Five Employment Mistakes Young Entrepreneurs Make… And How To Avoid Them
By Shelby R. Schwartz
Esquire, Littler Mendelson, P.C.
Young entrepreneurs are often so excited about their business’ growth that they fail to plan adequately for the business of being an employer. Employment non-discrimination obligations can kick in for companies with as few as four employees, and all companies have to comply with wage laws.
Employment Mistakes
Here are five common mistakes that young entrepreneurs and start-ups make in hiring their first employees:
1. Believing that your business engaged an independent contractor when you have actually hired an employee: While it is true that engaging an independent contractor rather than hiring an employee has certain financial benefits, much of the time young entrepreneurs are surprised to find out the government and courts will consider them to be an employer. Simply signing a written contract designating someone as an independent contractor isn’t enough to prevent an employment relationship.
To avoid the obligations of employing personnel, a young entrepreneur should ask: Am I prohibiting this individual from working for my competitors or other businesses? Do I have the right to terminate our business arrangement on the spot? Can I tell this worker how, where, and when I want the work done instead of simply specifying the end result? Being able to answer these questions with “no’s” can indicate that an employer is creating a true independent contractor relationship. If a business needs to exert more control over the worker, it may need to commit to an employment relationship, even if a written contract is involved.
2. Using unpaid interns to do work: Managing the company’s social media presence, making photocopies, and getting coffee all sound like tasks that would be ideal to delegate to an enthusiastic and unpaid college intern. Unfortunately, the Department of Labor has grown increasingly strict about when for-profit companies are obligated to pay minimum wage to workers who perform these kinds of tasks.
While the DOL uses a formal six-part test to assess whether an internship can be unpaid, there is also a simple rule of thumb: is this intern more of a help or a hindrance? If an intern is mostly doing work that helps the company, like the tasks described above, he or she is an employee and needs to be paid minimum wage for the hours worked. Other types of experiences, like shadowing employees and attending industry networking events, may still meet the guidelines for unpaid internships and be permissible.
3. Forgetting about overtime compensation: Many young entrepreneurs have it in their head that “hourly equals overtime, salary does not,” and as a result fail to pay any heed to whether they owe their full-time employees overtime compensation. Overtime rules, however, are not quite that simple. Generally, employees are owed an overtime premium for any time they work over 40 hours per week.
There are, however, categories of employees who fall outside that rule – doctors, executives, many commissioned salespeople, and others are not entitled to overtime wages. It is important, however, to analyze each employee’s specific duties against the criteria laid out by the DOL. (You can find summaries of these categories on its website: http://www.dol.gov/whd/regs/compliance/fairpay/fact_exemption.htm) If a company fails to pay overtime that is owed, the employee can sue and recover double damages, plus attorneys’ fees.
4. Failing to keep adequate personnel records: When a company has just one or two workers, they can seem more like family than employees. As a result, young entrepreneurs may make agreements on a handshake or in conversation rather than through formal documentation for new hires, raises, benefit arrangements, leaves of absence, discipline, and other personnel matters.
But failing to keep records of these decisions can leave companies vulnerable to claims down the road. Employees may misunderstand what was being offered or, if leaving on bad terms, might simply misstate the bargain that you thought you had reached. Oral agreements and terms of employment are much harder to prove without any backup documentation. Even in cases of handshake bargains, the employer can keep contemporaneous written record of your personnel decisions and file it. Additionally, if a company does keep personnel folders, it must make sure any medical information is stored in a separate place. There are HIPPAA laws and other reasons to separate out those documents.
5. Confusing tax advice for employment law advice: Most new and emerging companies have one lawyer to call for advice; if they are lucky, that attorney is likely to specialize in business or tax law. Nonetheless, it can be cost effective and very helpful for new businesses to consult with an employment law specialist early on.
For example, a general practitioner might advise that the IRS permits designating a worker as an independent contractor so long as the company sends out a 1099 form at the end of the year – but an employment attorney would know that the IRS uses one test to assess whether a worker is an employee, the DOL uses another, courts adjudicating discrimination suits use a third, and many states use a fourth in assessing unemployment and workers’ compensation claims. Employment attorneys can also provide valuable advice and expertise in hiring guidelines, setting up personnel systems, notifying business about local ordinances, and assisting with other related matters.
Hiring a workforce is an important part of growing a new business – but it is crucial that young entrepreneurs remember that being an employer is a serious business too.
About the Author
Shelby Schwartz is an Associate in Littler’s Philadelphia office. She advises and represents clients in a broad range of labor and employment matters and can be reached at srschwartz@littler.com. The firm’s website is: http://www.littler.com/
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