Ask A Lawyer: What You Need to Know Employment Law, Contracts, and Agreements
Employment Law Basics
When you hire your first employee, you enter a whole new world of legal obligations. Employment law is complex, and violations can be expensive. Here's what to know to stay out of trouble:
First, understand the difference between employees and independent contractors. This is one of the most commonly misunderstood areas of business law. Employees work under your direction and control. You set their schedule, provide their tools, and tell them how to do their work. Independent contractors control how they work. They usually have their own tools, set their own schedule, and work for multiple clients.
Why does this matter? Because if you classify someone as an independent contractor when they should be an employee, you could face penalties from the IRS and Department of Labor, plus back taxes and benefits. The government doesn't care what you call someone. They care about the actual relationship.
When you hire employees, you have to comply with wage and hour laws. This means paying at least minimum wage, paying overtime for non-exempt employees who work more than 40 hours per week, and following state-specific wage laws that might be more protective than federal law. You also need to withhold taxes from employee paychecks and pay employer payroll taxes.
You must comply with anti-discrimination laws. You cannot discriminate based on race, color, religion, sex, national origin, age, disability, or genetic information. Many states add additional protected categories like sexual orientation, gender identity, and marital status. This applies not just to hiring, but to pay, promotions, and terminations.
If you have employees, you might need to provide certain benefits. For example, the Affordable Care Act (ACA) requires businesses with 50 or more full-time employees (or equivalent employees) to offer health insurance. Some states and cities also require paid sick leave. Additionally, if you have 50 or more employees, the Family and Medical Leave Act (FMLA) requires you to provide unpaid leave for certain family and medical situations.
Documentation matters. Have written job offers, employee handbooks, and clear policies. When someone starts, have them fill out an I-9 form to verify they're legally allowed to work in the U.S. and a W-4 form for tax withholding. Keep good records of hours worked, wages paid, and any disciplinary actions.
Make sure to properly use vesting schedules for equity. This means ownership stakes are earned over time (typically four years with a one-year cliff). If a co-founder leaves after three months, you don't want them walking away with 30% of your company.
Contracts and Agreements: Getting It in Writing
Get everything important in writing. Handshake deals and verbal agreements might feel good in the moment, but they're a disaster waiting to happen.
Customer contracts: These contracts outline what you're delivering, when you're delivering it, how much it costs, and what happens if something goes wrong. Even if you're running a simple business, having standard terms and conditions protects you. If you're doing custom work or projects, use a statement of work or service agreement for each engagement.
Vendor and supplier agreements: If you're relying on another company to provide something essential to your business, get it in writing. What are they providing? When? What if they fail to deliver? What are the payment terms? It's like a customer contract, where you are the customer.
Partnership and operating agreements: These documents should cover ownership percentages, roles and responsibilities, how decisions are made, what happens if someone wants to leave, what happens if someone dies or becomes incapacitated, and how disputes are resolved. Do not start a business with other people without these agreements in place. Too many friendships and businesses fail every year because founders didn't have clear agreements.
Non-disclosure agreements (NDAs): These contracts protect your confidential information when you share it with others. If you're talking to potential investors, partners, or contractors about sensitive information, consider having them sign an NDA first. That said, don't be overly aggressive with NDAs. Many investors won't sign them before an initial pitch. Use NDAs when truly necessary, but not for everything.
Non-compete, non-solicitation, and non-circumvention agreements: These agreements prevent employees or partners from competing with you or poaching your customers or employees after they leave. They are enforceable in most states, but only if they're reasonable in scope, duration, and geography. A non-compete that prevents someone from working in their field anywhere in the country for five years? Probably not going to hold up. A non-compete that prevents them from working for a direct competitor in your city for one year? Much more reasonable.
Read contracts before you sign them. If you don't understand something, ask questions or have a lawyer review it. That software license agreement you're clicking through? It might contain terms that aren't in your favor. That office lease? It might have hidden fees or onerous termination clauses.
Want to learn more? Our team of dedicated attorneys and consultants are here to work with you to make sure your business starts off on the right foot. Contact us to learn more and to see if we can help you with your business needs!
*Disclaimer: This article is intended solely for educational purposes and is not intended as legal advice resulting from legal representation, broker-dealer advice, tax professional advice, or other professional advice resulting in an implied or actual agreement with a professional acting in a representative capacity. This article does not directly or indirectly establish a relationship of representative capacity. All copyright and rights belong to Fox & Chester and are reserved. Consult with a professional where applicable.