Startup Legal 101: Employment Law Issues

Brian K. Nagatani(bnagatani@hixsonnagatani.com)

May 31, 2011Palo Alto, CA

Overview

When will you be covered by California’s employment laws?

Appropriate compensation of early hires Appropriate classification of contractors and

consultants

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Employment Law Coverage Wage and hour laws: all employers• Minimum wage

• Overtime

• Meal and rest periods

Fair Employment & Housing Act: 5 or more employees• Harassment

• Discrimination

• Retaliation

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Employment Law Coverage Leaves of Absence• FMLA/CFRA: 50 employees within 75 mile radius

• Pregnancy disability leave: 5 or more employees

• Other disability leaves: 5 or more employees

• Other forms of leave: various coverage thresholds

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Wage and Hour Laws

Common Mistakes:• Classifying employees as contractors/consultants

• Classifying all employees as exempt

• Compensating employees only with stock options

• Deferred compensation

Potential Exposure:• Class action liability

• Four year statute of limitations

• Plaintiffs’ attorneys’ fees

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Wage and Hour Laws

Recommendations:• Regardless of employer size, ensure that

employees are appropriately classified for overtime purposes

• Observe all minimum wage, overtime, and meal and rest period requirements for non-exempt employees

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Exemption Test

2 Requirements (Must Satisfy Both)

• Salary Test

• Duties Test

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“Salary” Requirement

Federal: $23,660/year California: $33,280/year• Must Equal or Exceed Monthly Salary for Full-

Time Employment at Two Times the California Minimum Wage

Generally No Deduction for Missing Time During the Week (Some Exceptions)

Federal: $23,660/year California: $33,280/year• Must Equal or Exceed Monthly Salary for Full-

Time Employment at Two Times the California Minimum Wage

Generally No Deduction for Missing Time During the Week (Some Exceptions)

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Key Duties Tests

Executive Administrative Professional

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The Executive Exemption

California “Duties” Requirements

• Primarily Engaged in Management of the Enterprise or Recognized Department or Subdivision

• Supervises At Least 2 Full Time Employees (or Equivalent)

• Authority to Hire or Fire (or Strong Recommendation Authority)

• Discretion and Independent Judgment

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The Administrative Exemption California “Duties” Requirements

• “Back-Office” Duties

oNot “Production” Work

• Discretion and Independent Judgment

oDistinction: Exercise of Skill

• Work Involves Either:

oAssisting Owner/Executive

oHighly Specialized Technical Tasks, or

oSpecial Projects

California “Duties” Requirements

• “Back-Office” Duties

oNot “Production” Work

• Discretion and Independent Judgment

oDistinction: Exercise of Skill

• Work Involves Either:

oAssisting Owner/Executive

oHighly Specialized Technical Tasks, or

oSpecial Projects

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The Professional Exemption

Can Cover Employees Performing “Production” Work (Unlike Administrative Exemption)

Exempt Professionals Include:

• Formally Licensed Professionals (Law, Medicine, Dentistry, Pharmacy, Optometry, Architecture, Engineering, Teaching, or Accounting)

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Computer Professionals: Special Exemption Duties Test: Same as For Computer

Workers Under the General Professional Exemption• Excludes entry-level employees, and those who

do not primarily exercise independent judgment and discretion.

What it Adds: Exception to the Rule that Hourly-Paid Employees Are Non-Exempt• Minimum Pay Rate: $27.63/Hour

California Computer Professionals:• $37.94/hour, or

• $79,050/year

• Caution: the California rate may increase each year!

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Other Commonly Used Exemptions Outside Sales Certain Commissioned Employees

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Important Classification Issues: Employee Versus Contractor Common Mistake: Retaining a

Worker as a “Contractor,” But Treating the Worker More Like an Employee.

One Misclassification Results in Simultaneous Violation of Numerous Laws

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Why It’s Important

BreachOf Contract

ADAViolation

FMLAViolation FLSA

Violation

WorkersComp

Violation

UnemploymentViolation

ERISAViolation

TaxViolation

ONEMISCLASSIFICATION

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The Main Test: “Right to Control” The worker is a contractor only if

he/she retains the “right to control the manner and means by which the product is accomplished” Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989)

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Key Factors Amount of Supervision Discretion Over When/How Long to

Work Location of Work Right to Discharge/Quit Duration of Relationship• Is the Contractor a Former Employee?o How Similar is the Work?

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Key Factors

Right to Assign Additional Project Method of Payment Skill Required• How Different than Skills Possessed by

Employees?

Intent of the Parties• Is There a Signed Contractor Agreement?

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Key Factors

Is Work Part of Company’s Regular Business?• Do Employees Perform Same Type of

Work?

Does the Worker Own/Come From a Separate Business?• Does Worker Perform Work for More

than One Company?

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Key Factors

Is Worker Subject to Risk of Profit or Loss?• Are the Workers’ Expenses Reimbursed?

• Who Pays for Assistance?

• Source of Instrumentalities/Tools?

What Support Does the Company Provide?• E-mail?

• Voice Mail?

• Business Cards?21

Conclusion

Thank You!

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