Starting or running a business? Do not ignore these legal issues.

On Behalf of | Mar 17, 2015 | Employment Law -- Employer |

Startups and businesses are great opportunities for entrepreneurs to achieve their vision. In the pursuit of finding and retaining talented employees, many of these businesses overlook several “hidden” legal issues which can be detrimental to long profitability and viability.


According to the Federal Justice Center, wage and hour lawsuits have increased 438% since 2000. Misclassifying employees as exempt from the Fair Labor Standards Act (FLSA) can be an incredibly expensive minefield for to employers fall into. The FLSA affects smaller businesses as well as large multinational corporations. This set of laws is incredibly complex. Employees may be exempt from overtime if they earn over $455 weekly and their duties fall into administrative, executive, learned professional or highly compensated categories. However, determining whether an employee may be exempt from overtime is a fact specific analysis in a rapidly evolving area of law. Misclassification may be costly.

In smaller businesses and startups, it is not uncommon for employees to be compensated in stock or interest in the company. However, compensating employees in stock does not always adequately compensate them under federal and state minimum wage laws. It is illegal to pay in stock instead of wages.

Another mistake businesses make is classifying workers as contractors, when they are actually employees. Businesses may try to ease their tax burden by hiring workers and giving them titles such as contractor, consultant or intern. The determination of who is a “contractor” and who is an “employee” is governed by both the parties’ own understanding of the employment relationship, as well as federal and state wage-hour laws. Whether someone is an employee or contractor is based on multi-factor tests promulgated by both the IRS and state law. The consequences for mischaracterizing an employee can be expensive and result in significant IRS fines

In order to avoid these common pitfalls, business owners should work with legal counsel to create accurate job descriptions. These job descriptions can also be useful tools for evaluating applicant’s abilities and an employee’s performance later on. While correctly classifying and compensating employees may cost more money in the short term, it can save potentially millions of dollars and perhaps the business, in avoided litigation and IRS fines.

Employment Policies

No matter how small, all companies should have personnel polies. The EEOC Title VII applies to companies who employ at least fifteen (15) people, and the Pennsylvania Human Rights Act (PHRA) applies to any company who employs four (4) or more people. All businesses should have a formal equal opportunity and a sexual harassment policy in place. Under federal law (as well as state and local laws), an employer can demonstrate that having a formal and active policy with a complaint procedure is a defense to a sexual harassment or discrimination claim. Establishing these policies can help your business run efficiently and fairly, as well as build as strong internal infrastructure. Working with counsel to establish these policies is invaluable, and can save your business from costly litigation as well as bad press.

Restrictive Covenants

For some businesses, trade secrets and intellectual property are the most important and valuable assets they have. Failure to legally protect these assets may lead to the end of a business.

While preparing restrictive covenants, it is important to evaluate what is being protected and if the covenant is effective enough. Many covenants may be drafted with overbroad and unreasonable language, which may run afoul with local laws. Business owners need to work with counsel to draft a clear and precise covenant, with provisions that a court will enforce.

Termination Policies

Although it can be unpleasant to contemplate what will happen if an employer/employee relationship does not work out, startups and small businesses should focus on protecting their physical and intellectual property when employees leave the business. Employees who use devices to access company information should either have the device returned or wiped to protect company data. If the departing employee has access to or managed your company’s social media accounts, ensure that all passwords are either returned or changed so that the former employee cannot claim the followers or connections belong to him or her personally.

Sometimes if an employee leaves on negative terms, it may be advantageous employer to enter into a separation agreement with a departing employee, where an employee waives his or her right to bring a lawsuit in exchange for an amount of money or other consideration. While this strategy may be costly upfront, it can save money in legal fees in the long term.

Legal planning for your business will protect your assets as well as build a strong foundation for future success. If you have any questions or concerns, please contact the attorneys at Hardin Thompson to help find the correct strategy to maximize your business’ potential.