Employment Issues For Start-Ups

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CONTENTS:

• Hiring Employees
• Personnel Policies and Coverage of Federal Laws
• Confidentiality
• Wage Considerations and Independent Contractor Issues

Many small business owners give short shrift to employment issues. Afterall, there are more important things to do, like grow your business. However, the legal issues involved in hiring and retaining employees can almost certainly create pitfalls for the unprepared small business owner. Having a proper employment strategy in place before you hire your first employee can save you a good deal of time and money.

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Part I: Hiring Employees

Employers can establish two different types of employment relationships. There are at-will employment relationships and contractual relationships (called "term employment"). An at-will employment relationship is a less formal and more common means of hiring employees. The main feature of an at-will employment relationship is that it may be terminated by either party for virtually any reason.

A contractual relationship is a more formal agreement between the employer and employee and is usually written. A contractual agreement means that both parties are obligated to adhere to the terms of the contract for a certain period of time. Most contracts that govern a contractual relationship contain a discharge provision that allows the employer to dismiss the employee for certain defined reasons.

Occasionally, at-will employees will claim they are contractual employees and vice versa. It is, therefore, advisable to consult an attorney before you enter into either of these employment relationships so that both you and your employee have the same expectations and obligations.

In today.s competitive job market, the choice of the employment relationship is crucial. While the at-will relationship gives employers flexibility in size and scope, it also allows employees to leave your company easily if they find a higher-paying job. A contractual relationship is not a guarantee of retention for an employer, but it may provide the employer with an opportunity to include certain restrictions designed to retain an employee or prevent him or her from damaging your company by performing the same work for a competitor. Thus, an employment contract may be especially useful if your wages are not competitive, or if you view a certain employee as particularly valuable.

There are times, however, when an at-will relationship may be necessary. When extending a written offer for at-will employment, make sure you do not inadvertently turn it into a contract. An outright statement that the employment relationship is at-will, while not always palatable to the employee, may prevent a claim that a contract was formed.

The Employment Contract

A formal employment contract can be particularly useful in attracting and retaining highly skilled employees. There are some basic terms that should be included in every employment contract:

Duration: A contract should define the expected duration of the agreement. However, some contracts may be indefinite until terminated in accordance with the terms of the contract (for example, when a certain set of goals are met).

Position, Title and Duties: A clause which defines an employee.s position, title and duties is a helpful way of clarifying the scope of the employee.s duties and his or her place in the company hierarchy. However, if you need an employee to wear a number of hats, you may not want to make this clause too restrictive. Additionally, issues regarding confidentiality of the company.s secrets should be addressed in Part III: Confidentiality .

Compensation: Compensation is, of course, the most important (and sometimes the most contentious) issue between employers and employees. Therefore, it requires the most clarification. If the agreement addresses only a base salary, one issue that should be resolved is whether that salary may be adjusted with any regular frequency (e.g. annually or pursuant to a regular evaluation). Other forms of compensation which are especially important for high-tech and Internet small businesses are stock option and profit sharing incentive plans:

Terminability: There are several different permutations of termination clauses in employment contracts, the most common of which allow for termination for "cause." The termination section should also address the employee.s right to terminate the relationship and any severance package to be granted.

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Part II: Personnel Policies and Coverage of Federal Laws

Although there is no law which requires an employer to draft employee policies, such policies can be useful tools for establishing the parameters of the employer/employee relationship, the scope of acceptable behavior and the relative expectations of the parties to an employment relationship.

The wording of any policy should be precise and limited to ensure that you do not inadvertently create unintended rights or obligations. Also, it is important to remember that all policies must be enforced evenly and consistently.

The following are a few of the basic employee policies every employer should have:

• Equal Opportunity/Nondiscrimination Policy: Having a policy which states that the company is an equal opportunity employer and strongly enforces a nondiscrimination policy among its employers demonstrates, to employees and the courts, that the company is aware of these issues and has taken a first step toward addressing them.
• Sexual Harassment Policies: In light of changing social norms and the constantly evolving state of the law, many companies have struggled to adopt appropriate sexual harassment policies. At a minimum, the policy should contain the following:
• A definition of what is or may be considered sexually harassing conduct;
• A statement that such conduct is inappropriate;
• An explanation of the steps an employee may take to notify the employer of harassment;
• A statement that an employee who makes a complaint under the company.s policy will not be subject to any form of retaliation for having made the complaint.
• E-mail: High-tech companies are highly reliant on e-mail for internal and external communications. In order to ensure that your employees are not engaging in any improper or illegal conduct using your e-mail system, you may wish to implement an e-mail policy that allows the company to monitor e-mail without notice.

As noted, these types of employee policies can be exceedingly complex, and it is strongly recommended that you consult an attorney before drafting or adopting any of them.

Coverage of Federal Employment Laws

Not all federal employment laws apply to businesses with a small number of employees. The following is a summary of the major federal employment laws and their scope. Keep in mind, however, that many state laws offer similar or stronger protection for employees and apply such laws to companies not covered by federal law. Also be aware that all federal laws apply only to those businesses engaged in "interstate commerce." Without belaboring the point with legalese, chances are your company engages in interstate commerce, whether you know it or not. Once again, consult an attorney.

Title VII of the Civil Rights Act of 1964: Prohibits discrimination on the basis of race, color, sex, religion, national origin or pregnancy. The law applies to those employers engaged in interstate commerce with 15 or more employees.

Age Discrimination in Employment Act (ADEA): Prohibits discrimination against individuals 40 years or older. Applies to employers engaged in interstate commerce with 20 or more employees.

Americans with Disabilities Act (ADA): Prohibits discrimination against employees or potential employees with disabilities and mandates "reasonable accommodations" to employees with disabilities. Applies to employers engaged in interstate commerce with 15 or more employees.

Fair Labor Standards Act (FLSA): Sets minimum wage and overtime requirements for certain non-exempt employees (see discussion above). Applies to employers engaged in interstate commerce with certain gross sales.

Equal Pay Act: Prohibits paying employees different wages based on sex. Applies to employers engaged in interstate commerce who are subject to the FLSA (see above).

Family and Medical Leave Act (FMLA): Provides employees with up to 12 weeks of leave for the birth or adoption of a child or for a serious medical condition. Applies to employers engaged in interstate commerce with 50 or more employees located within a 75 mile radius.

Immigration Reform and Control Act: Prohibits employment of illegal aliens. Applies to all employers.

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Part III: Confidentiality

Internet and high-tech companies have special needs from their employees. Unlike brick and mortar companies, the value of your company will probably lie in certain intangible assets, like source code or your business process. By carefully formulating confidentiality and trade secret policies now, you can help protect the value of your business. To learn more about Intellectual Property issues, click here.

Confidentiality, Trade Secrets and Intellectual Property.How it Affects your New Employee

Protecting your intellectual property or confidential corporate information is essential to maintaining your competitive edge. The law can help protect these intangible assets through a variety of means:

Trade Secrets Act: Many states have adopted the Uniform Trade Secrets Act (UTSA) which protects particular information from being disseminated. Trade secret law can protect your source code, business plan or other proprietary information. The UTSA allows for injunctive relief (e.g. a restraining order) and/or monetary damages against the employee (or former employee) and the party to whom the information has been provided, in certain circumstances.

Duty of Loyalty: Some states legally require that employees owe their employers a "duty of loyalty." This duty imposes an obligation on the employee not to misappropriate the confidential information of the employer.

Contractual Provisions: It is a good idea to contractually obligate confidentiality at the beginning of the employment relationship so that the employee is aware of his or her duty to the company (For more information, see: Part II: Personnel Policies ).

Protecting Your Patent: Patents can protect new processes, machines, or methods of manufacture by giving the owner the right to exclude others from making, using, selling, offering to sell, or importing the patented product for a certain number of years. For companies that employ inventors or software developers, it is appropriate to require a invention disclosure agreement as a condition of employment. The agreement should do the following: 1) bind the employee not to disclose to third parties any inventions made by the employee during the term of employment; 2) assign any inventions made by the employee during the term of employment to the employer; and 3) require the employee to disclose any invention made prior to employment. This last requirement will prevent an employee from falsely claiming that an invention was created before his or her term of employment and is, therefore, the property of the employee and not the employer.

Copyright: A copyright protects the unique expressions of an idea or a creation, but not the underlying idea itself. Again, small business owners should be careful that the employer, not the employee, owns all copyrightable works and should draft an agreement with the employee stating the same.

Covenants not to Compete: A covenant not to compete is a useful tool that small business owners may use to prevent employees from taking valuable knowledge, skills, abilities or information to competing firms. These types of written agreements can prevent employees from competing with his or her prior employer in a defined geographic area for a specified period of time following termination of his or her employment. However, covenants must be carefully drafted in accordance with state law. Small business owners should consult an attorney before requiring an employee to sign a covenant not to compete.

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Part IV: Wage Considerations and Independent Contractor Issues

Wage Considerations

The Fair Labor Standards Act (FLSA) requires employers to pay a minimum wage of $5.15 to all employees and to pay hourly or "non-exempt" employees overtime for work in excess of 40 hours per week. A common (and often confusing) question is whether or not an employee is considered "exempt" from the FLSA, and, therefore, not eligible for overtime pay.

Generally, an employee is exempt from the FLSA if he or she is salaried (or meets a certain hourly minimum wage) and works in a "bona fide executive, administrative, or professional capacity." The FLSA also exempts professional computer programmers and computer systems specialists. The key distinction here is whether an employee.s job duties place him or her in an exempt position. Thus it is important to carefully define an employee.s job duties at the beginning of an employment relationship. For more information on the FLSA click here.

State law may impose additional wage and hour requirements that cover such topics as the method of payment, pay schedules, wage withholding.

Using Independent Contractors

Companies are increasingly turning to independent contractors to outsource their short-term technical needs such as programming and web design. However, employers should be careful of the following issues when dealing with independent contractors.

First, especially when outsourcing proprietary information or source code, make sure that you protect your intellectual property. You may wish to enter into an non-disclosure agreement that provides that all work performed by the contractor becomes the property of the company.

Second, employers should draw a clear distinction between employees and independent contractors. A number of state and federal laws governing benefits, discrimination and minimum wage issues will apply to independent contractors who are, in essence, employees regardless of a written or oral agreement to the contrary. Although there are many different tests and alternate factors to consider for each statute, an independent contractor will generally be deemed an employee for purposes of most laws if the employer retains a "right to control" the result, details and means of work. For more information, see the factors used by the Internal Revenue Service to evaluate whether an employee is an independent contractor.

All this can be a bit overwhelming for a small business owner. The temptation is to concentrate on growing your business and let the details work themselves out. However, formulating a comprehensive employment policy and ensuring compliance with applicable state and federal laws is smart, preventive work that can save you and your company precious time and money in the future. Good luck!