I was recently invited to speak on a legal panel at a conference for founders of start-up and emerging companies. While I initially thought the topics of conversation would focus heavily on issues such as venture capital financing and federal and state securities laws, I quickly realized that the crowd was particularly interested in several aspects of employment law. The crowd feedback was intriguing, but not surprising as many founders highlighted the fact that they wear many hats and employment law compliance oftentimes falls behind other operational concerns.

Issues such as raising capital, product development, and marketing (among many others) are certainly important focus points for start-up organizations. However, as these organizations grow, hire employees, and expand operations to multiple states, start-up and emerging companies should put appropriate attention on employment law compliance. Indeed, the failure to proactively do so can lead to costly legal disputes, reputational damage, and in some instances, personal financial liability. This article will summarize a few, but certainly not all, pertinent employment law considerations that start-up and emerging enterprises should keep at the forefront.

Compliance in Hiring

One common mistake start-up and emerging companies should avoid is operating under the belief that employment law compliance begins on an employee’s first day of work. In actuality, potential legal exposure can arise with the publishing of a job posting and/or during the interview process.

For example, many states and/or municipalities have adopted “ban the box” laws, which generally prohibit employers from requesting conviction and arrest information at the application stage of the hiring process. Some states have also implemented pay transparency laws, which may require employers to provide certain salary and benefits information in a job posting. In a similar vein, some states have adopted laws prohibiting employers from requesting an applicant’s pay history. These are only a couple of the potential legal issues that employers may encounter during the application stage of the hiring process.

Interviews can also be tricky:

Are you married? Do you plan to have children in the near future? Have you had any recent medical problems? What church do you attend? Are you from another country?

These questions are innocuous, right? Perhaps in a conversation amongst friends, but these inquiries can be problematic if asked during the employee screening or interview process. Accordingly, start-up and emerging companies should take caution when formulating interview questions and should specifically avoid questions that could be perceived as discriminatory based on protected characteristics such as race, gender, age, disability, religion, national origin, etc.

Record keeping in the hiring process is another area that start-up and emerging companies may overlook. Among other recordkeeping obligations, employers may be required to maintain records of applications, resumes, interview notes, screening processes, and any other information that explains the decision-making process and/or why certain applicants were selected for a position.

Wage and Hour Compliance

Start-ups often operate under tight budgets, making it crucial to understand and comply with wage and hour laws from the outset. Misclassifying employees as independent contractors, failing to pay overtime, or neglecting minimum wage requirements can result in hefty fines and other legal consequences, including individual liability for certain officers of a company.

Start-up and emerging companies should invest time and resources into learning how the law defines exempt versus nonexempt employee status so that employees can be classified correctly from the outset. These employers should also conduct a thorough review of their compensation structures to ensure compliance with federal, state, and local laws, and should likewise consider the implementation of time-tracking systems that document hours worked, lunch breaks and remote work. Additionally, staying informed about changes in legislation and seeking legal counsel when expanding operations into new states can help growing companies maintain compliance with wage and hour laws.

Employment Agreements and the Protection of Trade Secrets and Confidential Information

Many start-up companies wrestle with whether to require their employees to execute employment agreements. On one hand, employers want to ensure the protection of confidential information and trade secrets, and they may also want to implement post-employment restrictive covenants for certain key employees. On the other hand, employers may not deem it necessary to have any and all employees sign robust and detailed employment agreements.

Adding to the confusion, laws related to noncompete and non-solicitation agreements are rapidly changing. Indeed, the Federal Trade Commission has issued a new rule all but banning noncompete agreements, and an increasing number of states have implemented laws curbing employer use of noncompete and non-solicitation agreements.

Complexities aside, start-up and emerging companies should take appropriate steps to protect their intellectual property, trade secrets, and confidential information. Considering this rapidly evolving area of the law, these companies should seek legal counsel not only when considering whether to implement an employment agreement, but also when trying to determine which employees should be subject to an employment agreement.

Crafting an Effective Employee Handbook

Drafting and implementing an employee handbook with well-crafted employment policies is crucial for start-up companies. An employee handbook serves as a foundational document that outlines the company's policies, procedures, and expectations, thereby establishing clear guidelines for employees. This clarity helps mitigate potential disputes and ensures consistency in how issues such as discipline, investigations, and leaves of absence will be handled. Moreover, an employee handbook can provide legal protection by clearly communicating compliance with certain employment laws and regulations. By outlining policies on discrimination, harassment, safety, and confidentiality, the handbook helps the company demonstrate its commitment to a fair and legally compliant work environment. Distributing the handbook to new employees and having them sign an acknowledgement of receipt could best position the company to defend unemployment compensation claims following termination for policy violations.

There are a multitude of federal, state, and local employment laws, many of which vary significantly. The successful navigation of these laws is essential for the long-term success and sustainability of any start-up or emerging organization. The savvy start-up employer should prioritize compliance with employment laws and should likewise seek legal counsel to help avoid falling victim to an employment law gotcha.

For more information, contact Charles E. Bush II or any member of Ice Miller's Workplace Solutions Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.