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Employment Considerations
for Early Stage Companies
Hallie Miller and Holly Hammer
First Flight Venture Center | February 6, 2014
hutchlaw.com
Overview of Discussion –
“Hot Topics” in Employment Law
 Employee Classifying & Paying Workers
 Independent Contractor versus Employee
 Unpaid Interns
 Employment Considerations
 Employment Status (Exempt versus Non-Exempt)
 Wage Hour Laws/Other Compensation Considerations
 Documenting the Relationship & IP
Ownership
 HR Practices & Why
 General Compliance Considerations
 Taxes, Posting Requirements, Record-Keeping
 Employment Laws “by the numbers” (# of employees)
hutchlaw.com
Initial Contractor Classification
 Independent Contractor vs. Employee
 Based on Relevant Facts; 3 Main Considerations
 Behavioral Control
 Direction, Control, Training
 Financial Control
 Profit and Loss, Investment, Payment
 Nature of Relationship
 Contracts, Duration, Inclusion
 Services as key to business
hutchlaw.com
Initial Contractor Classification
(cont.)
 Operational Aspects
 Employees sign offer letters; independent
contractors or consultants sign contracts
 Taxes are withheld from employee pay;
contractors are provided a 1099 and required to
pay taxes on their own behalf
 Employees are eligible for benefits; contractors
are not
 REGARDLESS of how the relationship is defined,
agencies use their own tests to determine how to
classify the relationship!
hutchlaw.com
Initial Contractor Classification
(cont.)
 Results of Misclassification
 Fines
 Back taxes
 Back pay and Overtime
 Law suits to include in Past Benefits
 Exclusion from future Contracts
 Scenario - Audit from regulatory agency
(IRS, DOL, NCDOL, NCESC, Industrial
Commission); disgruntled contractor or an
disclosure against the reps & warranties in a
corporate transaction
hutchlaw.com
Employment Classifications
 Independent Contractor
 Employee - Typical Employment Status
 Regular (never ‘permanent’) Full-Time - hired indefinitely;
works a full workweek (often 40 hours)
 Regular Part-Time – hired indefinitely; works less than a
full workweek
 Temporary/Seasonal – Hired for a specified, limited
period, either full time or part time; can be hired directly
(on your payroll) or through an agency (would not be
employee for payroll tax purposes, but may be for other
purposes).
hutchlaw.com
Employment - Compensation
 Compensation – Fair Labor Standards Act
 Non-Exempt: Minimum wage $7.25 (currently)
plus overtime (1 ½ regular rate of pay) must
be paid for all workers unless exemptions
apply
 Exempt Employees: (paid a set salary regardless of
hours worked)
 Executive
 Administrative
 Learned Professional
 Creative Professional
 Outside Sales
Employment – Compensation
(cont.)
 Unpaid Internships
 Similar to training in an educational environment;
 Is for the benefit of the intern;
 The intern does not displace regular employees, but
works under close supervision of existing staff;
 Employer derives no immediate advantage; and on
occasion operations may be impeded;
 No job entitlement at conclusion; and
 Clear understanding that intern is not entitled to
wages
 Document expectations and ownership of IP
hutchlaw.com
Employment – Compensation
(cont.)
 Legal Risks of Misclassifying Exemption/Not
Paying Wages:
 Possibility of personal liability
 Liquidated damages equal to the unpaid wages
 Interest
 Attorneys’ fees
 Criminal sanctions
 Business risks too!
 Cost & Delay to clean up
 Transaction Impediments
hutchlaw.com
Employment – Compensation
(cont.)
 Other Compensation Concepts
 Deferred compensation
 Equity!!!
 Bonuses
 Vacation/Paid Time Off (Note on NC law: can disclaim payment on
termination in advance of when earned)
 Severance
 Benefits
hutchlaw.com
Employment - Documentation
 Documentation Associated with Hiring
 Offer Letters – should concisely define the
employment relationship:
 Key business terms
 Employment contingencies
 Employment Agreement – severance
 Business Protection Agreement
Employment At-Will
hutchlaw.com
Employment - Documentation
 Business Protection Agreements (Intellectual
Property Protection)
 Confidentiality
 Ownership of Intellectual Property
 Non-solicitation (customers and employees)
 Non-competition
 Non-disparagement
HR Practices & Why
 Recruiting & Hiring
 Start-Up Trend: Too Quick to Hire, Too Long to Fire
 Responsibilities for the role & goals to accomplish, you’ve
got your job description!
 Get the right person for the job!
 Don’t hire just because someone will work for Equity!
 Performance Management
 Goals, training, informal discussions & PIPs
 Investigations & Documentation
hutchlaw.com
HR Practices & Why
 Separations
 “Things will get worse before they get better.”
 More Complicated with More Time
 Things to Consider
 Final Pay (when, how)
 Deductions from Pay
 Return of Company Property
 Exit Interview
 Release Agreements
 References
hutchlaw.com
Employment - Compliance
 I-9s
 1st
day, employee must complete/sign Section 1;
 Employer must physically examine the original
documents and record the information in Section 2
within 3 business days
 Keep in separate, secured file (not personnel file)
 Retain for the longer of 3 years or 1 year after
employment ends
 E-Verify mandatory for certain federal contractors and
for NC employers with 25 or more employees;
 New hire reporting
 W-4/NC-4
 Payroll taxes
 Posting Requirements
 Consolidated Poster
 Document Retention
 Personnel File (no
medical records,
no I-9s)
 Meal & Rest Breaks
 Multistate Environment
Employment - Compliance
hutchlaw.com
Employment - Compliance
Applicable to ALL
employers, regardless
of the number of
employees:
FLSA/NC Wage and Hour Act
Federal Insurance Contributions Act (FICA)
Immigration Reform & Control Act (IRCA)
Occupational Safety and Health Act (OSHA)
Employee Retirement Income Security Act (ERISA) (if
benefits are offered)
Equal Pay Act
Fair Credit Reporting Act
National Labor Relations Act (NLRA)
At least 15 employees Americans with Disabilities Act (ADA);
Title VII of the Civil Rights Act, Pregnancy Discrimination Act
At least 20 employees: Age Discrimination in Employment Act (ADEA); Consolidated
Omnibus Budget Reconciliation Act (COBRA)
At least 50 employees: Family and Medical Leave Act (FMLA)
At least 100 employees Worker Adjustment & Retraining Notification Act (WARN);
EEO-1 Reporting
hutchlaw.com
Q&A
Hallie Miller
hmiller@hutchlaw.com
(919) 829-4301
Holly Hammer
hhammer@hutchlaw.com
(919) 829-4289
19hutchlaw.com
Hutchison PLLC
North Carolina Office
3110 Edwards Mill Road, Suite 300
Raleigh, NC 27612
919.829.9600
hutchlaw.com

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Personnel structuring and compensation considerations for early stage companies

  • 1. Employment Considerations for Early Stage Companies Hallie Miller and Holly Hammer First Flight Venture Center | February 6, 2014
  • 2. hutchlaw.com Overview of Discussion – “Hot Topics” in Employment Law  Employee Classifying & Paying Workers  Independent Contractor versus Employee  Unpaid Interns  Employment Considerations  Employment Status (Exempt versus Non-Exempt)  Wage Hour Laws/Other Compensation Considerations  Documenting the Relationship & IP Ownership  HR Practices & Why  General Compliance Considerations  Taxes, Posting Requirements, Record-Keeping  Employment Laws “by the numbers” (# of employees)
  • 3. hutchlaw.com Initial Contractor Classification  Independent Contractor vs. Employee  Based on Relevant Facts; 3 Main Considerations  Behavioral Control  Direction, Control, Training  Financial Control  Profit and Loss, Investment, Payment  Nature of Relationship  Contracts, Duration, Inclusion  Services as key to business
  • 4. hutchlaw.com Initial Contractor Classification (cont.)  Operational Aspects  Employees sign offer letters; independent contractors or consultants sign contracts  Taxes are withheld from employee pay; contractors are provided a 1099 and required to pay taxes on their own behalf  Employees are eligible for benefits; contractors are not  REGARDLESS of how the relationship is defined, agencies use their own tests to determine how to classify the relationship!
  • 5. hutchlaw.com Initial Contractor Classification (cont.)  Results of Misclassification  Fines  Back taxes  Back pay and Overtime  Law suits to include in Past Benefits  Exclusion from future Contracts  Scenario - Audit from regulatory agency (IRS, DOL, NCDOL, NCESC, Industrial Commission); disgruntled contractor or an disclosure against the reps & warranties in a corporate transaction
  • 6. hutchlaw.com Employment Classifications  Independent Contractor  Employee - Typical Employment Status  Regular (never ‘permanent’) Full-Time - hired indefinitely; works a full workweek (often 40 hours)  Regular Part-Time – hired indefinitely; works less than a full workweek  Temporary/Seasonal – Hired for a specified, limited period, either full time or part time; can be hired directly (on your payroll) or through an agency (would not be employee for payroll tax purposes, but may be for other purposes).
  • 7. hutchlaw.com Employment - Compensation  Compensation – Fair Labor Standards Act  Non-Exempt: Minimum wage $7.25 (currently) plus overtime (1 ½ regular rate of pay) must be paid for all workers unless exemptions apply  Exempt Employees: (paid a set salary regardless of hours worked)  Executive  Administrative  Learned Professional  Creative Professional  Outside Sales
  • 8. Employment – Compensation (cont.)  Unpaid Internships  Similar to training in an educational environment;  Is for the benefit of the intern;  The intern does not displace regular employees, but works under close supervision of existing staff;  Employer derives no immediate advantage; and on occasion operations may be impeded;  No job entitlement at conclusion; and  Clear understanding that intern is not entitled to wages  Document expectations and ownership of IP
  • 9. hutchlaw.com Employment – Compensation (cont.)  Legal Risks of Misclassifying Exemption/Not Paying Wages:  Possibility of personal liability  Liquidated damages equal to the unpaid wages  Interest  Attorneys’ fees  Criminal sanctions  Business risks too!  Cost & Delay to clean up  Transaction Impediments
  • 10. hutchlaw.com Employment – Compensation (cont.)  Other Compensation Concepts  Deferred compensation  Equity!!!  Bonuses  Vacation/Paid Time Off (Note on NC law: can disclaim payment on termination in advance of when earned)  Severance  Benefits
  • 11. hutchlaw.com Employment - Documentation  Documentation Associated with Hiring  Offer Letters – should concisely define the employment relationship:  Key business terms  Employment contingencies  Employment Agreement – severance  Business Protection Agreement Employment At-Will
  • 12. hutchlaw.com Employment - Documentation  Business Protection Agreements (Intellectual Property Protection)  Confidentiality  Ownership of Intellectual Property  Non-solicitation (customers and employees)  Non-competition  Non-disparagement
  • 13. HR Practices & Why  Recruiting & Hiring  Start-Up Trend: Too Quick to Hire, Too Long to Fire  Responsibilities for the role & goals to accomplish, you’ve got your job description!  Get the right person for the job!  Don’t hire just because someone will work for Equity!  Performance Management  Goals, training, informal discussions & PIPs  Investigations & Documentation hutchlaw.com
  • 14. HR Practices & Why  Separations  “Things will get worse before they get better.”  More Complicated with More Time  Things to Consider  Final Pay (when, how)  Deductions from Pay  Return of Company Property  Exit Interview  Release Agreements  References hutchlaw.com
  • 15. Employment - Compliance  I-9s  1st day, employee must complete/sign Section 1;  Employer must physically examine the original documents and record the information in Section 2 within 3 business days  Keep in separate, secured file (not personnel file)  Retain for the longer of 3 years or 1 year after employment ends  E-Verify mandatory for certain federal contractors and for NC employers with 25 or more employees;  New hire reporting  W-4/NC-4  Payroll taxes
  • 16.  Posting Requirements  Consolidated Poster  Document Retention  Personnel File (no medical records, no I-9s)  Meal & Rest Breaks  Multistate Environment Employment - Compliance
  • 17. hutchlaw.com Employment - Compliance Applicable to ALL employers, regardless of the number of employees: FLSA/NC Wage and Hour Act Federal Insurance Contributions Act (FICA) Immigration Reform & Control Act (IRCA) Occupational Safety and Health Act (OSHA) Employee Retirement Income Security Act (ERISA) (if benefits are offered) Equal Pay Act Fair Credit Reporting Act National Labor Relations Act (NLRA) At least 15 employees Americans with Disabilities Act (ADA); Title VII of the Civil Rights Act, Pregnancy Discrimination Act At least 20 employees: Age Discrimination in Employment Act (ADEA); Consolidated Omnibus Budget Reconciliation Act (COBRA) At least 50 employees: Family and Medical Leave Act (FMLA) At least 100 employees Worker Adjustment & Retraining Notification Act (WARN); EEO-1 Reporting
  • 19. 19hutchlaw.com Hutchison PLLC North Carolina Office 3110 Edwards Mill Road, Suite 300 Raleigh, NC 27612 919.829.9600 hutchlaw.com