Most startups and early-stage companies have limited cash. As a result, they often are eager to use stock as a major component of compensation. They need to make sure, however, that personnel stick around long enough to make the contributions for which they are being compensated.
In some instances, the corporation creates a tax-qualified incentive stock option plan. Employees are granted options to purchase stock, and they do not have to pay any tax on the stock (actually, on profits from their sale of the stock) until they exercise the option (purchase the stock, presumably, at a low price) and, later, sell the stock. (Tax law is less favorable to independent contractors.)
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Prudent employers have known, for many years, the importance of Employee Handbooks in setting forth a company’s policies and operational procedures. However, the recent increase in the popularity of social media – Facebook, Twitter, blogs and the like – has taken many employers, and their Handbooks, by surprise.
Policies governing mobile phones, computers, Internet access and e-mail no longer suffice. With social media, every employee – for better or for worse, intentionally or unintentionally – can become a spokesperson for the company.
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Earlier this year, I wrote Avoiding the “Independent Contractor” Trap about the dangers that companies face if they misclassify employees as independent contractors. The Wall Street Journal recently reported (Employers and Workers Clash in Court Over ‘Contractor’ Label) that those dangers have increased.
According to the WSJ article, the Internal Revenue Service will audit 6,000 randomly-selected U.S. companies in its first attempt since 1984 to quantify the extent of employee misclassification. The IRS is not taking this step merely to help the individuals involved receive the pay and benefits to which they are entitled – state and federal governments stand to gain billions of dollars every year from withholding taxes, unemployment insurance and workers’ compensation if workers are classified properly.
Even greater than the risk of a government audit is the risk that a disgruntled “independent contractor” will file a wage claim (see Wage Claims – Nasty but [Sometimes] Necessary).
Avoiding the “Independent Contractor” Trap lists factors that can help you determine how to classify workers properly.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
According to an article in yesterday’s Wall Street Journal, the U.S. Equal Employment Opportunity Commission is seeing a surge of complaints based on retaliation – i.e., allegations that an employer retaliated against an employee who sought to protect his or her rights by complaining to the EEOC.
The article reports that eliminating retaliation is the EEOC’s top priority, because its enforcement of anti-discrimination laws will be successful only to the extent that employees free to file complaints.
So whether you are a large or small employer, here is the bottom line:
- Do not discriminate against any employee based on age, race, sex, religion, etc.
- If an employee files a discrimination complaint, do not retaliate against that employee.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
I answer questions on Avvo pretty regularly. From time to time, I will reproduce (perhaps with modest editing) some of the questions and answers here on my blog.
Question: If an employer has cash flow problems, who should be paid first: employees or vendors?
Answer: I see this situation as requiring analysis from both the business and the legal perspectives.
Business: I believe that employees are more important, and are less able to do without the money to which they are entitled, than (most) vendors, so I would pay employees first.
Legal: While either employees or vendors could bring suit against the employer, employees also would have the ability to file, at no cost, a wage claim with the Division of Labor Standards Enforcement. In my opinion, DLSE investigation of a wage claim is worse than a lawsuit, so for this reason, too, I would pay employees first.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Recently I have seen an increase in the number of current or former employees filing wage claims against their employers nere in California. There often is a good reason for the filing – in my experience, employees typically do not spend time and effort on the wage claim process unless they have some basis for concluding they have been underpaid, such as:
- Unpaid wages, including commissions or bonuses
- Accrued but unused vacation time not paid at the time of termination
- Unauthorized deductions from paychecks
Wage claim procedures can be nasty from the employer’s perspective, because the employee – who need not be represented by counsel – can have the Labor Commissioner issue subpoenas for documents, records or witnesses. (The employee needs to pay associated out-of-pocket expenses.) Few employers want to be subjected to Labor Commissioner subpoenas, much less the hearing at which the subpoenaed evidence will be presented.
The bottom line for employers: Pay employees what they are owed throughout their employment and upon termination. Complying with law usually is more cost-effective than defending a wage claim.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Last month, my post Court Curbs Inspection of Employee Text Messages discussed an employer that was held to have unreasonably searched employee text messages because, despite a policy stating that employer-supplied technology must be used only for the employer’s business activities, that policy was undercut when it was only selectively enforced.
Continuing this theme, in a more recent case, Guard Publishing v. NLRB, the D.C. Circuit held that selective enforcement of a policy limiting employee e-mails constituted a violation of federal labor law.
In my opinion, Guard Publishing actually made two mistakes. First, the e-mail policy prohibited “non-job-related solicitations” (emphasis added) but did not prohibit other other non-job-related communications. So the employer gave itself the ability to limit only a fraction of all possible non-business communications.
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A software company (“Client”) had to dismiss one of its developers (let’s call her “Alice”). The problem was Alice’s incompetence.
But there was a complication: Alice was pregnant. Adding to Client’s frustration, Alice, without permission or advance notice, was taking more time off than she was entitled to. Client wanted to be rid of Alice but did not want to be charged with discrimination based on sex or pregnancy.
Focusing on the Issue
I worked with Client’s CEO and Alice’s manager. We agreed right away to ignore the unauthorized time off. The amount of money at stake was relatively small, and we were concerned that raising time off as an issue could entangle us in Alice’s pregnancy-related medical needs.
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Employment terminations are difficult for both managers and employees. Because of the sensitivities involved and the desire to avoid litigation, managers should take special care in drafting the severance agreement and release and in conducting the termination meeting.
For California employers, one of the most important contract provisions is to require that the employee waive all rights under Section 1542 of the California Civil Code. This Section, which is well-known to attorneys but not necessarily to business managers, states: “A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.”
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“Texting” is booming in popularity, especially among younger workers. Are your personnel sending text messages on company-provided devices? If so, you should know about the Ninth Circuit’s decision in Quon v. Arch Wireless Operating Co., Inc., 529 F.3d 892 (2008).
Update: On June 17, 2010, the U.S. Supreme Court, in City of Ontario v. Quon, overturned the Ninth Circuit decision, ruling that the search of employee text messages did not violate the Fourth Amendment prohibition against unreasonable search and seizure because (a) it was motivated by a legitimate work-related purpose and (b) it was not excessive in scope. However, the Court expressly sidestepped the issue of whether employees have a reasonable expectation of privacy in their text messages, so the precautions listed at the end of this post still are relevant.
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Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.