Five Legal Mistakes California Startups Should Avoid With Their Employees

Some of the most common legal mistakes that California tech startups and other small employers make with their employees are also the easiest to avoid:

Terminating an employee without consulting an attorney about the circumstances of that termination. Just because you believe that you have valid reasons for terminating an employee, who also happened to be “at will”, doesn’t mean that the same employee won’t be able to make it look like he was fired for an unlawful reason. Suppose you fire someone for poor performance, but that employee happened to complain about sexual harassment, or he filed a workers compensation claim just a few weeks or even a few days earlier. Will you be able to show, given this suspect timing, that the true reason for termination was in fact his performance, and it wasn’t retaliation? Or suppose you lay off a minority employee due to your changing needs or budget issues, but then just a couple of weeks later you get a new (and unexpected) round of funding and you post the same position back on Linkedin and end up hiring a white employee. Will that laid off employee come back and claim racial discrimination? These are just a few random examples of how a seemingly just termination can look less than entirely lawful. Consulting a reputable employment lawyer about your termination decisions before making that decision can make a difference between having a clean break-up with the employee in question v dealing with the stress, the expense, and the hassle of litigation. Remember – what matters is not what actually happened from your perspective, but what the employee can prove happened or most likely happened given all the surrounding circumstances.
Misclassifying an employee as exempt v hourly. To be salaried and exempt from overtime pay in California, your employee has to satisfy very specific requirements. In the context of tech start-ups, the most common exemption is an executive / managerial exemption. However, just because you label someone at your company as a manager, doesn’t mean that that employee is correctly classified as exempt, unless over half of his job duties actually involve managerial work. This type of misclassification can be particularly costly, if that employee frequently works more than 8 hours per day without being paid overtime, which is very common in start-ups, and who will later be able to claim that he worked hundreds of fifteen-hour days for which he wasn’t paid correctly.
Misclassifying an employee as a contractor. Referring to someone as a contractor and even having them sign a well-drafted contractor agreement alone doesn’t make them an independent contractor in California, unless they satisfy the now infamous “ABC” test. Very few employees meet this stringent test. Incorrectly classifying a worker as a contractor can lead to liability for unpaid taxes, contributions to social security and Medicare, unemployment benefits, and other penalties, in addition to the increased likelihood of being audited by the Department of Labor. A reputable employment attorney should be able to help you determine whether you can lawfully classify a particular worker as a contractor.
Paying your employees with equity only. Paying your employees (no cofounders) with equity only is generally unlawful, and those types of employees will be able to claim at least minimum wage for every hour they worked for your start-up, in addition to overtime, and any applicable interest and penalties associated with those claims. The fact that you are not able to pay wages due to lack of funding is not a legal defense, and it’s not going to absolve you of liability for this type of violation.
Sending emails to an employee, which can be later used as proof of discriminatory / retaliatory motive on your part. Some of the specific examples of this we have recently seen include: “this is really not a good time for you to take medical leave” (disability discrimination), “your ways of thinking seem to be outdated” (potential age discrimination), “is this even a real disability?” (skepticism suggesting potential disability discrimination), “complaining isn’t going to help your future career around here” (retaliation for making a harassment complaint).

Avoiding the above five basic employment law mistakes will significantly reduce the likelihood of you having to deal with any employees claims.