As the entrepreneur of a startup, you wear numerous hats. In the frenzy of starting a business, it’s easy to overlook one of the most critical hats you’ll ever wear: employer. The following are five employment law pitfalls that every company founder should be aware of.
Related: 6 Important Areas of Law Every Business Owner Needs to Know
- 1 1. Define the terms “employee” and “independent contractor.”
- 2 2. Preserve your commercial secrets SECRET.
- 3 3. Determine which employees are exempt.
- 4 4. Create regulations and processes for your workplace to safeguard your business.
- 5 5. Determine if employment practices liability (EPL) insurance is appropriate for your business.
1. Define the terms “employee” and “independent contractor.”
Numerous businesses choose to hire independent contractors over staff. Employing independent contractors often results in lower overhead costs, as companies are not required to adhere to wage and hour regulations or to cover contractors under their worker’s compensation or medical insurance policies. Many employers, however, incorrectly identify their employees as independent contractors in order to dodge these commitments, putting their businesses at risk of costly litigation.
Consider the following variables when selecting how to categorize your employees:
Contractors on their own:
- The individual providing services is involved in a profession or business that is unique from that of your business. If you own a technology company and hire a trainer to teach networking skills, for example, the trainer’s business is distinct from yours.
- To do the activity, the individual supplies and utilizes their own tools and equipment.
- The individual may conduct the work whenever, when, and however they like.
- The work requires particular talents.
- The organization establishes guidelines and maintains control over the manner in which the task is executed.
- The individual makes use of the employer’s tools and equipment.
- The employee completes their work at the employer’s premises and/or according to the employer’s timetable.
- The individual is compensated on a time basis (hourly, daily rate, etc.) rather than by the project.
- The employer has the right to fire the employee at any time and for any cause.
2. Preserve your commercial secrets SECRET.
A trade secret is defined in California as knowledge, such as a formula, pattern, compilation, program, gadget, method, technique, or process, that derives economic value from its not being generally known to the public and is protected by reasonable efforts to maintain its secrecy.
Essentially, if you generate knowledge such as customer lists, process procedures, or other formulas, it can be protected as a trade secret as long as reasonable attempts are made to keep it hidden. This may involve storing the information in a password-protected location, disclosing it only to those with a need-to-know basis, and avoiding posting the information in a public location (like the Internet).
It is strongly suggested that all workers sign confidentiality agreements stating the information the company regards to be its trade secrets and promising not to expose it.
Related: 7 Types of Insurance You Need to Protect Your Business
3. Determine which employees are exempt.
Exempt employees are those who are not subject to overtime pay requirements. In general, exempt employees in California must earn at least double the state minimum wage for full-time employment. These most frequently include executives and professionals. However, they also include some types of personnel, such as software developers, independent salespeople, and creative arts workers. By creating well-thought-out job descriptions, businesses may classify their people more accurately.
4. Create regulations and processes for your workplace to safeguard your business.
Employers frequently provide computers, email, and free Internet access to their employees. What is less prevalent are well-written company policies governing the usage of these technologies. To protect yourself, ensure that your policies prohibit employee abuse (such as accessing restricted websites or sharing confidential information), inform employees that the company can and will monitor their use, and emphasize that these systems are intended to enhance their work, not to be used for recreational purposes.
5. Determine if employment practices liability (EPL) insurance is appropriate for your business.
Employing in California is fraught with dangers that can end in expensive lawsuits. Consider whether it makes sense to purchase an EPL insurance coverage to cover employment claims. Because not all policies include the appropriate coverage, ensure that your policy covers the types of disputes that concern you the most. For instance, if your business has a large number of employees, coverage of class lawsuits may make sense.