START UPS AND EMPLOYMENT LAW RISKS. ROBERT PHANSALKER, Esq. Outten & Golden New York, NY

Transcription

1 START UPS AND EMPLOYMENT LAW RISKS by ROBERT PHANSALKER, Esq. Outten & Golden New York, NY 119

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3 NYSBA Start-Ups and Employment Law Risks New York, New York November 18, 2016 Robert Phansalkar Common Issues Facing Start-Up Companies, Founders, and Employees For early stage start-ups, complying with employment rules and regulations can feel like navigating a maze. This paper highlights some of the common areas that affect start-up companies, particularly in early-stage development, and some of the concerns that companies, founders, and employees need to be aware of in their attempts to achieve employment law compliance. I. Classifying the Workforce Independent Contractors vs. Employees: o New companies frequently misclassify employees as independent contractors. 121

4 o A service contract will not be determinative as to whether a worker is an independent contractor or an employee. o Instead, government agencies and courts focus on a multifactor test that analyzes, among other things, the level of control an employer has over a worker. o Misclassification can lead to penalties, including back taxes and employee lawsuits. o When properly classified as an independent contractor, the distinction can drastically alter a worker s legal protections, including: Anti-discrimination protection: Generally unavailable under Federal and state law, but can be available under city and local laws, such as the New York City Human Rights Law (NYCHRL). Unemployment Insurance: New York s unemployment insurance law permits employees, but not independent contractors, to claim unemployment insurance benefits. Wage and Hour Protections: New York s minimum wage and overtime laws apply to employees, but not independent contractors. Intellectual property rights: Work for hire may not apply to a worker s development of IP where a worker is properly classified as an independent contractor. Enforceability of restrictive covenants: Distinction between employees and independent contractors may be relevant for purposes of analyzing the enforceability of the covenant

5 Exempt vs. nonexempt employees: o Generally employees are entitled to receive wages and overtime (1.5 times base wage), unless if they are exempt under labor laws. o Much like classification of independent contractors vs. employees, an employee s title or compensation as a salaried employee is not determinative. o A far more important factor is what the employee s duties and responsibilities are. II. Compensating the Workforce Cash o Salaries and Wages Employers must comply with minimum wage laws for all employees of the company. o See Exempt vs. Non-Exempt Employees above Independent contractors, if properly classified, may be compensated on a project basis instead. o Bonuses Assuming the company has sufficient cash to pay bonuses, a bonus can be a good way of compensating employees. It is important to develop strong bonus metrics. These metrics may include a combination of company and individual performance. o Commissions 3 123

6 Sales commissions can be an effective way of directly tying compensation to production. Commissions are treated as wages when earned, as defined in the commission plan, and are subject to various statutory requirements. Commission plans must be documented by way of a commission plan that sets forth when and how commissions are earned and the frequency of pay. Employees who earn commissions are still protected by minimum wage laws, however. Deferred Compensation o Equity Most common forms include: Options, Restricted Stock, RSUs, Phantom Stock, Membership Interests, and Carried Interest/Profit Shares. Usually evidenced by both an award agreement, which is specific to the individual, and a plan agreement, which governs all similar types of grants. o Bonuses Depending on the industry, some bonuses may be subject to deferral of a portion of the bonus compensation. o Purchasing or granting equity Some start-ups permit or require employees to purchase equity upon joining the company. An increasingly common form of this is a convertible note or debt-to-equity instrument for high-level employees

7 Benefits o Employers are required to provide certain minimum benefits to employees. In New York employers are required to provide: Short Term Disability Insurance, Workers Compensation, and Unemployment Insurance. Other requirements: o Health insurance State and local law may require certain types of paid leave (e.g., Sick Time, state-equivalents of Family Medical Leave Act). Depending on jurisdiction, may be required to pay out Paid Time Off on termination. In New York, this right depends on company policy; in California, if granted and accrued, an employee cannot forfeit unused PTO. Still a discretionary health benefit, but employers with more than 50 employees may be subject to additional fees as a result of the Affordable Care Act. Nevertheless, offering health insurance is an important component of attracting and retaining talent. o Supplemental Plans Start-up companies may eventually consider implementing plans such as a 401(k) and/or profit sharing plan. III. Common mistakes for companies and employees Improper documentation 5 125

8 o Handshake deals can lead to a variety of issues beyond litigation with founders and employees. o Failing to adequately address these concerns can also create unnecessary tax obligations for employees and the company, particularly for improperly documented compensation arrangements. o Informal company policies (e.g., no employee handbook, no HR policies and procedures, no equal employment opportunity or anti-discrimination policies) can create legal exposure for companies and uncertainty for employees. Failing to protect company interests and employee rights o Confidential Information/Trade Secrets o Intellectual Property Includes assignment of rights, but state specific laws may limit the enforceability of such measures. o Clear policies provide employees with clear definition around their rights and obligations vis-à-vis the company. Restrictive Covenant Agreements o Non-Solicitation and Non-Competition agreements are not always enforceable. o Factors affecting this include: Overly broad covenants are generally unenforceable Applying covenants to all employees and independent contractors (regardless of the employee s access to confidential information, the employee s unique skills, or the company s protected interest) State law differences: 6 126

9 California: non-competition and non-solicitation clauses are generally unenforceable. New York: potentially enforceable, if an employer has a protected interest and the covenant is not overly broad. Failing to consider termination in agreements o Aside from severance, what happens on a termination of the employee s employment? Specific concepts to consider include terminations with and without Cause, death/disability, resignation/withdrawal. o What specifically happens to equity (and other compensation) on a change in control, initial public offering, or liquidity event? 7 127

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11 11/1/2016 Start-Ups and Employment Law Risks November 2016 Presented by: Philip Berkowitz Shareholder Littler, New York (212) Robert Phansalkar Outten & Golden, New York (212)

12 11/1/2016 Topics Biggest Employment/HR Liabilities (or The Ones You Can t Afford to Get Wrong ) Risks of using independent contractors Exempt /non-exempt employee classification Balancing lack of cash with need to pay proper compensation Documenting Relationships with Founders and Employees (or The Ones You Want to Get Right Before You Need Them ) Confirming all at-will employment relationships in writing Protecting intellectual property Adapting restrictive covenants to the startup environment Other Steps Startups Should Take Before Hiring Employees (or The Ones You Can Afford to Get Right ) Government filings and registration Immigration compliance (Form I-9s) Hostile work environment/lack of diversity Workplace policies and procedures BIGGEST EMPLOYMENT/HR LIABILITIES OR THE ONES YOU CAN T AFFORD TO GET WRONG 130 2

13 11/1/2016 Independent Contractor or Employee You probably know the answer you just don t want to hear it The Independent Contractor Fallacies We re not ready to hire employees we ll just use independent contractors They re only working part-time so they must be independent contractors We don t need formal employment relationships Everyone uses independent contractors ( everyone else is doing it ) 131 3

14 11/1/2016 Independent Contractor Tests and Factors Variety of tests are defined by law not the parties agreement Most common factors indicating employee status: Day-to-day control over the worker s tasks, hours, and work location Worker is integral to the business Worker does the same work as others who are classified as employees Worker uses company s equipment, , and office to perform services Business reimburses worker for expenses Common factors tipping the scale toward independent contractor status: Worker performs services for multiple entities Work is project-based and worker controls manner of work Company pays worker on a project basis, not an hourly or salary basis Contract specifies independent contractor relationship (not dispositive) Worker performs services through worker s own corporate entity (also not dispositive) Unpaid Interns DOL Tests and Factors Federal law - USDOL criteria: Internship is similar to training which would be given in an educational environment the internship experience is for the benefit of the intern the intern does not displace regular employees, but works under close supervision of existing staff the employer derives no immediate advantage from the intern s activities; rather, operations are occasionally impeded the intern is not necessarily entitled to a job afterwards, and the employer and the intern understand that the intern is not entitled to wages New York law Six Additional Criteria 132 4

15 11/1/2016 Unpaid Interns Second Circuit Test and Factors Primary Beneficiary Test - Looks at the extent to which: the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee and vice versa. the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions. the internship is tied to the intern s formal education program by integrated coursework or the receipt of academic credit. the internship accommodates the intern s academic commitments by corresponding to the academic calendar. the internship s duration is limited to the period in which the internship provides the intern with beneficial learning. the intern s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern. the intern and the employer understand that the internship is conducted without entitlement to a paid job when the internship concludes. Volunteers Individuals may work for charitable, civic or religious nonprofit enterprises without expectation of compensation and be considered volunteers. Factors considered: The nature of the entity receiving the services. Whether the volunteer receives or expects to receive any benefits from those for whom the services are performed. The receipt, promise or expectation of any compensation. Whether the activity is less than a full-time occupation. Whether regular employees are displaced. Whether the services are offered freely without pressure or coercion. Whether the services are of the kind typically associated with volunteer work 133 5

16 11/1/2016 Misclassification Risks Costs associated with hiring employees include: Employer s share of Social Security and Medicare Unemployment and workers' compensation insurance Other benefits (some required by state or local law) Potential liability from: IRS back taxes and penalties DOL Plaintiff class actions Some estimate that each misclassification costs employers $80,000: For 25 employees, that s $2,000,000! It s a hot enforcement issue Bottom Line: Do not rely on independent contractors, interns, or volunteers to do the work of employees If she looks like an EMPLOYEE, works like an EMPLOYEE, and is treated like an EMPLOYEE, then she probably IS an EMPLOYEE 134 6