5 Employment Law Tips for Startups

As a business owner of a startup, you wear many hats. In all the rush of running a startup, it’s easy to forget one of the most important hats you’ll ever wear: the employer. Here are five employment law traps that every startup founder needs to know.

1. Know the difference between an employee and an independent contractor.

Many companies prefer hiring independent contractors rather than employees. Hiring independent contractors generally reduces overhead costs, because employers do not have to comply with wage and hour requirements or include contractors on their worker’s compensation or medical insurance. However, many employers wrongly classify employees as independent contractors in order to avoid these obligations, and doing so puts their companies at risk for costly litigation.

In determining how to classifying your workers, consider the following factors:

Independent contractors: 

  • The person performing services is engaged in an occupation / business distinct from that of your company. For example, if you run a tech company, and you hire a trainer to teach networking skills, the trainer’s business is distinct from yours.
  • The person supplies and uses their own tools and equipment to complete the work.
  • The person can perform the work when they want, where they want and how they want.
  • The skills required by the work are specialized.


  • The company provides directions and retains control over how the work is completed.
  • The person uses the employer’s tools and equipment.
  • The person completes their work at the employer’s facilities and / or on a schedule set by the employer.
  • The person is paid by time (by the hour, daily rate, etc.) rather than by the project.
  • The employer can terminate the person at any time, for any reason.

2. Keep your trade secrets SECRET.

In California, a trade secret is defined as information, including a formula, pattern, compilation, program, device, method, technique or process, that derives its economic value from not being generally known to the public and is protected by reasonable efforts  to maintain its secrecy.

Basically, if you have information like customer lists, process methods or other formulas that you’ve developed, they can be protected as trade secrets as long as you use reasonable efforts to keep them secret. This could include storing the information in a password protected place, only disclosing the information on a need-to-know basis and making sure the information isn’t posted in a public place (like the Internet).

It’s highly recommended that all employees sign confidentiality agreements outlining what the company believes are its trade secrets, and the employees promise not to disclose them.

3. Know who are exempt employees.

Exempt employees are those who are exempt from overtime laws. In California, exempt employees generally must earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment. Most commonly, these include executives and professionals. But they also include certain employees in specific fields such as software developers, outsider salespersons and creative arts workers. Drafting well thought-out job descriptions help companies properly classify their employees.

4. Draft your workplace policies and procedures to protect your business.

It’s common for employers provide their workforce with computers, email and free Internet access. What are less common are well-drafted company policies that govern how these systems can be used. In order to protect yourself, ensure that your polices restrict employee abuse (accessing restricted websites or sharing confidential information), provide notice to your employees that the company can and will monitor their use and make clear that these systems are designed primarily to enhance their work, not for fun.

5. Consider whether employment practices liability (EPL) insurance is right for you.

Being an employer in California is full of pitfalls that can result in costly litigation. You should consider whether obtaining an EPL insurance policy to cover employment claims makes sense. Not all policies provide the necessary coverage, so be sure your policy covers the type of disputes you are most concerned about. For example, if you are a company with many employees, coverage of class actions may make sense.

This article was originally published at Entrepreneur.com.