be eligible for benefits, overtime, worker’s comp, etc. This can be a very costly error for a company to make.

TIP TWO – HAVE A CONFIDENTIALITY/NON-DISCLOSURE AGREEMENT

Many businesses succeed because of a unique or novel idea, device, method, formula, technique, process or business model. Protecting this confidential information is critical for most businesses. However, many start-up and emerging companies overlook this significant risk by not obtaining a confidentiality/non-disclosure agreement from employees or contractors. A confidentiality/non-disclosure agreement helps establish protection for certain types of information under state trade secrets acts, and can protect other information under contract principles.

The confidentiality/non-disclosure agreement should state with specificity the types of information the company considers its confidential and proprietary information, i.e. cost data, customer lists, general financial data, inventions, product specs, etc. The agreement should also specify the circumstances under which the confidential and proprietary information can be used (i.e. in furtherance of the company’s business) and should prohibit any other use or disclosure of such confidential or proprietary information.

TIP THREE – CONSIDER A NON-COMPETE OR NON-SOLICITATION

In some states, such as Oregon and California, there are stringent restrictions or prohibitions on non-compete agreements. In other states, such agreements are easier to obtain, but still certain precautions must be taken. First evaluate whether a non-compete or non-solicitation is needed for your business and if so, for which employees and in which states. The agreement should be carefully drawn and approved by legal counsel.

TIP FOUR – HIRE THE BEST EMPLOYEE

To find the best applicants for a particular job, the employer needs to use some creative advertising methods. Don’t just advertise in-house or through the local newspaper or one on-line source. Consider advertising in national or regional professional or trade journals, minority newspapers or magazines. Use a headhunter if needed. Contact local colleges or specialty trade and business schools. If your recruiting plan is narrow, you will not get the most diverse and best-qualified applicant pool.

TIP FIVE – UNDERSTANDING AND DEALING WITH DISCRIMINATION AND HARASSMENT

Discrimination is making decisions based on differences. Not all discrimination is illegal. Discrimination is illegal in the employment context when an employer makes an employment decision impacting the terms or conditions of employment – hiring, promotion, demotion, firing – on the basis of that employee’s membership in a protected class – disabled, male, female, black, white, etc. Harassment is when a work atmosphere is not free from treatment based on protected class status. It does not matter if it makes the employee blush, cry, smile or quit – it is still harassment, and it can still get you in trouble.

Employers can prevent harassment by:

  • Enforcing the company anti-harassment policy
  • Talk about the policy on a regular basis in meetings
  • Remind employees how to report harassment
  • Stop harassing behavior whether someone objects or not
  • Do not engage in any improper behavior yourself

Employers must promptly respond to all complaints of harassment. Even if the employer has not received a complaint, but supervisor or management personnel suspects that harassment is occurring within the workplace, the employer should respond swiftly, even if the complaint is vague or mentioned off-hand; even if the complainant says he/she doesn’t want you to do anything; you must act.

TIP SIX – PROVIDE A POLICY HANDBOOK

There are certain laws that require notice to employees. This is most easily done in an Employee Handbook. Handbooks should include policies regarding:

  • “At-will” employment;
  • Equal opportunity;
  • Harassment and discrimination;
  • Leave laws;
  • Expressly state that employees are not guaranteed a particular schedule or a minimum number of hours each week or any length of employment;
  • Summary of benefits – generally only, plan documents control;
  • Required local, state and federal notices/policies/procedures; and
  • Work rules/conduct.

Do not include:

  • Probationary period;
  • Progressive discipline; or
  • For “cause” termination.

TIP SEVEN – DISCIPLINE AND EVALUATION OF EMPLOYEES

One of the most difficult and unpleasant tasks of being a supervisor is the task of counseling, coaching and disciplining an employee. Usually coaching is a first step to dealing with performance problems or rule violations. Generally, disciplinary action follows either a clear violation of company policy or prior discussions with the employee about a particular problem. Principles of effective coaching, counseling and discipline are:

  • Describe the problem behavior, including what policy is being violated and how the employee’s behavior is impacting the Company and coworkers.
  • Explain the disciplinary action you are taking and why.
  • If there is an excuse or your facts are challenged, investigate the matter further.
  • Clarify future improvements needed and set a specific follow-up date.
  • Express your confidence in the employee.
  • Document the session, including the employee’s feedback and explanation.
  • Copy the documentation to the employee and the file.

TIP EIGHT — KNOW WAGE AND HOUR LAW

Wage and hour law can be complicated and confusing. One of the most common mistakes made by employees is improper classification of employees. Whether or not an employee is entitled to overtime pay depends on whether they are “exempt” or “non-exempt.” There are only three narrow categories of white-collar exemptions with specific criteria required: Executives (supervisors), administrative employees, and professional employees. In addition, outside sales professionals and certain highly paid computer professionals may be exempt. Each job description has to be carefully analyzed against the legal test. The exempt employee must be paid on a bona fide salary basis regardless of hours worked. All other employees are non-exempt and must be paid hourly and paid overtime.

TIP NINE – TRAIN YOUR MANAGERS AND SUPERVISORS

Nothing causes companies more employment-related headaches than mistakes by front line managers and supervisors. Train every manager or supervisor to:

  • Properly interview an applicant (including what not to ask);
  • Ensure that all paperwork on a new employee is properly completed and submitted at time of hire (job application and resume, minor work permits, U-4’s, I-9’s, signed Handbook Acknowledgement form);
  • Properly discipline and regularly evaluate employees;
  • Don’t tolerate what is inappropriate workplace conduct (not “just” harassment and discrimination, but also conduct that is unprofessional, immature, or indicates a lack of anger control);
  • Know how and when to document inappropriate workplace conduct, report it, investigate it; and preserve any evidence;
  • Know how to report any work-related injuries or incidents (slip and falls, assaults, shopliftings and robberies) and preserve evidence;
  • Be familiar with wage and hour issues;
  • Consistently treat employees equally;
  • Memorize the following mantra when it comes to counseling and coaching employees: IF IT ISN’T WRITTEN DOWN, IT DIDN’T HAPPEN (document, document, document!);
  • Memorize part II of the mantra: IF IT IS WRITTEN DOWN, MAKE SURE IT’S ACCURATE, only facts (not legal conclusions), dates, times, names, conduct, penalties, notice to employee of what will happen in the future); and
  • Know when to call an H.R. consultant or legal counsel.

TIP TEN – HOW TO FIRE CORRECTLY

How to Terminate
If an employee is not meeting expectations or completing a corrective action plan, do not be afraid to terminate the employee. If your performance evaluations and corrective action plans have been done properly, it can be a constructive parting for both you and the employee. However, before you decide to terminate an employee, you should carefully consider the decision and circumstances. Make sure your facts are accurate.

  • Make sure there are no surprises.
  • Be civil, concise, and compassionate.
  • Respect the person’s dignity.
  • Be truthful when giving the reasons for termination.
  • Support your decision with facts and documentation.
  • Have a witness present.
  • Meet with the employee in a private, controlled environment.
  • Retrieve all company property, e.g. laptops, etc.
  • Consider having someone escort the employee out of the office.
  • Know the rules for final paychecks.
  • Cut-off all electronic access.

Remember: This post is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

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Fun Happenings

Several really good pieces of reading today on the web about startup law and how it might change for the better.

First, Eric Koester writes a great piece for Xconomy about his testimony before Congress. Eric nails it with his recommendations. Eric did a great job representing us in D.C.

And then, in the Huffington Post, there is a really good article titled, My Attorney Just Shattered My Crowdfunding Dreams.

Finally, Bill Carleton has written another great blog post–Startup Investing: Public Park vs. Gated Community. Continue reading

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Think You’re Having a Bad Day?

Consider this thought: for the last several decades, you have not been paying sales tax on food, because the state exempts food sales from the tax. Okay, that is not an earth shattering thought. However, imagine that the legislature has determined that exempting food from the sales tax is not good tax policy, that it is no longer affordable by the state, or that the products manufactured by food companies should bear the same tax burden as all other manufactured products. The reason why the change occurred does not really matter but now you know that you are liable for sales tax on food. Okay, now you’re having a bad day. You do not like that result, but it is fair notice of your tax responsibilities into the future. You budget accordingly and go on with life. Continue reading

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How Congress Can Make Startup Fundraising Easier and Better

I was excited to hear that fellow Seattle lawyer Eric Koester was going to testify in front of Congress next week on how to make startup financings easier and better. Please see the story on GeekWire. Eric, below is my bullet point list of what I would change if I could.

  1. Allow general solicitation.

Right now, startups are bound by Rule 502(c), which provides as follows:

Limitation on manner of offering. Except as provided in Rule 504(b)(1), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

  1. Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
  2. Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising;

Intelligent folks have argued these rules don’t make sense. See footnote 25 of the Letter From SEC Chairman Mary L. Schapiro to The Honorable Darrell E. Issa, Chairman, U.S. House Committee on Oversight and Government Reform.

See, e.g., Final Report of the Advisory Committee on Smaller Public Companies to the U.S. Securities and Exchange Commission (April 23, 2006), http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf; Joseph McLaughlin, How the SEC Stifles Investment – and Speech, The Wall Street Journal (February 3, 2011). Concerns about the scope of the Commission’s rules on general solicitation and advertising have been raised by the participants in the annual SEC Government-Business Forum on Small Business Capital Formation. See 2009 Annual SEC Government-Business Forum on Small Business Capital Formation Final Report (May 2010), http://www.sec.gov/info/smallbus/gbfor28.pdf.

  1. Reduce the “accredited investor” financial thresholds.

Dodd-Frank made it more difficult for folks to qualify to invest in startups. This wasn’t helpful to startups.

  1. Add to the definition of “accredited investor” sophisticated persons who make certain acknowledgments about the risks of investing in investment agreements.

If folks are willing to acknowledge that they are willing to lose their money on a highly speculative venture, let’s let them.

  1. Allow a tax write off before the stock is sold.

Right now, the tax law doesn’t allow a recovery of basis in stock until the stock is sold. This encourages people to flip companies.

  1. Allow a tax credit for investments if the funds are used to employ people.

There is a great bill out there right now in Congress that would allow a 25% tax credit for investments made in qualifying startups. This would be a good law to add to the books.

  1. Disallow states from imposing fees on companies simply because an investor is resident there.

Right now, startups can wind up paying $300 fees in numerous states.

  1. Allow offerings in which small amounts of money are raised from many people to be completely exempted from the rules.

For example, if you are raising less than $500 (for example), from 1,000 people to fund a renewable energy project in your neighborhood, allow this to happen.

Good luck and have fun Eric!

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Update

Eric Koester’s written testimony to the House Committee on Oversight & Government Reform

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Why You Should Attend The Next WTIA Event

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