"Legal Corner: Employment Issues Affecting Your Start-Up"
The article below appeared in Silicon Bayou News on February 4, 2015.
By: Michael A. Balascio and Michelle M. Rutherford
Bringing on employees can raise a host of legal issues for your start-up. Below are a few of the more common legal issues you should consider and navigate before you make new hires to ensure successful relationships with your workers:
1. Employment Relationship: At the outset, it’s important to think about the overarching structure of your company’s relationship with employees. Generally, this relationship is governed either by contract, or is considered “at will.” “At will” employment is more common. In this relationship, there is no written contract governing the parties’ rights and obligations, and the employer-employee relationship can be terminated by either party for almost any reason. Alternatively, an employer may use a written contract to define the terms of the employment relationship, including duration and scope of work, compensation, and the conditions under which the employee can be discharged.
While an “at will” employment relationship requires less initial investment and provides employers with greater flexibility, these informal arrangements also make it easier for employees to leave your company. An employment contract will not prevent employees from leaving, but these agreements can provide a way for employers to put restrictions in place that may incentivize employees to stay put. This may be useful to encourage employees that have a particularly valuable skill set to remain with your company. See the section below on restrictive covenants for examples of these.
2. Employee or Independent Contractor: Another initial decision is whether to classify a worker as an independent contractor or an employee. Classifying a worker as an independent contractor allows your company to avoid many legal requirements associated with employees, including tax withholding, wage and hour requirements, and health insurance and benefits plans. Relying on independent contractors, rather than employees, can save costs and give your company some much need flexibility in managing its work force. The test for whether a worker can be properly classified as an independent contractor is highly fact-driven, and depends heavily on the extent to which your company controls when, where, and how the services are provided by the worker. Incorrectly classifying a worker as an independent contract can make your company liable for back taxes and penalties.
3. Restrictive Covenants: Consider how non-compete and non-solicitation covenants may be useful in employment contracts. Non-compete agreements prevent employees from leaving your company and competing with you for clients and business in the same geographic area for a specified period of time following termination. Non-solicitation agreements similarly put limitations on when and how your former employees can solicit clients or other employees and lure them away. Both can be useful in protecting your company and your investment in new employees, but there are specific drafting requirements to make these agreements enforceable. Consult an attorney, and see our previous article for more information on drafting these agreements to comply with state law: http://siliconbayounews.com/2014/07/31/legal-corner-non-compete-agreements/.
In the same way that you should consider using non-compete agreements, keep in mind that your new hire’s former employer may have had the same idea. When you are considering new hires, make sure to ask them specific questions about agreements that they may have signed with their former employers, including non-compete and non-solicitation agreements. These restrictive covenants can expose your company to legal claims even if you don’t know they exist. Depending on the situation, it may be wiser to insist on reviewing these prior agreements – rather than simply accepting the prospective new hire’s explanation – before extending an employment offer.
If you do decide to hire a candidate subject to a restrictive covenant, make sure you document, in an offer letter or employment contract, your understanding of the restrictive covenant. This will help insulate your company in the event that later facts are revealed about the covenant of which you weren't aware.
4. Confidentiality and Intellectual Property: Protect your company’s trade secrets and IP by considering agreements that notify employees of their obligations to safeguard sensitive and proprietary information. In addition, consider making the confidentiality agreement broad enough to ensure that any intellectual property developed during the scope of your employees’ work remains the sole property of your company.
These are just quick summaries of a few issues relating to employees that might affect your company. As always, consult with an attorney to ensure your company is compliant with state and federal law.
About Legal Corner
Legal Corner is a recurring column in Silicon Bayou News, featuring a discussion of legal issues relevant to entrepreneurs and start-ups. Legal Corner is authored and edited by Michael A. Balascio and Michelle M. Rutherford, associates at the New Orleans-based law firm Barrasso Usdin Kupperman Freeman & Sarver, L.L.C. Michael and Michelle have significant experience advising small companies and start-ups with strategic and legal decisions. They are both licensed to practice law in Louisiana – with Michael also licensed in Massachusetts and New York, and Michelle in California.
About Silicon Bayou
Silicon Bayou News is the leading source for tech and entrepreneurial news in Louisiana. Silicon Bayou's goal is to put a spotlight on the great things happening in Louisiana and provide a common virtual space for community discussion and collaboration.
About Barrasso Usdin Kupperman Freeman & Sarver, L.L.C.
Barrasso Usdin Kupperman Freeman & Sarver, L.L.C. is a litigation law firm located in New Orleans, Louisiana. The Firm has experience litigating complex civil cases throughout the country, including all types of commercial disputes, class actions, environmental cases, product liability and toxic tort cases, intellectual property cases, insurance bad faith and coverage cases, and securities arbitrations, litigation, and regulatory matters.