General Business

Human Capital is Mission Critical

Emerging growth companies must consider employment law issues.

Because the human capital of startup and emerging growth companies is mission critical to success, these business owners should pay close attention to employment law matters, including the following five tips.

1. Know the difference between an employee and an independent contractor. Companies may prefer hiring independent contractors rather than employees for a variety of reasons, including perceived cost efficiency and preservation of financial resources. However, the law (and not the employer) dictates who is characterized as an independent contractor and who is an employee, regardless of the employer’s classification. Employee misclassification can mean penalties and fines from agencies within the state of employment, the U.S. Department of Labor, or the Internal Revenue Service – and can also mean costly litigation. 

2. Draft your workplace policies and procedures to protect your business. Although companies with only a handful of employees often hesitate to use limited resources to prepare an Employee Handbook, clear policies regarding issues such as equal opportunities, harassment and protected leaves of absence are essential. Startups should prioritize creating an Employee Handbook so managers and employees understand their rights and responsibilities.

3. Avoid misclassifying employees as exempt. A common misconception, particularly among early stage companies, is that all salaried employees are exempt from overtime payment requirements. But this has little to do with receiving overtime pay. A company’s failure to pay overtime and give appropriate breaks to non-exempt employees can be costly, resulting in back pay, penalties and fines. Drafting well thought-out job descriptions help companies properly classify employees.

4. Avoid the pitfall of perceived free labor. Internships are an increasingly popular way for startups to recruit talent. Eager students work without pay to gain experience and build their resumes; companies secure sorely needed resources without paying a salary. But, in most jurisdictions, unless the internship is similar to training that would be given in an educational environment and primarily benefits the student, interns likely must be paid at least minimum wage and are subject to applicable wage and hour laws.

5. Use restrictive covenants to protect intellectual property. Trade secrets and intellectual property are integral to a startup’s business. Companies should consider restrictive covenant agreements, such as non-disclosure, non-solicitation, non-competition agreements and/or confidentiality agreements, for any potential employee. An enforceable restrictive covenant should be narrowly tailored to protect a startup’s business interests while being reasonable enough that it will be upheld in court.

About the Author: Lindsay Sorin is an attorney in the Newark office of Littler Mendelson, where she counsels employers in all aspects of labor and employment law. She can be reached at [email protected].

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