Employment Law I: Founders Need to Get Ahead of Employment Law Issues

As enterprises grow, they demand more people power. And as they work to respond to that demand, enterprises inevitably encounter employment law questions. To avoid costly and damaging missteps, it is important for founders and leaders to understand the laws involved in the employer/employee relationship. 

“Employment law” refers to a set of legal rules, regulations and principles that govern the relationship between employers and workers in the workplace. This includes a very wide range of topics (such as hiring/firing, compensation and benefits, workplace safety and health, Civil rights/discrimination, harassment, and employee contracts), each of which may have a significant impact on the enterprise as it grows and operates. Consequently, founders and entrepreneurs should be vigilant about the relationships between the enterprise and its workers. At the same time, staying on top of these relationships can be difficult due to the complexity of the laws that are involved and the role they play. 

Employment laws aim to protect the rights and interest of workers, and they do this by ensuring that employers comply with legal requirements which are often enforced by government agencies. Some examples include the Fair Labor Standards Act, which establishes minimum wage and hour laws for employees, the Americans with Disabilities Act, which prohibits discrimination against individuals with disabilities, Title VII of the Civil Rights act, which prohibits workplace discrimination, and state laws that include Workers Compensation requirements. Each of these laws regulate the employment relationship, although in different ways and to varying degrees. 

Failure to comply with employment laws can result in legal disputes, including litigation, financial penalties, and damage to the enterprise’s reputation. Startups face a particular threat in this area because they often do not have resources to hire a dedicated HR person to handle legal compliance. In addition, the informal culture of many startups can make it difficult to ensure that their hiring, firing, compensation, and benefit packages are in line with legal requirements. 

Some of the common areas of concern for startups include minimum wage and overtime requirement, employment classification (specifically, whether a worker is an employee or independent contractor), tax compliance, and use of equity as part of an incentive program. Other areas of concern involve discrimination and harassment or workplace safety claims. Disputes in any of these areas can lead to lawsuits, fines, and regulatory intervention. When processes like these begin, the time and energy they take from a startup can be devastating. 

Even while the concerns are significant, they can be managed. This begins with a comprehensive overview of employment policies, practices, and procedures to identify areas of legal risk, ensure compliance with federal, state and local laws, and assess the overall HR strategy. These assessments are often called an “Employment Law Audits” and they provide a road map of where corrective steps may be needed – avoiding the disputes and conflicts that can derail success – and in many cases how to effectively protect the enterprise’s business and intellectual property. 

We are planning a series of blogs with additional information on employment law topics that we hope are helpful as founders begin to grow their enterprises. The first topic, found below, discusses employment agreements.

Thinking through when you need an employment agreement.

Employment agreements are an effective way to manage the employee/er relationship. 

Here are some things leaders should consider when thinking about putting employment contracts in place for their employees and contractors. 

An employment contract serves as a legal agreement between the employer and employee and contains the terms and conditions of the working relationship. Employment contracts are important for several reasons: 

1. Clarify expectations: The employment contract describes work responsibilities, compensation, benefits, work hours, at-will status, and other terms of employment. This makes it less likely for misunderstandings to occur and ensures both parties share an understanding of what can be expected. 
2. Protect rights: The employment contract may also include provisions that protect each parties’ rights, such as confidentiality, non-compete rights, and intellectual property rights. These are important provisions for any enterprise but have a heightened importance for most startups depending on new innovations as part of their business strategy. 
3. Define a mechanism for dispute resolution: The employment agreement can provide an effective dispute resolution mechanism should a disagreement arise. This may include mediation or arbitration provisions before litigation, which is helpful in most cases, as well as to determine where any litigation must be filed and heard, which can be very helpful when remote workers are involved. This means that an employer can require any claims to be heard in a court near the employer’s offices, instead of somewhere remote and out of state. 
4. Comply with local legal requirements: Employment contracts may be required under local laws in some jurisdictions. Even when they are not, they are still a good practice to have in place to ensure compliance. 

Putting employment contracts in place is easiest at the beginning of the employment relationship before the employee starts working. It is possible to put the agreement in place after the relationship has begun, but employers must keep in mind the need to advance additional consideration for the new agreement. 

Employment contracts will often contain a number of common elements, although they may differ depending on the specific job and industry, including: 

1. Job title and description: stating the employee’s responsibilities and expected performance standards and goals. 2. Compensation: stating the salary or wage the employee will receive, along with any. Bonuses, commissions, or other forms of incentives. (Note that stock options will be treated in a separate agreement.) 
2. Benefits: where details on any benefits (health insurance, retirement plans, leave and other perks). 
3. Employment terms: this section describes the length of employment, including start and end dates, if applicable, and any termination clauses. Typically, this would include discussion of termination for cause or without cause – and without cause is most common. 
4. Confidentiality Clause: any requirements for maintaining confidentiality, which are extremely important when the employee has access to proprietary information, will be included. 
5. Non-compete clauses: this section will refer to the reasonable limits placed on an employee’s ability to work for a competitor after their employment ends. State laws regulate non-compete clauses, so employers should be certain that they can rely on the language in their agreements. 
6. Intellectual Property Rights: the “work for hire” doctrine will most often control when an employee creates intellectual property for an employer. The employment contract should clearly document the parties IP rights in light of this doctrine. 8. Dispute resolution and forum selection: this section should contain a framework for resolving disputes as efficiently, and economically, as possible. Including choice of law. 

Employment contracts offer clarity to both employers and employees and can help you avoid conflict in the future. The lawyers of Cutting Edge Counsel are available to meet with you to explore how we may be able to assist you with your employment law questions. Schedule a free consultation.