If you’ve reached the stage in your startup where you’re ready to start hiring employees, then you’ve grown past the 40% of startups that never move past one person. And going forward, that stat alone means the chances your startup will be successful are increased by 19%. But before you go out and make your first hire, there are a few basic U.S. human resources laws you need to be familiar with.
In this article, we’ll cover some basic federal employment laws that particularly effect startups, such as overtime, internships, remote workers and age discrimination, and set forth some guidelines on how to navigate these issues.
- Who is Due Overtime Pay?
As a startup founder you’re currently probably putting in well over forty hours a week for your company without receiving extra compensation for overtime. And thus, you might imagine that your first employees would do the same. Starting in late 2016, however, that’s no longer legal even if the employee agrees to do so.
Effective 12/1/2016, per the Fair Labor Standards Act (FLSA), unless an employee has an annual salary in excess of $47,476 (adjusted annually), that employee is de facto eligible for paid overtime for their work in excess of 40 hours per week. Previously, if an employee had management discretion and responsibilities, they could be considered exempt from overtime no matter their pay rate, but that is no longer the case.
How to Handle It?
As an employer you effectively have three choices,
- (a) make sure that your employees do not work over 40 hours a week (and use a time clock, preferably with the employee signing the time sheet) to track this,
- (b) hire employees with a base salary + bonus of at least $47,476, or
- (c) track and pay employees overtime.
- Avoid Inadvertent Employee Discrimination
In your mind, you probably want to use your first hires to further your company’s ‘culture’. For example, you may be trying to cultivate a “youthful energetic culture”, or perhaps, if, for example, your business caters to women you might be considering seeking out females for your first hire to “understand your clientele better”. But as innocent as these sentiments seem, they can all run your startup afoul of Federal Antidiscrimination Laws.
The vast majority of federal anti-discrimination laws only start applying once your company has at least three employees (the Equal Pay Act is an exception), however, it’s a good idea to set your hiring policies to be in compliance from the get go. Federal Antidiscrimination Laws consist of a series of laws that collectively prohibit you from discriminating in the hiring, firing or pay based on a person’s race, religion, sex, national origin, age, disability, pregnancy, military involvement or genetics.
How to Handle It?
Before you even make your first hire, the first step is to make sure your job posting itself is in compliance with antidiscrimination laws. For example, job listings that state that the job is for “US Citizens Only” illegally excludes legal US visa holders. So instead, list that only individuals who are “Legally Authorized to Work in the United States” should apply. Similarly, be careful about the perception of age discrimination by stating that you’re a “young startup” looking for “young energetic people”, as the word “young” might be perceived as age discrimination.
Then, during the interviewing process, make sure to focus on the individual candidate’s abilities, talents and experience for the job actually required, as opposed to discussing the person’s personal background or demographics, which might be perceived as a form of discriminatory employee screening. And finally, consider using a written objective scoring method for all job candidates, so that you have a written record that the criteria you used to make the hire was objective and non-discriminatory.
- There’s No Such Thing as an Unpaid Intern Anymore
Your first job might have been an unpaid internship, but those days are long gone. The Fair Labor Standards Act requires that a for-profit company meet a 6-part test before it can offer an unpaid internship, otherwise the intern must be paid wages and overtime just like a regular employee.
Meeting the 6 part test, in almost all cases, defeats the purpose of having an intern for most startups, with the exception of some professional services businesses like dentists that offer unpaid internships for future doctors as a way of ‘giving back’ to their alma mater. Specifically, the internship must include “training similar to an educational environment,” the intern “must not fill the place of an employee,” and, most importantly, the “employer must derive no immediate advantage from the activities of the intern.”
How to Handle It?
If you’re thinking about offering an unpaid internship as a means of testing out a potential employee, or to boost summer productivity, you’ll need to actually pay that intern instead, which in many cases means it’s better to just hire a permanent employee. While it’s theoretically possible to have legal unpaid interns, the number of legal hurdles you’d have to jump through in order to make sure you’re doing it legally, and the restrictions on the activities of the intern are such that in almost all situations it’s more work than it’s worth.
- What’s the Minimum Wage?
Looking to hire for an entry level position? If so, you probably think you’re covered in terms of paying minimum wage as long as long as you’re offering $7.25 per hour or more. And for about half of the U.S. that’s still the case. But increasingly, states and even individual cities are requiring employers to meet local minimum wage laws, some of which increase annually with inflation.
And if, like many startups, you’re considering hiring remote employees to offer increased flexibility and cut down on office expenses, you’ll need to know the prevailing minimum wage applicable where that employee works (presumably from their home), which may of course be different than the applicable minimum wage where your office is located.
And, finally, if you’re thinking that the Fair Labor Standards Act, which mandates the federal minimum wage, might not apply to you because your business doesn’t meet the minimum of $500,000 per year, note that that exclusion only applies if your business doesn’t engage in any form of interstate commerce. “Engaging in interstate commerce”, however, has been defined by US courts to be almost anything (e.g. something as small as that some of your merchandise or equipment comes from out of state, etc.) therefore you can generally assume the FLSA applies to your business.
How to Handle It?
Know the prevailing local minimum wage in your office’s area before posting a job opening for an in-office position. The Economic Policy Institute maintains a Minimum Wage Tracker that will allow you to find the applicable rate for your business. And for remote employees, have the employee document, in writing, the address from which they’ll be performing their work, so that there’s no question about what minimum wage laws should apply. And finally, calendar an annual adjustment of minimum wages if you hire any employees that live in the 18 states (and Washington D.C) where the minimum wage increases each year with inflation.
- Get Your Paperwork In Order
Assuming you’ve navigated the above issues and selected a job candidate, it’s important to document the terms of employment appropriately, otherwise you may face government fines in addition to potentially inviting lawsuits from disgruntled former employees if future misunderstandings occur.
How to Handle It?
At a minimum, you are legally required to have new employees complete a Form I-9 and a W-4 Form. The I-9 is used to verify the identity and employment authorization of the individual hired, and the W-4 enables you to withhold taxes from your employees pay.
In addition, it’s a good idea to develop an employee handbook that new employees sign, which covers very basic things like expectations of conduct, timeliness, dress code, how sensitive data should be handled when accepting credit cards, vacation policy, paid leave, etc. While you might think such things are obvious, in the event that you terminate someone for cause (e.g. they keep showing up late) you’ll need to present documentation to the workforce commission that the terminated employee was aware of the company policy in order to prevent the person from collecting unemployment against your business.
Entrepreneurs are the engine of the US economy, driving much of our nation’s economic growth and 64% of new Americans jobs. Despite the need to support small businesses, however, the overlapping array of regulations governing small business hiring continues to grow more, not less, complicated for small businesses and startups in particular. By understanding how to properly navigate the five employment issues discussed in this article, however, your startup is far better positioned to add its first employees in full compliance with applicable U.S. law.
The content of this article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.