Employment Law Issues for Startups, Entrepreneurs, and Growing Businesses

EMPLOYMENT LAW ISSUES FOR STARTUPS, ENTREPRENUERS, AND GROWING BUSINESSES

HARTUNG SCHROEDER LA W FIRM

NOTE: This Hartung Schroeder Practice Note has been provided for educational and informational purposes only. This Practice Note is not intended, nor should it be construed or relied upon, as legal advice. Your possession of this Practice Note does not create an attorney-client relationship between Hartung Schroeder and readers, and should not be substituted for legal advice in lieu of contacting an attorney in your state. Readers should consult an attorney regarding their circumstances and how the information relates to their circumstances. Reproduction of Hartung Schroeder content without written consent is prohibited.

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INTRODUCTION Entrepreneurs and startup business owners often focus their time and energy on financing the business and developing and marketing their core products or services. As their businesses grow and they hire more employees, complying with the panoply of federal, state, and local employment laws is not generally of primary concern as they attend to other business demands. However, non-compliance with these laws can pose substantial risks. Determining who will oversee employment and human resources-related issues, and how to handle them, should be among the key considerations for startups.

This Hartung Schroeder Practice Note provides an overview of the employment laws, practices, and policies of particular concern for startups, entrepreneurs, and growing businesses, including: • Employment-related filing, reporting, and insurance requirements; • Hiring considerations; • Offer letters and employment agreements; • Wage and hour issues, including classifying employees and independent contractors; • Anti-discrimination laws; • Employee policies; and, • Workplace notice and posting requirements.

This Hartung Schroeder Practice Note is intended for educational and information purposes only. It is not intended, nor should it be construed or relied upon, as legal advice.

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CONTENTS 06

EMPLOYMENT-RELATED FILING, REPORTING, AND INSURANCE REQUIREMENTS • New Hire Filing, Reporting, and Notice Requirements • Immigration Issues and Form I-9 Compliance • Employment-related Insurance Requirements

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FORMING AND DOCUMENTING EMPLOYMENT RELATIONSHIPS • At-Will Employment Status Presumed • Offer Letters • Employment Contracts • Special Considerations for Founders and Management Executives • Mandatory Arbitration Provisions

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RISKS IN HIRING AND INTERVIEW PROCESS • Discrimination in the Hiring Process • Background Checks • Criminal Background Checks • Social Media Issues in Hiring

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WAGE AND HOUR ISSUES • Administering Payroll • Complying with Minimum Wage and Overtime Laws • Classifying Workers as Exempt or Nonexempt • Can Startup Founders Agree to Work for Free?

• Independent Contractors and the Risks of Misclassification • Improper Reliance on Unpaid Interns • Liabilities that Survive Business Closure • Employee Benefits and Incentive Compensation

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PROTECTING INTELLECTUAL PROPERTY AND GOODWILL • Confidentiality and Proprietary Rights Agreements • Non-Compete Agreements • Non-Solicitation Agreements

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WORKPLACE POLICIES AND PROCEDURES • At-Will Employment Policy • Equal Employment and Anti-Discrimination Laws and Policies • Disability and Religious Accommodation Policies • Anti-Harassment and Anti-Retaliation Policy • Sick Leave, Holiday, Vacation, and Paid Time Off Policies • Family and Medical Leave • Social Media, Internet, Email Monitoring, and BYOD Policies • Code of Conduct, Code of Ethics, and Conflicts of Interest Policy • Business Expense and Reimbursement Policies • Performance Reviews and Talent Management • Workplace Postings and Notices

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EMPLOYMENT-RELATED FILING, REPORTING AND INSURANCE REQUIREMENTS When hiring their first employees, all businesses, including startups, must comply with numerous filing, reporting, and insurance requirements. In addition to federal requirements, many states require businesses to report information about their employees. The following provides high-level guidance for compliance with applicable federal laws and identifies those additional requirements governed by state or local law.

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FEDERAL AND STATE TAX FORMS Before hiring any employees, a business owner must: • Obtain

a

federal

Employer

Identification

Number (EIN) with the Internal Revenue Service (IRS) by either sending a completed IRS Form SS-4 to the IRS or completing an online application; and, • Require each new employee to complete and return an IRS Form W-4 designating the appropriate federal tax withholding (which must be retained by the employer for at least four years).

State and local tax authorities typically require similar forms and withholding information.

In addition to the tax forms referenced above, most states require some form of employee registration for purposes of tracking child support obligations, state taxes, workers’ compensation, and unemployment insurance. Employers should check and comply with the new hire reporting requirements in any state where the business will operate or employ workers.

Some startups attempt to outsource these issues by engaging a professional employer organization (PEO) to manage functions such as new hire reporting and payroll administration. However, startups engaging PEOs can remain liable for violations as an employer and must remain vigilant about legal compliance.

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STATE WAGE NOTICE REQUIREMENTS More than a dozen states, including New York, New Jersey, California, Connecticut, and Illinois, plus the District of Columbia, require businesses to comply with state Wage Theft Prevention Acts. These state laws vary in their specific requirements, but generally: • Identify

what

wage-related

information

the

employer is required to provide to the employees in a written notice, such as wage rates and regular paydays.

• Specify when it must give the notice, and whether it must give it to new employees, all employees periodically, or only nonexempt employees.

• Require certain employer-related information, such as its “doing business as” name, address, and telephone number, to be provided to employees.

• Specify whether the notices must be translated into an employee’s primary language.

• State whether the employer must get a written acknowledgment of receipt from employees.

• Impose penalties for non-compliance.

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IMMIGRATION ISSUES AND FORM I-9 COMPLIANCE The federal Immigration Reform and Control Act

Employers do not need to file the Form I-9 with

of 1986 (IRCA) prohibits:

any federal or state government agency, but must maintain proper records as described above.

• All employers from hiring or continuing to employ workers who are not legally authorized

Employers must strictly comply with Form I-9

to work in the US.

requirements or risk penalties. For knowingly

• Employers with four or more employees from

hiring or continuing to employ an unauthorized

discriminating based on national origin or

worker, penalties can include a cease and desist

citizenship.

order and/or increasing fines for each subsequent offense.

To comply with IRCA, all employers must: • Have each new employee complete Section 1 of a Form I-9 employment eligibility verification form by the first day of starting work.

• Review original documents presented by the employee to establish identity and employment authorization.

• Complete Section 2 of Form I-9 generally within three days of hire (for employees whose employment will last fewer than three days, this must be done on the first day of work).

• Retain a Form I-9 on file for each current employee for the longer of three years from the date of hire or one year after the employment ends.

• Make all Forms I-9 available for inspection if requested by the US government.

• Determine whether the business uses E-Verify on a volntary basis or operates in a state or an industry which requires the use of the E-Verify system.

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EMPLOYMENT-RELATED INSURANCE REQUIREMENTS In most states, businesses are required to maintain

for workers’ compensation. In addition, workers’

or pay into funds to support insurance to protect

compensation coverage is optional in at least one

their workforce, including workers’ compensation

state (Texas). Workers’ compensation is generally

insurance, unemployment insurance, and state

the exclusive remedy for employees who are

disability insurance.

negligently injured during the course and scope of their employment and can insulate employers

These insurance schemes are administered by

from many tort claims by their employees based

state law and apply in all jurisdictions where a

on workplace injuries.

business has employees.

UNEMPLOYMENT INSURANCE WORKERS COMPENSATION Unemployment insurance provides temporary Most

employers

are

covered

by

workers’

income for eligible workers who:

compensation laws. A majority of states require private employers with one or more employees to carry workers’ compensation insurance, but some

• Become unemployed through no fault of their own.

states have an exception for small employers

• Are ready, willing, and able to work.

with less than a threshold number of employees.

• Have sufficient work and wages in prior

Some states allow employers to be self-insured

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covered employment.

FOREIGN WORKERS AND INTERNATIONAL ENTREPRENUERS Employers seeking to hire foreign workers may

International Entrepreneur Final Rule (8 C.F.R. §

need to offer immigration sponsorship for the

212.19) on January 17, 2017. The final rule allows

individuals to begin working for the employer or to

the DHS to grant parole (temporary permission to

remain authorized to work in the US after a period

be in the US) to certain international entrepreneurs

of time.

to start or scale a business in the US. However, the DHS has delayed the effective date of the final rule

The United States Citizenship and Immigration

until March 14, 2018 (82 Fed. Reg. 31887), and may

Services (USCIS), operating under the Department

withdraw it.

of

Homeland

Security

(DHS),

published

the

The money for unemployment insurance benefits

OTHER BUSINESS INSURANCE

comes from taxes paid by employers, both at the federal level through the Federal Unemployment

Depending on their size, risk profile, and industry,

Tax Act (FUTA) and the state level through similar

businesses may consider purchasing other types

state unemployment tax laws. No deductions are

of insurance, including:

made from a worker’s paycheck for unemployment insurance. Typically a state’s labor or employment

• Commercial general liability (CGL) insurance.

development department determines whether an

• Directors and officers (D&O) insurance.

unemployed worker qualifies for unemployment

• Employer practices liability insurance (EPLI).

benefits after a worker files an application and

• Property and casualty insurance.

the employer has had a chance to respond.

• Key man or key person insurance.

• Umbrella and excess liability insurance.

Unemployment to

independent

benefits

are

contractors.

not

available

However,

filing

Althougth these forms of insurance are not legally

for unemployment benefits by independent

mandated, most business elect to purchase them.

contractors is one of the most common ways misclassification issues are flagged for the government authorities.

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FORMING AND DOCUMENTING AN EMPLOYMENT RELATIONSHIP At the outset of the employment relationship, startup business owners must determine the terms and conditions on which they will hire and employ individuals. Specifically, employers must decide issues such as: • Whether an individual is hired as an employee or retained as an independent contractor.

• Whether the employee is employed on an atwill basis or under the terms of an employment agreement.

• What types of screening methods are to be used.

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• How the employee is to be compensated.

• What types of agreements employees are to sign to protect the employers’ intellectual property.

• Whether they want employees to sign an arbitration agreement.

AT WILL EMPLOYMENT STATUS PRESUMED Employers must decide on an individual basis

Startups without formal employment policies

whether their employees are being hired on an

should make sure that any employee policy

at-will or some other basis. The default rule in the

communication reaffirms the at-will relationship.

US is at-will employment. This means that either the employer or the employee can terminate the

Some states recognize policy exceptions to

employment relationship at any time, with or

the at-will presumption (such as prohibiting

without notice, for any reason or for no reason,

employment terminations that violate public

as long as it is not a discriminatory reason.

policy of the state).

Some courts have held that provisions in an employee policy or handbook may modify the at-will presumption if the policy language is clear enough to create an enforceable express or implied contractual right (compare Robinson v. Ada S. McKinley Cmty. Servs., Inc., 19 F.3d 359 (7th Cir. 1994) with Stedillie v. Am. Colloid Co., 967 F.2d 274 (8th Cir. 1992)). For example, disciplinary policies that allow for discipline only under specific circumstances or through progressively rigorous disciplinary steps may inadvertently modify the at-will employment status.

Employers should ensure that all employmentrelated documents, including any employee handbook and workplace policies, expressly preserve and reaffirm the at-will relationship.

These documents should: • Not contain any provisions creating an express or implied contract undermining an at-will employee’s status.

• Include a disclaimer stating that disciplinary procedures and policies do not modify the atwill employment relationship and do not create a contract of employment, and the employer maintains the right to skip, repeat, or modify disciplinary procedures at its discretion.

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OFFER LETTERS Startups hire the majority of their workers

Even when not required to do so, startups should

without formal employment contracts. Some hire

memorialize the employment relationship with a

employees and retain service providers such as

simple offer letter to be signed by the employee

independent contractors without any written

containing the key terms and conditions of

documentation. Although federal law and most

employment, including the employee’s:

state laws do not require any specific contract terms to be in writing, there are some state law

• Title or position.

exceptions, such as California and New York laws

• Reporting relationship.

that require all commission agreements to be in

• Start date.

writing and contain certain information. New York

• Term of employment, if any.

City further requires that certain independent

• Rate and frequency of pay.

contractor agreements also be in writing.

• Manner of pay (such as salary, wage or commission, including whether the employee is

Additionally, many states now require employers

exempt or nonexempt from federal minimum

to notify their employees at the time of hiring of

wage and overtime requirements).

their rate of pay and regular pay day (see New Hire

• Hours of work, including whether full-time

Filing, Reporting, and Notice Requirements above).

or part-time, and whether the employee can

However, this information need not be included in

continue working in any capacity with another

an offer letter or contract.

employer during the initial stages of the startup.

• Eligibility for benefits (often spelled out in detail in a separate policy or plan).

should not be carbon copies of offer letters or

• Conditions of employment, including: Form I-9

compliance;

contractor relationships, but these agreements

successful

completion

of

background and reference checks (if used);

employment

contracts.

Instead,

they

should

emphasize the factors that distinguish them from an employer-employee relationship.

confirmation that their employment does not

violate

a

non-compete

or

restrictive

covenant with another employer; and signing a confidentiality or non-compete agreement.

• At-will confirmation.

Unless a specific contract or collective bargaining agreement (CBA) forbids it, the employer generally may make prospective, unilateral changes to an at-will employee’s terms and conditions of employment, such as wages, bonus payments, or commission structures.

Startups also should document any independent

EMPLOYMENT CONTRACTS Formal reserved

employment for

management

contracts

more

senior

personnel.

In

generally executives

addition

to

are

• Bonus compensation.

and

• Profit-sharing or equity grants.

the

• Accelerated vesting provisions if there is a

standard terms included in offer letters, executive

change of control.

agreements are typically lengthier and may include provisions addressing: • Employment for a term of years.

• Notice of termination or garden leave.

• Severance

benefits

if

the

executive

is

terminated without good cause (as defined in the agreement).

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SPECIAL CONSIDERATIONS FOR FOUNDERS AND MANAGEMENT EXECUTIVES SET REASONABLE SALARY EXPECTATIONS Compensation decisions may have a dramatic impact on a startup’s ability to attract investors and raise capital. Research suggests that most founders and CEOs of startups are paid less than $100,000 in annual salary, with many receiving $50,000 or less. Lower salaries for founders and senior executives set similar expectations for other employees. Before any significant fundraising efforts begin, business owners should determine the nature and amount of compensation for founders and management executives, considering that: • The more modest the salaries (and therefore monthly overhead for personnel), the more attractive the business may appear to investors.

• Higher salaries may be justified at later fundraising rounds or after certain funding milestones are met; or as the business begins to generate revenue or become profitable.

• Lower salaries may be counterbalanced with equity grants, incentive compensation, or other forms of benefits, such as insurance or retirement plans.

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DETERMINE HOW TO SHARE THE EQUITY

discussion of the issue is beyond the scope of this Note, failure to properly value the company’s

Many startups are co-founded by two or more

shares may result in:

individuals. When dividing ownership in the company, founders should not automatically assume that an equal split is the only or best

• Liability under Section 409A of the Internal Revenue Code (IRC § 409A).

alternative. They should instead consider the

• Unfavorable tax consequences and potential

possibility of an unequal distribution based on

penalties for the corporation and the individual.

each founder’s contributions to the business.

Factors to be considered in an unequal distribution

Companies should also ensure that stock issued

of equity include:

to founders and other key executives is subject to a vesting schedule so that these individuals

• Who came up with the idea that is the key to the new business.

cannot immediately abandon the company yet retain an ownership stake or control. Setting a

• Who has the greatest stake in the intellectual

reasonable vesting schedule also helps market

property (IP) of the business, including: who

the company to investors, especially where the

developed the technology necessary to run

business depends on the commitment of those

the business; who owns the patents on which

investors for its success.

the company or its products will be based; and whether any founder brings existing copyrights or trademarks into the company.

• How much time each founder has invested in the company and in what percentage contribution.

• What the opportunity cost was for each founder to join the business, with those who sacrificed more lucrative, high-power positions at more established businesses sometimes receiving more for their risk than those who were not actively employed when the venture began.

• Whether all founders are full-time contributors to the company.

• The extent of each founder’s industry expertise.

VALUATION AND VESTING ISSUES When issuing stock, companies should determine the fair market value of the shares using a reasonable valuation method. Although a full

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MANDATORY ARBITRATION AGREEMENTS There are substantial financial and operational risks

associated

with

employment-related

litigation, even for startups and small businesses, including:

• Can reduce the risk of a “runaway” jury verdict, including a lower risk of substantial punitive damage awards.

• Can be more convenient for the lawyers and witnesses on scheduling issues.

• High costs of litigation.

• Can eliminate private employment class actions

• Risk of large jury awards, especially in class or collective actions.

for wage and hour, employment discrimination, and other labor and employment claims

• Negative publicity of court proceedings.

otherwise amenable to class or collective

• Distraction and time away from the company’s

action in jurisdictions that allow this.

core business operations.

However, To minimize these risks, some employers require

arbitration

presents

disadvantages

because:

mandatory arbitration agreements with their employees as a condition to employment. A mandatory arbitration provision is used to compel

• Arbitration fees can be substantial, and are generally borne by the employer.

an employee to resolve any employment-related

• Arbitrators can be less likely to grant dispositive

disputes by binding arbitration rather than in

motions, such as motions to dismiss or

court. While courts usually enforce a well-drafted

summary judgment motions.

mutual arbitration agreement, employers must

• Procedural defenses, such as the failure to

make a strategic decision on whether to enter

exhaust administrative remedies, may not

into arbitration agreements with employees.

apply.

• Arbitrators do not need to follow the rules

Arbitration has been favored by employers

of evidence and therefore are more likely to

because it:

allow hearsay and irrelevant evidence.

• Courts rarely will disturb an arbitrator’s award

• Can

be

more

cost-effective

than

court

even if it is erroneous on the facts or the law.

proceedings, due to the likelihood of more limited discovery and motion practice.

• May be resolved faster than in court, depending on the jurisdiction.

• Provides a more confidential forum with less publicity than court proceedings.

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The National Labor Relations Board (NLRB) recently has been challenging employers’ use of arbitration agreements with class action waivers as violative of employees’ Section 7 rights under the National Labor Relations Act (NLRA). The

courts are split about whether mandatory class action waivers are enforceable.

New employers should consider the benefits and drawbacks of entering into arbitration agreements with their employees at the outset of any employment relationship, taking into consideration the current state of the law and their business needs.

Emloyers should note that this is an area of the law that is currently developing and should seek current information from legal counsel before implementing mandatory aribtration agreements with employees or relying on the enforceability of an existing arbitration agreement.

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RISKS IN THE HIRING AND INTERVIEW PROCESS Employers, including startups, face potential liability risks in the hiring process. Key areas of exposure include: • Discrimination and retaliation claims based on an applicant’s membership in one or more protected classes under federal, state, or local laws.

• Hiring an employee who may have taken or used trade secrets or confidential information belonging to a prior employer or does not have the rights to use the information or IP.

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• Immigration audits and fines.

• Wage

and

hour

violations,

including

the

misclassification of employees.

• Conducting background checks, including those delving into criminal and credit history, which may violate state law.

• Conducting improper social media searches of applicants during the hiring process.

DISCRIMINATION IN THE HIRING PROCESS Many aspects of the recruiting process may trigger

begun conducting voluntary self-audits of their

an employment discrimination claim, including:

compensation practices for pay equality.

• Advertising and describing a job vacancy.

To minimize the risk of a discrimination claim in

• Conducting an interview.

the hiring process, employers should:

• Making an offer of employment.

• Rejecting an applicant.

• Determine the applicable federal, state, and

• Setting compensation in a discriminatory manner.

local laws and the protected classes covered by each.

• Ensure that the individuals involved in the

Most

federal

do

recruitment process are trained to identify

not apply to businesses with fewer than 15

and avoid potentially discriminatory practices.

employees,

anti-discrimination

though

federal

laws

immigration

law

prohibits employers with four to 14 employees from discriminating on the basis of citizenship or national origin.

• Identify

the

essential

qualifications

and

functions of each position.

• Focus on objective criteria in the interview and selection process.

However, state and local laws often apply to smaller businesses and cover a wider range of protected classes. For example, California’s state anti-discrimination laws apply to employers with five or more employees, and for harassment purposes, the law applies to employers in California with one or more employees. New York’s anti-discrimination laws similarly apply to employers with four or more employees, except for the prohibition on sexual harassment, which applies to all employers.

While early-stage startups without funding may not be the prime targets of the Equal Employment Opportunity Commission (EEOC) or plaintiffs’ counsel, as these companies grow and gain public recognition the risk of legal challenges increases.

Many businesses in the traditionally maledominated technology sector have been sued for sex discrimination. Other companies have

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BACKGROUND CHECKS

Employers often want access to information about job applicants and current employees to improve the chances that they will hire, retain, and promote the best candidate for the job. Startups typically

• Obtain the applicant’s or employee’s written consent.

• Certify to the consumer reporting agency that they have complied with the FCRA.

want to find candidates not only with the desired

• Meet additional requirements to obtain an

skill set but who mesh with an often intense and

investigative consumer report, which involves

unique work culture. Background checks vary in

personal interviews and is more invasive of an

scope, depending on what an employer wishes to

individual’s privacy.

know, and may include delving into information about a job applicant’s job history, credit history,

In general, the FCRA does not apply to employers

or personal character. Conducting background

using their own in-house staff and resources to

checks

common

conduct background checks. However, in-house

screening methods used by employers. However,

background checks may be regulated by state law.

and

calling

references

are

they can expose employers to substantial legal and financial risks if not conducted lawfully.

Employers also must comply with state laws regarding

Employers

can

conduct

background

the

proper

use

of

background

checks

checks in the employment application process,

internally or by using a third-party service provider,

including providing the proper disclosures and

also known as a consumer reporting agency (CRA).

receiving authorization. For example, Delaware,

Employers using a CRA must follow the rules

Massachusetts,

established by the Fair Credit Reporting Act (FCRA)

and Puerto Rico have passed laws prohibiting

(as amended in 2003 by the Fair and Accurate

employers from inquiring about an individual’s

Credit Transactions Act and the Dodd-Frank Wall

salary history until after they make an offer

Street Reform and Consumer Protection Act of

including compensation.

2010 (Dodd-Frank)).

The FCRA applies to the use of third-party service providers to obtain background information on applicants and existing employees, and imposes notice, disclosure, and consent requirements.

Before

obtaining

a

consumer

report

for

employment purposes from a consumer reporting agency, employers must: • Notify the applicant or employee in an easily understood writing that the employer may obtain a consumer report.

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New

York

City,

Philadelphia,

CRIMINAL BACKGROUND CHECKS

While employers may have good reason to seek

a direct relationship to the job and involves an

information about an applicant’s criminal history,

unreasonable health or safety risk. (N.Y. Correct.

inquiring about or using this information may

Law §§ 751 and 753.)

create certain risks. For example, the EEOC’s Enforcement Guidance on an employer’s use of

In recent years, some states and municipalities

criminal records suggests employers might violate

have passed “ban the box” legislation, prohibiting

Title VII of the Civil Rights Act of 1964 (Title VII) in

private employers from making any inquiry

this arena by:

into criminal backgrounds until after an initial interview or conditional offer of employment.

• Treating job applicants with the same criminal

States that have enacted these restrictions include

records differently based on their race, color,

Connecticut (Conn. Gen. St. § 31-51i), Hawaii (Haw.

religion, sex, or national origin (disparate

Rev. Stat. § 378-2.5(b)), Illinois (820 Ill. Comp. Stat.

treatment discrimination).

75/1 to 75/99), Massachusetts (M.G.L. ch. 151B, §

• Disproportionately excluding certain protected

4 (9-1/2), Minnesota (Minn. Stat. Ann. § 364.021),

classes of job applicants or employees with

New Jersey (N.J.S.A. 34:6B-11 to 34:6B-19), Oregon

criminal histories even where the employer

(H.B. 3025), Rhode Island (R.I. Gen. Laws § 28-5-7),

applies criminal record exclusions uniformly

Vermont (H.B. 261), and the District of Columbia

(disparate impact discrimination).

(D.C. Law 21-259). Municipalities that have passed ban the box laws include Austin, New York City

In addition, state law may restrict an employer’s

(N.Y.C. Admin. Code, Tit. 8, § 8-102(5)), Portland

inquiry

history.

(OR) (Portland Mun. Code, ch. 23.10), and San

Generally, it is impermissible to inquire about

Francisco (S.F. Police Code, art. 49). Employers

past arrests that did not lead to a conviction. In

should be aware of any restrictions on the use of

some states, even convicted felons are entitled to

criminal background checks in the jurisdictions

certain legal protections, and employers cannot

where they operate and hire employees.

into

an

applicant’s

criminal

make hiring decisions solely based on a criminal conviction alone without considering other factors.

For example, New York law prohibits employers from discriminating against an applicant or employee on the basis of a criminal conviction.

Before making a hiring or employment decision based on a prior conviction, including felony convictions, the employer must analyze eight enumerated factors. The employer can only make an employment decision based on a prior conviction if it determines the prior conviction has

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SOCIAL MEDIA ISSUES IN HIRING Social media is integral to many startups, and serves as a primary tool for communication and information-gathering by both business owners and employees. Many employers search social media for information about prospective employees, even if not officially part of the formal hiring process.

While social media can help employers gather information about an individual’s education and employment experience relevant to the hiring decision, personal information and photos on social media sites may reveal information about an applicant that would be beyond the scope of legal inquiry during an interview. For example, an employer may glean information about an applicant’s membership in or affiliation with certain protected classes of individuals, including: • Religious affiliations or beliefs.

• Genetic conditions.

• Sexual orientation.

• National origin.

• Age.

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The law on permissible use of social media during

from requesting password and username

the hiring process is still developing. Employers

information

can minimize potential legal liability by either:

password protected portions of a prospective

or

otherwise

accessing

the

or current employee’s personal social media • Not conducting social media searches at all during the hiring process, which is the most

accounts with certain exceptions.

• Lawful interview practices.

conservative approach.

• Using someone other than the interviewer, such as a human resources professional, to conduct social media screening, and ensure that person only passes lawful information to the interviewer.

However, many startups pride themselves on having a distinct company culture, and finding the right fit with employees may be as important as finding someone with the right resume. Foregoing social media as a hiring tool may not be feasible.

Startups that conduct social media searches of applicants can protect against any potential discrimination claims by non-hired applicants by training its hiring managers to comply with: • Anti-discrimination and lawful off-duty conduct laws.

• The FCRA. • Password protection laws. For example, more than 20 states, including California, Colorado, Connecticut, Michigan,

Delaware,

Nebraska,

Illinois,

Nevada,

Maryland,

New

Jersey,

Oregon, and Washington, have enacted laws addressing employer access to current and prospective employees’ social media accounts.

These

laws

generally

prohibit

employers

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WAGE AND HOUR ISSUES Wage and hour issues can be especially difficult for startups. In the startup environment, most employees work long hours. They also do not necessarily operate within clearly delineated roles or traditional job titles, often performing the functions of multiple jobs within a given day or week. Compensation may be primarily comprised of stock or equity grants, with little cash flow available for base wages. Many startups never contemplate paying overtime to their employees, operating under the false assumption that the overtime laws are inapplicable to startups.

Nonetheless,

startups

remain

vulnerable

to

Key considerations include:

potential wage and hour liability arising from employee claims and agency audits. Therefore,

• Determining how payroll is administered.

they should take time to consider wage and hour

• Properly classifying workers as exempt or

compliance as part of their initial business planning and strategy. These concerns become increasingly important as the company’s workforce expands, or as the business positions itself for additional rounds of financing, a public offering, or an acquisition.

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nonexempt.

• Complying with minimum wage and overtime laws.

• Ensuring workers are not improperly classified as independent contractors.

COMPLYING WITH MINIMUM WAGE AND OVERTIME LAWS Both

federal

and

state

law

impose

strict

of family businesses, are covered (for example,

requirements on the payment of minimum wage

see Reich v. Stewart, 121 F.3d 400 (8th Cir. 1997)

and overtime pay for most employees. Unless

and 29 U.S.C. § 203(d)).

the employer can demonstrate that an employee qualifies for an exemption from the overtime

There is no catchall exception for startups. If a

requirements

Labor

business otherwise meets the test for enterprise

Standards Act (FLSA) and applicable state law, the

or individual coverage, the employer cannot avoid

employer must pay all nonexempt employees at

liability for wage and hour violations by citing

least minimum wage and overtime in accordance

common industry practice of working more than

with applicable wage and hour laws. Overtime

40 hours per week with no payment of overtime.

is generally calculated at a rate of 1.5 times the

Some early-stage startups may not meet the

employee’s regular rate of pay for all hours worked

minimum annual sales threshold for enterprise

over 40 hours in a workweek under federal law,

coverage. In limited circumstances, employees

but may be calculated differently under state law,

working for early-stage startups or local family-

such as in California.

owned businesses may not qualify for individual

under

the

federal

Fair

coverage because they are not sufficiently engaged Employers also must keep records of all hours

in interstate commerce (see Jian Long Li v. Li Qin

worked by nonexempt employees, or suffer harsh

Zhao, 35 F. Supp. 3d 300, 308 (E.D.N.Y. 2014)).

penalties for non-compliance. For example, in

However, most startup employees regularly use

2014, LinkedIn agreed to pay nearly $6 million in

the telephone, internet, email, and interstate

settlement of a Department of Labor (DOL) audit.

“instrumentalities

of

commerce”

to

conduct

business and therefore qualify for individual The FLSA applies to all private employers and

coverage under the FLSA (29 C.F.R. § 776.10).

employees who in any workweek are either: Even if not technically covered by the FLSA, an • Engaged in interstate commerce or in the

employer forced to defend a claim for wage and

production of goods for commerce (individual

hour violations likely will incur significant costs,

coverage).

even if it prevails on the merits. Moreover, business

• Employed

by

an

enterprise

engaged

in

owners and management executives such as CEOs

commerce or the production of goods for

may be held individually liable as an “employer”

commerce with gross annual sales or business

under the FLSA if they exercise a sufficient level of

of at least $500,000 (enterprise coverage).

operational control over the employees (see, for example, Irizarry v. Catsimitidis, 722 F.3d 99 (2d

Each of the above tests is interpreted broadly. Most

Cir. 2013)).

private and public employers, with the exception

27

Employers must also comply with state wage and hour laws with regard to nonexempt employees because the laws often impose: • A higher minimum wage.

• More stringent overtime payment requirements.

• Required meal and rest break periods.

For example, in California, nonexempt employees are entitled to overtime pay if they work more than eight hours in one day. In other words, the overtime rate in California is calculated on a daily, rather than weekly, basis.

ADMINISTERING PAYROLL Before hiring any employees, the employer should

Employers generally should communicate this

determine:

information to their employees in an offer letter or a state wage payment act notice. Some employers

• Who will be responsible for payroll (for

adopt a uniform policy for payroll practices. Even

example, a chief financial officer, human

if hiring friends or former colleagues during a

resources professional, professional employer

startup’s early stages, employers should document

organization (PEO), or payroll company).

their pay practices in some manner to avoid

• How often it will pay its employees.

future disputes or liability under wage payment

• How much and in what manner it will pay its

laws. Documented pay policies also can provide

employees (such as on a salary, hourly, or

employers a safe harbor defense to certain wage

commission basis).

payment errors.

29

CLASSIFYING WORKERS AS EXEMPT OR NONEXEMPT The classification of employees as exempt or

• The salary basis requirement or, for certain

nonexempt is a hotly litigated issue and poses

exemptions, the fee basis requirement, unless

a serious risk to businesses that get it wrong,

the employee is:

including the individuals who own the businesses.

• a business owner; • a teacher;

Under the FLSA, employers must pay covered

• practicing law or medicine; or

employees at least the minimum wage. Employees

• a computer professional earning at least

also must receive overtime payments for hours

$27.63 per hour for every hour worked.

worked in excess of 40 hours per week unless they qualify for one of the statutory exemptions. The

An employer pays an employee on a salary basis

most common exemptions include those for:

if:

• Administrative employees.

• The employee receives a predetermined salary

• Executive employees.

• Professional

each pay period that is not subject to reduction

employees,

including

learned

professionals and creative professionals.

based on the quality or quantity of work performed.

• Computer professionals.

• The predetermined salary is at least $455 per

• Outside sales employees.

week, or $23,660 annually (or $380 per week,

• Highly compensated employees.

if the employee is employed in American Samoa by employers other than the federal

To

qualify

as

an

administrative,

executive,

government).

professional, highly compensated, or computer professional

employee

under

federal

law,

employees must meet both:

Please note that the test for determining exempt status may be different under state law. For example,

• The applicable exempt duties test, meaning the employee must spend a sufficient amount of

the

highly

compensated

employee

exemption does not apply in California or Pennsylvania.

time performing duties that qualify as exempt

30

from the FLSA’s overtime provisions. Each

A common misconception is that a “salaried”

exemption classification requires certain types

employee does not get overtime and therefore is

of exempt duties.

properly classified as exempt. However, merely

paying an employee on a salary basis is not sufficient to qualify for an exemption. Proper classification requires a factual analysis of the duties and responsibilities actually performed by the employee and not just those listed on a job description. This is especially challenging for startups where employees may serve multiple functions without clearly defined job descriptions or titles.

In addition, startups should be prepared for potential changes to the minimum salary threshold and monitor developments on the status of the DOL’s position on this issue.

Although many startups outsource payroll and certain human resources functions to third-party providers, doing so does not eliminate the risks of misclassification or overtime liability. As the entity that primarily controls the terms and conditions of the workers’ employment, the startup likely remains responsible as an employer under the FLSA and applicable state law.

31

THE COMPENSATION OF STARTUP FOUNDERS Many early-stage startups do not have the cash flow to cover the high salaries formerly earned by their founders and key executives. These individuals are often compensated with equity instead of a higher salary. Some may agree to work for free or take an annual salary of $1 while putting in long hours well in excess of 40 hours a week. Startup business owners should not automatically assume this is permissible under the FLSA. FLSA EXEMPTION FOR BUSINESS OWNERS Most white collar exemptions under the FLSA require employees to receive a minimum weekly salary. If the business is covered by the FLSA, working for free (or $1) violates the minimum wage and overtime requirements unless the employee falls within an enumerated exemption. However, many founders may qualify as an exempt executive employee under the business owners’ exemption (29 C.F.R. § 541.101) if they both: • Own at least 20% equity interest in the business (whether corporation, partnership, or other entity).

• Are actively engaged in the management of the business.

32

The business owners’ exemption may apply even if the owner is not paid a salary. However, an individual with a 20% or greater interest in a business who is required to work long hours, but makes no management decisions, supervises no one, and has no authority over personnel does not qualify for the business owners’ exemption.

However, it is also important to note that an arrangement that complies with the FLSA may also still violate state or local law. Startup business owners should check the applicable exemptions in the jurisdictions where they work.

If a company agrees to pay a salary, but lacks funds to pay it, it sometimes treats that payment as a salary deferral for accounting purposes. However, this arrangement may: • Violate state law provisions that require payment of any wages at certain intervals.

• Have negative tax consequences for the business or the founder.

33

INDEPENDENT CONTRACTORS AND THE RISKS OF MISCLASSIFICATION Many businesses attempt to avoid significant tax

how, when, and where the work is performed,

and other liabilities every year by classifying certain

while employees generally must follow their

workers as independent contractors instead of

employer’s instructions);

employees. Some business models in the new

• requiring the use of company equipment,

on-demand economy have been built on using

such as computer and emails (independent

independent contractors as their primary service

contractors

providers instead of relying on the traditional

equipment);

generally

use

their

own

employer-employee relationship. Many startups

• the evaluation system used (independent

use independent contractors to help build their

contractors are typically evaluated only by

business or design a product, especially in the early

the end result of the work, while employees

financing stages. While some of these individuals

may be evaluated on how the work is actually

may

performed);

be

properly

classified

as

independent

contractors, simply referring to a worker as an

• the application of employee policies and

independent contractor in a written agreement or

procedures (independent contractors are

otherwise does not protect a business from a legal

not covered); and

challenge to their status. Further, a worker is not

• training (independent contractors generally

properly classified as an independent contractor

do not receive training from the company

just because the work is part-time, seasonal, or for

that retains their services).

a trial period.

• Financial control (the right to control economic aspects of a worker’s activities), including

Improper classification of workers as independent

factors such as:

contractors can result in steep penalties. Recent

• the

contractor’s

degree

of

investment

federal and state enforcement efforts have

(independent contractors often make a

resulted in a steady increase in agency audits and

significant investment in the tools and

class and collective action lawsuits.

equipment they use to perform the work); • reimbursement

CLASSIFICATION TESTS

(independent

of

business

contractors

are

expenses typically

responsible for their own expenses and There are several tests used to determine whether

overhead);

independent contractors are properly classified.

• the contractor’s opportunity for profit or

Although no one factor is determinative, the IRS

loss (independent contractors run a greater

test considers several factors grouped into three

risk of incurring a loss in connection with a

general categories:

particular engagement); • the contractor’s ability to service multiple

• Behavioral control (the right to control the

clients at the same time (independent

manner in which work is performed), including

contractors generally do not have exclusivity

factors such as:

obligations); and

• the type and degree of instructions given (independent contractors generally control

34

• method

of

payment

(independent

contractors are often paid a flat fee for

an engagement, while an employee is

IRS test. Some states, such as California, require

generally guaranteed a regular wage for the

employers to report their hiring of independent

period of time the employment relationship

contractors in certain situations, and New York

continues).

City now requires written agreements for certain

• The relationship between the parties, including

independent contractor relationships.

factors such as: • written contracts (while written contracts

CONSEQUENCES OF IMPROPER CLASSIFICATION

are not sufficient to determine a worker’s status, they can help indicate the parties’

Although the benefits of properly classifying

intent);

a worker as an independent contractor are

• employee benefits (independent contractors typically

are

not

entitled

to

significant, the financial costs and penalties of

receive

improperly making that classification can be

retirement, health insurance, and other

serious. Classification lawsuits are costly to defend

similar benefits an employer provides to its

and potentially can disrupt or destroy a company’s

employees);

business built on using independent contractors.

• permanency of the relationship (employees

Misclassification suits often result in settlement

are typically engaged for indefinite periods

payments in the millions of dollars. Because

and can be discharged for any or no

contractors avoid many of the tax and other

reason without notice, while independent

employment law requirements of an employment

contractors

for

relationship, the IRS, state government agencies,

specified periods or projects and cannot be

and courts construe independent contractor

discharged except under the terms of their

status narrowly and impose large penalties for

contract);

improper classification.

are

typically

engaged

• whether the services are provided through a corporate entity or through an individual

The IRS typically requires a company to reclassify

service provider (employees are hired in

the worker as an employee, making the company

their individual capacities while independent

liable for any financial and litigation liability

contractors who provide services to the

concerning that employee, including:

general market typically form a business entity, such as a limited liability company

•

Back wages and overtime pay.

(LLC) or corporation); and

•

Tax and insurance obligations.

•

Employment law compliance.

•

Employee benefits.

• whether the services provided are key aspects

of

the

business

(where

the

individual’s services are a key aspect, it is more likely that the worker is actually an employee of the company).

Many states consider similar factors, though the tests may be enumerated differently than the

35

IMPROPER RELIANCE ON UNPAID INTERNS Many cash-strapped startups and new businesses rely on low paid or unpaid interns to perform

Although these tests differ, before retaining any unpaid interns, businesses should consider:

valuable services for the business. However, unless the intern relationship satisfies certain specific

•

Whether the intern is receiving academic

criteria, the intern likely qualifies as an employee

credit.

under the FLSA and therefore must be paid at least

•

minimum wage and overtime (if working over 40

otherwise would be performed by employees, or

hours a week).

the same as work other employees are performing.

•

Whether the intern is doing work that

The degree of training provided to the intern,

The DOL has adopted a six-part test for analyzing

and whether the intern is receiving academic credit

internship status. Although many circuit courts

for the internship.

have followed the DOL test, the US Court of

•

Whether the internship’s duration is finite.

Appeals for the Second Circuit has rejected the

•

Whether there is an expectation of future

six-part test and adopted a more holistic primary

employment.

beneficiary test.

LIABILITIES THAT SURVIVE BUSINESS CLOSURE Some startup business owners are cavalier about

(UVTA), if the new business was formed to

liability for wage and hour and misclassification

avoid a debt.

violations. They mistakenly believe that if the business does not succeed and lacks funds to pay

Therefore, even when funds are limited, business

employees or service providers, they can close

owners have a vested interest in ensuring that

down the business and walk away (often restarting

they:

the same or a similar venture under another name). However, startup founders and equity stakeholders may incur liability post-closure as:

• Properly classify employees as exempt (or, more importantly, as potentially nonexempt) from minimum wage and overtime requirements.

• An individual who exercises sufficient control

• Pay all employees their wages, including

over the terms and conditions of employment

overtime, if applicable, in a timely manner.

to qualify as an “employer” under the FLSA, and

• Properly classify independent contractors.

is therefore personally liable for back wages

• Do not rely on unpaid interns to perform the

and penalties.

work otherwise done by employees.

• The owner of a new business, formed after the

• Consider paying interns at least minimum wage

closure of the first, with the same owners and

and limiting their work to 40 hours a week or

operating essentially for the same purpose,

less.

under the Uniform Voidable Transfer Act

36

EMPLOYEE BENEFITS AND INCENTIVE COMPENSATION

Employers have many options for creating

• Retirement

benefits,

such

as

employee

compensation packages for their employees.

deferrals to pre-approved 401(k) plans or

Often startups and new businesses do not have the

contributions to employee stock ownership

cash flow to pay the high salaries or fixed benefits

plans.

offered by more established corporations, even

• Voluntary Benefits.

to their most valued employees. As a result,

• Group

health

plan

benefits,

which

may

startups commonly use some form of incentive

implicate numerous compliance obligations,

compensation and other variable or deferred

including:

benefits to motivate their employees and compete

• an Affordable Care Act (ACA) provision

for top talent.

effective in 2015 (subject to limited transition relief) under which large employers (those

Although a detailed discussion is beyond the

that employed on average at least 50

scope of this Practice Note, the types of incentive

full-time employees, including full-time

compensation

companies

equivalents, on business days during the

may offer their employees include equity-based

prior year) that provide no health coverage

awards, such as:

or inadequate coverage must pay penalties

and

benefits

that

to the federal government; • Restricted stock.

• complicated ACA information reporting

• Restricted stock units (RSUs).

• Stock

options,

including

rules involving employer offers of health incentive

stock

options (ISOs) and non-qualified stock options (or NQSOs).

coverage; and • additional group health plan mandates, including COBRA health plan continuation

• Stock appreciation rights (SARs).

coverage and HIPAA privacy and security

• Phantom stock.

rules.

• Performance share units (PSUs).

• In place of (or in addition to) traditional health plan coverage, coverage under the health

Other types of compensation include:

insurance exchanges, a private exchange, through a defined contribution health plan

• Incentive bonus plans (including short-term

model, or supplemental coverage.

and long-term, as well as discretionary and non-discretionary plans).

• Severance benefits (as part of either an individual employment contract or a companywide plan).

37

PROTECTING INTELLECTUAL PROPERTY AND GOODWILL Businesses invest significant resources in developing proprietary products and services, marketing strategies and customer goodwill. To protect these valuable assets to the fullest extent of the law, employers should consider requiring employees to sign agreements that clarify and protect the employer’s rights.

These agreements can include the following:

Ideally, these agreements should be signed by employees at the start of their employment as

• Confidentiality of trade secrets and protection of proprietary rights.

it has been generally held by courts in various jurisdictions that an offer of new employment

• Non-solicitation of employees.

is

• Non-solicitation of customers.

agreements. However, some jurisdictions require

• Non-competition by employees.

additional consideration.

38

sufficient

consideration

to

support

these

CONFIDENTIALITY AND PROPRIETARY RIGHTS AGREEMENTS Many employers require their employees to sign

Confidentiality provisions in agreements entered

a confidentiality and proprietary rights agreement

into or modified after May 11, 2016, should also

to protect their valuable confidential information

include the notice of whistleblower immunity

and intellectual property (IP) assets, including

required by the Defend Trade Secrets Act (DTSA).

trade secrets, from disclosure or misuse by an employee. This type of agreement may also be designed to protect the employer’s information technology (IT) resources and systems.

Especially for startups where sensitive product development and design information is often shared on a company-wide basis (at least during the company’s early stages), employers should require all their employees to sign a confidentiality and proprietary rights agreement at the start of the employment relationship: • To ensure that the employee does not learn confidential or proprietary information before the employee is subject to confidentiality restrictions.

• So that the new employment offer serves as consideration for the obligations in the agreement, to the extent applicable state law holds that at-will employment is sufficient consideration.

• To establish that the employee assigns any inventions he creates while employed by the employer, to the extent allowed by state law, and that all works created are works made for hire that belong to the employer.

Startups that use confidentiality agreements should ensure that the agreements do not run afoul of recent SEC and other agency guidance regarding permitted whistleblower disclosures.

39

NON-COMPETE AGREEMENTS A non-compete agreement (also known as a non-

to a defined group of competitors or to a specified

competition agreement or non-compete) is an

geographic region to comply with state law. Courts

agreement between an employer and an employee

in most states recognize that non-competes limit

that restricts a former employee from working for

an individual’s ability to make a living and will not

the employer’s competitors for a specified period

enforce non-competes that restrict employees

of time after his employment ends. Employers use

beyond what is reasonably necessary to protect a

non-competes to protect their valuable corporate

legitimate business interest. In other jurisdictions

assets, such as trade secrets and goodwill.

such as California, post-employment non-compete agreements with employees are illegal, except in

Enforceability of these agreements is generally a

very narrow circumstances involving the sale of a

question of state law, though employers may have

business.

federal remedies available under the DTSA. State law varies significantly by jurisdiction and industry.

Non-competes are particularly useful to employers

Some non-compete agreements limit the restriction

in cases where an employee knows important

confidential

information

or

trade

secrets.

company’s IP and key strategies. Employers should

However, non-competes limit employee mobility

identify employees in this high-risk subset and

and if used too broadly may have a negative

consider entering into effective and enforceable

effect on the startup’s competition for top talent.

non-competes with them, to the extent allowed by

Although most employees have some important

applicable state law.

company knowledge, it is rare for more than a few employees to have information that, if disclosed, could jeopardize a company’s business.

Often companies can get sufficient protection from these employees by entering into tailored confidentiality or non-disclosure agreements. On the other hand, the founders and first employees in a startup business typically are privy to the

NON-SOLICITATATION AGREEMENTS Less restrictive and more likely to be enforced

• Indirectly protect trade secrets by limiting a

than a non-compete, a non-solicitation agreement

former employee’s freedom to raid company

prohibits an employee (either during or after

resources.

employment, or both) from approaching the employer’s other employees, clients, customers, vendors, or business partners to attempt to hire, retain, or create contractual relationships with

• Are found either in a stand-alone agreement or a non-compete agreement.

• Non-solicitation agreements are also governed by state law.

them. Non-solicitation provisions typically: Non-solicitation • Prevent

former

employees

from

using

agreements

are

especially

common for salespeople who have developed

confidential and trade secret information to

customer

relationships

and

solicit others.

expense of their employers.

goodwill

at

the

41

WORKPLACE POLICIES AND PROCEDURES Employee handbooks, policies, and procedures generally are not the highest priority for startup business owners. However, as startups move past the conceptual phase and begin to hire more employees and position themselves for sale or financing rounds, potential employment issues take on greater significance.

Although formal written workplace policies are

an exhaustive list, the following section highlights

not legally required, many employers implement

the most commonly used and highly recommended

written policies to demonstrate a commitment

policies applicable to most employers, including

to comply with applicable laws and to encourage

startups and small businesses, whether used as

the resolution of problems before they become

stand-alone policies or as part of a comprehensive

legal claims. Alternatively, employers may opt

handbook.

to incorporate individual policies into a broader employee handbook or policy manual. Although not

42

GENERAL EMPLOYMENT POLICIES AT-WILL EMPLOYMENT POLICY

Many state and local laws prohibit discrimination based on a broader range of characteristics, such

Most employers operate under the presumption

as:

of at-will employment, meaning that they reserve the right to terminate employees at any time,

• Sexual orientation.

and employees may voluntarily leave at any

• Gender identity or expression.

time, with or without notice or cause (see “At-

• Status as a victim of domestic violence.

Will Employment Status Presumed” above). While

• Arrest record.

most employers confirm this presumption in an

• Criminal conviction.

offer letter or employment agreement, employers

• Unemployment status.

should reiterate the at-will policy when issuing any

• Marital status.

other handbook or policy to their employees.

In

addition,

although

most

federal

anti-

EQUAL EMPLOYMENT AND ANTI-DISCRIMINATION

discrimination statutes only apply to businesses

LAWS AND POLICIES

with at least 15 employees, many state and local laws apply to businesses with as few as five (or

Discrimination claims are one of the most

fewer) employees. Startup businesses that are

significant

US

not familiar with the parameters of federal, state,

employers. Employers face potential liability for

and local discrimination protections face potential

discrimination claims throughout every stage of

exposure under those laws.

areas

of

legal

exposure

for

the employment relationship, from hiring to firing and everything in between. Startup businesses are

An Equal Employment Opportunity (EEO) policy

not immune from these claims. Even if they do not

is often considered one of the most important

have enough employees to be covered by federal

policies to communicate to employees. Although

law, they are likely covered by a state or local

most employers must post employee EEO rights

law that applies to smaller employers. Avoiding

posters, an EEO policy is not technically required

employment

by federal law. Nevertheless, most employers

discrimination

liability

requires

sensitivity to a variety of protected classes under

implement and maintain an EEO policy to:

federal law, including: • Demonstrate • Race.

• Color.

• Religion or creed.

• National origin or ancestry.

with

anti-

• Support a legal defense against discrimination claims.

• Outline a complaint procedure for employees who

• Age.

discrimination.

• Veteran status.

compliance

discrimination laws.

• Sex, including pregnancy.

• Physical or mental disability.

their

feel

they

have

been

subjected

to

• Set a tone of diversity and acceptance in the workplace.

• Genetic information.

• Citizenship.

In support of these important goals, the EEO policy is frequently the first policy in a handbook.

43

DISABILITY AND RELIGIOUS ACCOMMODATION

ANTI-HARASSMENT

AND

ANTI-RETALIATION

POLICIES

POLICY

Businesses with 15 or more employees are covered

Although not required by federal law, all employers,

by the Americans with Disabilities Act (ADA), as

including startups, should consider implementing

amended by the Americans with Disabilities Act

and maintaining an anti-harassment policy. These

Amendments Act (ADAAA). Smaller employers

policies can help demonstrate reasonable care to

may be covered by state law affording protection

prevent and promptly correct harassing behavior.

to employees with disabilities. The ADA prohibits

This is a necessary element of the Faragher-Ellerth

covered employers from discriminating against

defense, which may be available in hostile work

qualified individuals because of a disability and

environment harassment litigation under certain

requires employers to provide a reasonable

circumstances.

accommodation to individuals with a disability.

Many state and federal statutes regulating the A reasonable accommodation is a change in the

employment relationship also prohibit employer

work, workplace, or application process that helps

retaliation, that is, taking adverse employment

make it possible for an individual with a disability

actions against employees who engage in protected

to perform or apply for a job. Once a request for

activity, such as making internal complaints or

accommodation has been made, an employer is

filing charges or lawsuits. Employees with a good

required to engage in an interactive process with

faith belief in their complaint can prevail on a claim

the individual and must provide a reasonable

of retaliation even when the underlying complaint

accommodation unless doing so would cause an

is meritless. Retaliation claims have been on the

undue hardship on the employer.

rise over the last decade.

Covered employers should consider implementing

For these reasons, even startup businesses should

a disability accommodations policy to communicate

consider:

the employer’s commitment to comply with the ADA and applicable state law and to inform employees

• Implementing a strong anti-retaliation policy.

of the right to request an accommodation.

• Communicating the policy to all employees.

• Training employees, particularly supervisors,

Businesses with 15 or more employees also

on the meaning and impact of the policy.

may be required to provide employees with a reasonable religious accommodation under Title

Although anti-retaliation provisions are often

VII. State law may require similar accommodations

included in equal employment opportunity and anti-

for smaller employers. Covered employers should

harassment policies, a stand-alone anti-retaliation

consider implementing and maintaining a religious

policy is important because retaliation can occur

accommodations policy to create uniform standards

in several contexts other than discrimination or

and procedures for responding to accommodation

harassment (such as following a complaint about

requests. The undue hardship defense is also

wage and hour violations). All employees should

available in religious accommodation cases, but is

be trained on anti-retaliation policies to prevent

measured by a different standard than under the

retaliation from occurring and to encourage the

ADA.

early resolution of complaints.

44

SICK LEAVE, HOLIDAY, VACATION, AND PAID TIME

and Seattle (among others), all have enacted

OFF POLICIES

mandatory paid sick leave laws. Employers should be familiar with local laws in any jurisdiction where

Although private employers are not required

they are based or their employees work.

by federal law to provide employees with paid holidays, vacation or sick days, many employers

Many mandatory leave laws apply to small

do so.

employers. For employees such as outside sales representatives who work primarily from home,

However, employers that are party to certain

their state of residence may be considered their

federal government contracts also are required to

place of work.

give paid sick leave beginning as of January 1, 2017.

Moreover, laws in an increasing number of states

Employers

typically

designate

paid

holidays

and municipalities require employers to provide

company wide. Some employers provide a certain

paid sick leave or other equivalent leave. For

number of vacation days or sick days depending

example, California, Connecticut, Massachusetts,

on the employee’s job classification or tenure with

Oregon, Vermont, and the District of Columbia,

the organization. Once any type of leave is offered,

as well as New York City, Newark and other cities

employers should have a policy clearly explaining

in New Jersey, Chicago, Los Angeles, Minneapolis,

its use and limitations.

San Diego, San Francisco, St. Paul, Philadelphia,

45

Best practice is to inform employees of:

or of a family member, or for the birth or adoption of a child.

• The designated paid holidays.

• The number of vacation and sick days an

Under the federal Family and Medical Leave Act

employee may receive and how this time

(FMLA), employers with more than 50 employees

accrues.

must offer unpaid family or medical leave to

• The policy for requesting approval of vacation

eligible employees for:

days and notifying the employer if an employee must take a sick day.

• Care of a child, including birth of an employee’s

• Whether vacation or sick days may be carried

son or daughter and placement of a son or

over from year to year; [However, please note

daughter with the employee for adoption or

that some states (such as California) prohibit

foster care.

so called “use it or lose it” vacation policies in which accrued vacation that is not used by the end of the year is forfeited and some states or

• Care of a spouse, son, daughter, or parent with a serious health condition.

• A personal serious health condition that

municipalities require the carry over or annual

prevents

pay out of sick time (such as New York City).]

essential job functions.

• Whether an employer pays out any unused but accrued vacation or sick days on termination and the conditions under which an employee can receive payment.

the

employee

from

performing

• A qualifying exigency arising out of the military service of a spouse, son, daughter, or parent.

• Care of a military member with a serious injury or illness.

Some employers maintain policies that provide

For most purposes, FMLA leave extends up to 12

paid time off (PTO) that can be used for multiple

weeks during an employer-specified 12-month

reasons at the employee’s discretion, for example,

period, but up to 26 weeks of leave are available

vacation, illness, or other personal reasons. In

to care for a military family member.

many states, including California, PTO is subject to the same rules as vacation for purposes of accrual

Although most early-stage startups are not

and payout.

covered by the FMLA, they should be aware of these requirements as their businesses grow.

Although rare, some startups have enacted

In addition, some jurisdictions require smaller

mandatory vacation policies to prevent burnout

employers not covered by the FMLA to grant

and for other cultural reasons.

similar leave.

FAMILY AND MEDICAL LEAVE Federal and many state laws require employers of a certain size to provide unpaid leave to employees (subject to length of service and other requirements) due to medical reasons of their own

46

47

SOCIAL MEDIA, INTERNET AND EMAIL MONITORING MONITORING AND SURVEILLANCE

• the amount of time employees spend on the internet while at work.

Some employers conduct electronic monitoring and

• Blocking employee access to inappropriate or

surveillance of their employees to protect against

illicit websites from the employer’s computer

employee

systems.

misconduct,

manage

productivity,

and increase workplace safety. Employers must comply with various overlapping laws (including

• Tracking employees’ keystrokes while using an employer-owned computer.

federal and state wiretapping, privacy and data

• Conducting video surveillance of the workplace.

security, and labor and employment laws) when

• Tracking employees using a global positioning

conducting electronic workplace monitoring and surveillance or they risk substantial legal and financial exposure.

system (GPS).

• Tracking

employees’

movement

in

the

workplace through electronic employee IDs, smartcards, or personal access codes.

Although not typical of the collaborative culture in

an

early

stage

startup

environment,

as

Many employers monitor their employees for

businesses grow and develop, employers may

several reasons, despite the risks. To limit liability

have legitimate reasons to conduct electronic

for monitoring employee activities, employers

monitoring and surveillance of their employees.

should enact a strong policy and consistently

For example, electronic monitoring of email and

adhere to it, including provisions such as:

internet activity may be appropriate for a business employing remote workers or using a virtual office environment.

• Notice to employees that there is no expectation of privacy in the use of their employer’s e-mail or computer systems.

Many employers conduct electronic workplace

• Explaining

the

business

purpose

of

the

monitoring and surveillance of employees, such

monitoring policy, such as the protection of

as:

confidential and trade secret information.

• Prohibiting

• Reviewing employee emails, including:

electronic

communications

for

any harassing, discriminatory, or retaliatory

• emails sent to or from the employer’s email systems; and

purpose.

• Restricting personal use of the employer’s

• emails sent to or from an employee’s

email and computer systems.

personal email account (such as Gmail,

• Notice of location of surveillance activities,

Yahoo, or Hotmail) accessed by the employee

which should not include lunch or break rooms

using the employer’s computer systems.

to ensure compliance with the NLRA.

• Monitoring internet usage, including: • websites

employees

visit

using

the

employer’s computer systems; • content posted by employees on the internet (for example, on blogs and social networking sites), whether at work or from home; and 48

Employers should not, however, enact policies that they do not intend to enforce, such as a blanket ban on the personal use of the company’s email systems.

SOCIAL MEDIA USE

• The policy applies only to employees’ use of social media in the workplace and with

The use of social media by individuals in and

the company’s IT resources, or also address

outside of the workplace is widespread and

employees’ personal use outside of the work

continues to grow, especially in the startup world.

environment.

However, improper and inappropriate use by

• The

policy

explicitly

references

employee

employees carries tremendous legal risk for the

rights under the NLRA and explain that it is not

employer, including:

intended to preclude or dissuade employees from engaging in Section 7 activity, including

• Potential

unauthorized

company’s

confidential

disclosure and

of

the

proprietary

discussing wages or other terms and conditions of employment.

information.

• Infringement of third-party intellectual property rights.

Employers seeking to discipline employees for social media posts must consider the application

• Employee harassment and privacy violations.

of the NLRA to this area. This applies particularly to

• Violation of securities laws if posts refer to

nonunionized employers that may not be as well-

prospective or ongoing funding rounds.

versed in the NLRA as employers with unionized workforces. Employers that discipline or discharge

Establishing a practical and enforceable social

employees for the content of social media posts

media policy allows an employer to minimize risk

may face allegations that the employees’ activity

associated with employee use of social media by

was protected by the NLRA and that the discipline

proactively defining acceptable and unacceptable

or discharge was unlawful.

uses in the context of the employment relationship.

To craft an effective social media policy, an

Additionally, employers that hire employees to

employer should carefully consider the purpose

maintain the company’s social media accounts or

and objectives of the policy. Instrumental to this

confer those responsibilities on certain employees

determination is a balancing of factors including

must consider account ownership issues.

the employer’s attitude toward social media use in its workplace, the nature of the employer’s business, characteristics of the employees and workplace environment, and legal restrictions on chilling concerted activity protected under the NLRA in both unionized and nonunionized workplaces.

For example, the employer should consider whether: • Employee use of social media is encouraged, discouraged, or simply tolerated.

49

BRING YOUR OWN DEVICE (BYOD) POLICIES Many startups and new businesses do not have the resources to provide mobile phones, laptops, or other technological devices to their employees.

Similarly, many employees at startups do not want to carry multiple devices, as the lines between their work and personal lives are often blurred.

• when the employer may access, monitor, wipe, or disable an employee’s device; and • what data or folders the employer may access.

• Institute procedures for reporting lost or stolen devices.

Employers therefore allow and may even require

• Prohibit off-the-clock email access and work

employees to use their own mobile devices for

by nonexempt employees unless authorized or

work-related purposes, and may allow access to

track the time the employee spends conducting

the company’s server through individually-owned

work on the mobile device outside of normal

devices. If an employer adopts a bring your own

working hours, either of which is admittedly

device (BYOD) policy in the workplace, it should:

challenging if not impractical in the startup environment.

• Implement

security

measures

to

protect

company data and confidentiality.

• Clearly define the limits of an employee’s expectation of privacy on their personal devices used for work purposes, identifying:

• Clarify the policy for reimbursing employees for costs associated with using the device for business purposes.

• Specify procedures for deleting company data on termination of employment.

CODE OF CONDUCT, CODE OF ETHICS AND CONFLICTS OF INTEREST A

workplace

conduct

policy

is

not

legally

or expectation of employment for any specific

required, but notifies employees about employer

term, or limits the employer’s right to terminate

expectations for acceptable workplace activity.

employees for anything other than cause. In some

Many startup business owners are hesitant to

jurisdictions, a rigid progressive discipline policy

formalize a workplace conduct policy, fearing

may transform an at-will employment relationship

that it will hamper creativity and collaboration, or

into a promise not to be terminated except for the

culturally is inconsistent with the startup culture.

infractions enumerated in the policy.

However, especially for those less seasoned in the

In

role of employer, if corrective action or termination

employers also choose to implement a code of

is required, a workplace policy gives the employer

ethics or conflict of interest policy for employees

an objective basis for disciplining or terminating

even though federal law does not require it. A

an employee who engaged in prohibited behavior.

code of ethics allows an employer to promote

To be effective, employers should tailor the list of

professionalism and raise awareness of potential

prohibited activities so that the policy is consistent

conflicts of interest.

addition,

many

privately

held

for-profit

with the actual expectations and culture of the company. In addition, employers should be careful not to craft a policy that creates a promise

BUSINESS EXPENSE AND REIMBURSEMENT POLICIES Employees frequently incur out-of-pocket expenses while traveling for work and performing their regular job duties. Many employers implement an expense reimbursement policy to establish

• Which expenses require prior authorization by a manager or supervisor.

• Who will approve or audit reimbursement requests.

guidelines for reimbursement of these businessrelated expenses. When drafting or reviewing an

For startup businesses, especially when cash

expense reimbursement policy, employers should

flow is limited and the business may be seeking

consider:

investor funding, it is important to establish prudent policies for expense reimbursement. If

• Which expenses the employer will reimburse, considering any applicable state law.

• Whether the employer will require employees to submit receipts or other substantiating

the business adopts a policy, it must consistently apply the policy to all employees and clearly document the reasons for any exceptions to the policy.

documentation.

51

PERFORMANCE REVIEWS AND TALENT MANAGEMENT Periodic employee performance reviews can

Poorly executed performance reviews, however,

be valuable tools to help employers improve

can result in increased litigation risk by providing

performance and employee morale at their

evidence for employees to use in employment-

company. While not the primary focus of most

related lawsuits against their employers, and are

startup business owners, many of whom have

worse than having no performance reviews at all.

never been employers, performance evaluations

Employers should ensure that if they implement a

become more important as the workforce begins

performance review policy they:

to expand and may be beneficial when used: • Train managers to conduct and document • As a basis for employment decisions, such as promotions and demotions.

• Evaluate employees’ performance using specific

• To improve the performance of underperforming employees.

• To

document

effective and honest reviews. criteria.

• Provide as much detail as possible, supported

employee

progress

at

the

company.

by examples.

• Consider whether to incorporate employee feedback.

Effective performance reviews can reinforce an employer’s business principles and priorities and help foster the skills the employer wants its employees to develop. They also can help employers gather information needed to improve individual

employee

performance.

52

and

overall

company

• Avoid emotional, sarcastic, or superfluous comments.

WORKPLACE NOTICES AND POSTINGS Employers must notify employees of their rights

The

agencies

charged

with

enforcement

of

under many federal, state and local employment

each statute generally provide free links to the

statutes. Many of these statutes mandate notice

individual posters. However, to avoid having to

through the display of posters in the workplace.

download and post numerous individual posters,

While many federal anti-discrimination statutes

many employers purchase combined federal and

do not apply to employers with fewer than 15

state workplace posters from commercial internet

employees, others, such as the FLSA or the OSH

services. For an additional subscription fee, these

Act, apply to all employers regardless of number

services typically offer updates annually or when

of employees.

the posting regulations change.

There is no single way for employers to provide notice to remote workers. Many of the poster rules were developed before the advent of remote worksites. Where remote workers visit central offices, it is common for employers to simply post in that central office. For those employees who do not visit central offices, some rules permit alternative notification for applicants and employees through electronic posting, direct mail, or email, but many do not specify alternatives.

In the case of electronic job postings and applications, the DOL recommends the employer place a prominent notice on the website where the job postings are listed stating that “Applicants have rights under Federal Employment Laws” and link to the posters, in addition to posting them in the worksite.

As a best practice, employers with remote location employees should consider: • Providing

email

or

intranet

notice

when

permitted.

• Mailing notices that must be physically posted at each worksite to the individual responsible at each worksite (including individual employees working from their home).

53

HARTUNG SCHROEDER LA W FIRM

303 Locust Street, Suite 300 Des Moines, IA 50309 TEL: +1 (515) 282-7800 FAX: +1 (515) 282-8700 www.hartungschroeder.com