A Short Primer for Startups on Local Labor and Employment Law Compliance
Louis Lehot, business lawyer and partner at Foley & Lardner LLP in Silicon Valley, and formerly the founder of L2 Counsel, P.C.
Labor and employment law compliance can cause significant problems for businesses, no matter their size, and there is no de minimis exception for startups. Like death and taxes, changes in labor and employment laws in every jurisdiction are the only constant. While keeping abreast of these rapidly evolving rules has always presented a management challenge, in the era of global pandemics and what comes after, compliance has a totally new lens on it. The following is a brief overview.
In the United States, Canada, Mexico, Brazil, and other federal jurisdictional regimes, you should be mindful that national, state, and local laws, rules, and regulations can be applied in almost any relationship, whether it be employment, consulting, or some other form of agency. While one jurisdiction may require employers to provide paid sick leave or other benefits and send specific wage payment notices to all new employees, for example, stating their rates and dates of payment, another may not. Just because you are exempt under one jurisdiction does not mean you are exempt under the other.
One of the first mistakes that companies make when first starting out is that they assume that hiring their friend or family member leaves them exempt from labor and employment laws. Nothing could be further from the truth. Courts are likely to find an employer/employee relationship unless there is a clearly defined agreement saying otherwise. Therefore, it is imperative that companies realize that any employer/employee relationship will be governed by labor and employment laws, no matter how informal the arrangement.
Classify independent contractors and unpaid interns correctly. Misclassification of employees as independent contractors can lead to substantial liability in several areas, including overtime pay, taxes and penalties, and employee benefits.
A company must define whether or not a worker is an independent contractor or an unpaid intern. As mentioned, if a company fails to do so, the law interprets a poorly defined working relationship as an at-will relationship between the company and an employee. This will leave the company open to being liable for overtime pay, unforeseen taxes, and other employee benefits.
Compliance with federal, state, and local wage and hour laws for all personnel must be the rule.
In the United States, the best way for companies to do this is by classifying employees as exempt or non-exempt from the federal minimum wage and overtime laws under the Fair Labor Standards Act (FLSA). Companies should also:
- compensate all non-exempt employees with cash payments for at least minimum wage, plus any applicable overtime
- ensure that any exempt employees are performing the job functions required to satisfy the criteria for exempt status under the FLSA and are paid the minimum threshold on a salary basis
- comply with any state or local wage laws that may be more generous to employees than the FLSA.
In a written offer letter, employment agreement, or workplace policy, specify that the relationship is at-will. Of course, this does not prevent you from conferring severance or other benefits for key executives if the employment is terminated without cause.
This cannot be overstated! It is imperative that companies clearly define in all employee agreements that each employment relationship is at-will. If not, a company will leave its fate in the hands of a court’s interpretation. It is always better to clearly define all employee relationships in writing at the outset.
Your company should quickly plan for some mechanism to administer payroll and other benefits. You should not assume that using a professional employer organization (PEO) or other temporary staffing agency insulates your business from liability for employment law violations.
While it is generally a good idea to employ a professional organization, it would be a mistake to assume that any organization will protect a company from liability. It is always in the company’s best interest to ensure that they are in complete compliance with all applicable employment laws. Otherwise, they will still face any fees imposed on them as a result of an employment law violation.
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