You have a great idea. You've put in the time and effort to get it off the ground. You have a business plan in place. You have secured venture capital funding. You're ready to make your first hires. What could possibly go wrong?
In my work counseling start-ups and entrepreneurs, I have gained deep admiration for the bold, ambitious, and focused individuals who make up the start-up culture. But I also find that, for many entrepreneurs, their business development is far ahead of their legal compliance. This leads them to into legal traps that could have been avoided with a small investment of time, money, and counsel to head off these issues from the get-go.
Here are three of the most common employment law pitfalls you should be aware of. Paying attention to these can save you great heartache and headache on the back end:
Pay Attention to Non-Competes and Non-Solicits in Your Hiring Process
When you are looking to attract talent or are engaged in the perpetual recruiting common for up-and-coming start-ups, the easiest place to go to attract employees is from companies in a similar space. But, in our practice, we consistently see start-ups running into problems because of restrictive covenants that may bind their new hires or because their new hires take information or solicit customers on their way out the door of their old company. Many start-ups do not realize that these actions not only effects the departing employee, but can get the new employer deeply entangled in legal problems as well.
Restrictive covenants are enforceable in most states! Before making any new hires, ask them whether they have a non-compete or other restrictive covenants. Don't just take them for their word—they may not even know exactly what they signed. You should even ask to see their agreements. And, of course, consult with legal counsel. These agreements are technical, and knowledgeable legal counsel can help craft a solution to bring the new hire on board.
Note that, while oftentimes you can structure a new employee's role in a way that does not violate their agreements, sometimes their covenants make it not worth your while to hire them—better to know before you extend the offer. Also, if a potential recruit is bound by non-solicitation restrictions for employees or clients of the former company, caution them that you do not want them to violate these agreements on your behalf.
Once you make the hire, make sure to document the efforts you made to ensure your new hires is complying with his obligations to your old employer. Put in writing that you expect the employee to abide by his or her agreements. Candidates should be advised during the hiring process not to take, delete, or destroy any documents from their previous employer and to even comb through their hard drives to make sure all confidential information has been returned or destroyed. These measures are worth it. Restrictive covenant and trade secret litigation gets very expensive very fast.
If you proceed with hiring an individual who has signed restrictive covenants with their previous employer, there are potential consequences you need to be aware of. One possible implication is receiving a cease and desist order, a legal order asking you to stop certain activities, such as employing the individual in question. It often arises when there is a conflict of interest or violation of the said covenants. If you receive such an order, you should immediately consult with your legal counsel. Understanding your rights, obligations, and the best course of action is crucial because failing to comply can lead to legal consequences, including lawsuits and financial damages.
Protect Your Intellectual Property and Relationships
On the flip side, employers often find themselves on the losing end of a battle over intellectual property rights and restrictive covenant violations when their own employees leave, often because the employer failed to invest in drafting enforceable agreements. I've seen millions of dollars walk out the door because an employer did not want to spend the few thousand dollars to engage legal counsel to ensure that their restrictive covenant and confidentiality agreements were fully binding and enforceable.
For example, many new companies use a standard offer letter and intellectual property agreement, which may be enough for most employees. But it may not fit all, and therefore may not be enforceable down the road. Careful thought and deliberation should be given to tailoring the definitions as to what is confidential information, proprietary information, and trade secrets, beyond the form language you may find online. It will also be important to create systems to protect the confidentiality of your trade secrets and ensure offboarding processes that provides maximum protection from wayward employees walking out the door
Similarly, to be enforceable in most states, restrictive covenant and non-solicit agreements must be carefully narrowed to the role of the employee, as well as the company's business. Form restrictive covenant agreements will not work. Don’t forget that every state's laws are different in this area. Where an employee resides makes a difference. The litmus test for these agreements will be whether they are crafted in a manner that protects the legitimate business interests of your company. Experienced counsel can work you through all these issues and provide great value to your business. It's well worth the investment.
Don't Hire "1099 Employees"
Emerging companies tend to "hire" independent contractors to perform work, especially during the ramp-up stages of new endeavors. There are many benefits to engaging only independent contractors, such as providing flexibility, the ability to take the employee for a "test drive," risk mitigation if it doesn't work out, and to avoid an array of federal and state legal and tax implications pertaining only to employees. But a big mistake many make is thinking they can simply "1099 them." It is not so simple.
The Internal Review Service has advised a 20-factor (!) test to determine whether an independent contractor is really an employee. Without getting into the details, it all boils down to control. If you call someone an independent contractor, but, for example, dictate when they have to work, how they have to work, what they have to wear, what equipment they use, and whether or not they can work for others, among other things, you're running the risk of a misclassification issue. This could result in lawsuits about overtime or minimum wage, Department of Labor investigations, workers compensation issues, and unexpected liability for federal discrimination laws, among many other issues.
So, when you set up your vendor and independent contractor engagements, its well worth your while to consult legal counsel. Have a lawyer prepare your agreements and advise you on how to best set up the arrangement to avoid these liabilities. It's easy to do and will avoid a lot of headache.
These are just a few examples of the most common errors we see. With a small investment of time and money, these mountains can become molehills. Legal costs should be factored into your start-up costs. Trust me, it's worth it. You'll save huge in the end.
There's no need to worry about these or any other legal issues or break the bank to engage thoughtful, efficient, and high-quality legal counsel. The lawyers at my firm stand ready to help. If you'd like to discuss how we can take your legal concerns off your shoulders so you can focus on what you do best—build your business—please reach out at [email protected] or https://stantonlawllc.com/.
Josh Joel is a passionate employment and business counselor and litigator at Stanton Law, LLC in Atlanta, GA. His practice focuses on helping small and mid-size businesses and start-ups creatively, strategically, and efficiently resolve their legal problems. Josh is also the host of the Stanton Law podcast, featuring timely and relevant issues in law and work culture.