What Do You Know About Employment Law?

Some Of My Early Employees Want Equity In the Company, What Should I Do?

Offering stock options to employees is an excellent way to incentivize them to continue to work harder and ensure that the incentives are aligned with the employee and the company. Essentially, if you are thinking of offering equity to an employee, you should always include a vesting schedule within the agreement. 


So, What Is A Vesting Schedule Anyway?

Setting up a proper vesting schedule is an easy way to encourage loyalty and incentivize a strong work ethic within your workforce. Essentially, vesting schedule can take three different forms:

Immediate Vesting:
Employees with this type of vesting schedule gain 100% of the ownership that their employer is offering them on day one. Many founders tend to stay away from this type of schedule, as it leaves open the possibility for the employee to leave with a significant equity stake the next day.

Cliff Vesting:
Cliff vesting transfers 100% of the ownership offered in one big chunk after a specific period of service. If the employee leaves the company before the cliff date, then they do not receive any equity at all.

Graded Vesting:
Graded vesting gives the employees increasing ownership as their length of service increases. For example, an employee may get 25% of their share of the company every year for four years (until they reach 100% ownership in their stake).


Should I Classify My Staff as Employees or Contractors?

If someone on your workforce believes they are being misclassified as a contractor as opposed to an employee, they may file a complaint with the Department of Labor. If this happens and you're found guilty of misclassification, then you could potentially face massive fines and penalties. There are several key questions that you must ask in order to figure out if the IRS considers your work force employees or contractors.

Some questions you should be asking yourself include:

  • • Is the worker on payroll and receiving steady paychecks?
  • • Does the worker supply their own equipment, or does the company?
  • • Are all necessary material supplied by your company?
  • • Can the worker freely leave whenever they would like and are able to not come to work without the fear of losing the job?
  • • Who is controlling the hours of employment, your company or the employee?
  • • Is the work temporary or permanent?


What Is An At-will Employee?

At-will employment is a term used in U.S. labor law for contractual relationships between an employee and an employer. The law generally presumes that you are employed “at-will” unless you can prove otherwise (typically through written documents that detail a working arrangement). This type of agreement allows the employer to dismiss an employee for any reason (without having to establish “just cause”), and without warning. If an employer decides to let you go from an “at-will” agreement, there is very little that you can do legally to fight this firing.


What Are the Laws Regarding Breaks?

At a federal level, employers are not required to provide meal or rest breaks to employees. That being said, some states do require employers to offer meal periods/rest breaks (typically lasting 15-30 minutes). These states include: California, Colorado, Kentucky, Minnesota, Nevada, Oregon, Vermont, and Washington. Most of the time, these breaks are uncompensated, unless the employee is ‘on-duty’ while they eat.


What Are the Rules Regarding Minimum Wage?

The federal minimum wage for employees is $7.25 an hour, or $2.13 for tipped employees. For tipped employees (i.e. servers), if wages and tips to not equal the federal minimum wage of $7.25/hour for any pay period, the employer must increase the cash wages to compensate for this difference. This is just the federal minimum wage though, as states typically set their own minimum wages as well. This can range anywhere from the federal minimum of $7.25/hr all the way to $10/hr, so be sure to check with your State’s particular regulations before setting your wages.


What About For Overtime?

According to the Fair Labor Standards Act (FLSA), which was signed into law in 2009, employers must pay a minimum of one and a half times the hourly rate of an employee for any time worked in excess of 40 hours within a workweek. The FLSA does not require overtime pay for work done on the weekends, holidays, or regular days of rest. Extra pay for working weekends or holidays are a matter of agreement between the employer and their employee. 


How About Recordkeeping Requirements?

The EEOC Regulations require that all employers must keep all personnel or employment records for at least one year after the termination of that employee. Employers must also keep their payroll records for at least three years, and any employee benefit plan (i.e. pension or insurance) for at least one year from the date of termination of that plan. Further, the FLSA requires that employers must keep all records that explain a basis for difference in wages (including wages, evaluations, merit systems, seniority, collective bargaining agreements, etc.) for at least two years.


What Are the Rules Around Youth Labor?

The FLSA sets 14 years of age as the minimum age for employment. Further, the FLSA limits the amount of hours anyone under the age of 16 can work. Minors (those under 18 years of age) are generally prohibited from work declared hazardous by the Secretary of Labor, and state that minors may only apply to particular types of jobs. These rules can vary depending on some exceptions (for instance, if the youth is being employed by one of their parents), and also vary drastically state-by-state, so be sure to check the local child labor laws before hiring anyone under the age of 18. 


If you found this interesting, be sure to review our entire Startup Business Checklist. 

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Revised: May 16, 2022, 6:32 a.m.
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