Start-ups and the Employment Law Gauntlet
One of the big positives about working at a large firm is access to legal experts in disciplines that interrelate with key issues that our start-up clients face. I was rehashing some conversations I recently had with founders and start-ups on employment issues and wanted to highlight some issues of which start-ups should be aware. In my research, I unearthed this gem of an ebook that succinctly lays out the “Five Common Employment Law Hazards for Start-ups” by one of our resident employment law experts – Mike Rosen. Download the ebook ( 5 Employment Law Hazards for Start-ups__eBook_info.pdf)
Mike is right when he says that faced with “limited personnel and monetary resources… many emerging companies employ a band-aid approach to HR-related issues”. With that in mind, he sets out the areas where employment related disputes for venture-backed start-ups most consistently arise. Keep reading for a synopsis of the 5 major areas where venture-backed start-ups stumble and expose themselves to disputes as they relate to employment law...
1) Liability during the hiring process – You need to temper the zeal of bringing in new recruits with having a well managed hiring process. Have you thought about what pre-existing obligations as to non-disclosures, non-competes, confidentiality agreements etc. from a previous or existing job/venture that your potential hires may be subject to? Is there a well-documented, clearly defined understanding between you and the hire as to their responsibilities to his/her previous company? You don’t want to saddle your fledgling venture-backed start up with litigation from an older more established company because of potential hires who are breaking their promises and divulging what might be confidential information to you.
2)Liability due to the hiring arrangement - So you have found some individuals you want to bring on. Have you clearly documented the understanding between the start-up and the new hires as to their responsibilities, their compensation, and the contingencies that would make the relationship void? Are the compensation arrangements clearly documented? If compensation is in the form of equity, is there a vesting period? Does such an agreement clearly claim that it is the only and final agreement between the parties and overrules any coffee shop “conversations” you might have had the potential hire where you promised to give them 50% of the company?
3) Liabilities due to misclassification of your hire: - The hire can be either an employee or an independent contractor. Having the person qualify as an independent contractor means you can avoid the federal and state laws governing an employment relationship. However, a problem arises when a company misclassifies a hire as an independent contractor or takes steps that would destroy that classification and switch it to an employee – employer relationships in the eyes of a judge. It can be expensive and time consuming to misstep on this classification and have an independent contractor later claim to be an employee and demand all the protections and benefits afforded to an employee under state and federal laws. It might in some cases be more worthwhile to set up your hires as employees rather than expose your venture-backed start-up to such a large risk.
4) Liability due to noncompliance with wage laws: - As a venture-backed start-up with limited resources you might want to defer payments to your employees temporarily for a greater reward further down the line. The problem is you might as a company run into formidable, state, and federal sanctions for taking such a course of action. In some states directors and officers of the company might be held personally liable for what could be considered withholding wages.
5) Liability due to Inadequate Protection of your I.P. – The use of standardized offer letters, NDAs, non-competes might be efficient but opens the door to IP squabbles and even worse, IP loss. Give special thought to agreements and try to tailor them based on the potential hire’s skill set and deliverables, and be sure to understand and implement a process that manages your I.P risk when bringing on new hires.
Long story short, this stuff is complicated. I’m a lawyer and I work with start ups day in and day out, but I’ll still talk to an expert to get a full and complete understanding of the risks in a particular legal area. More importantly, it’s more than just knowing the law, it’s the application of the law to the unique circumstances that impact your business and venture. You want to be able to take well reasoned risks on these issues and knowing what you are gambling with and the potential downsides are essential for growing your venture–backed start-up successfully.