Many entrepreneurs try to be flexible employers with their startups, generally because the perk of flexibility on the job can attract talent, or perhaps a startup owner simply wants to create the work environment that he or she would’ve liked to have worked in as an employee themselves. However, sometimes being a flexible employer can get business owners into trouble by violating federal and state labor laws — state laws being the trickier variety as they vary from jurisdiction to jurisdiction. Here are a few of the laws employers may violate by trying to be efficient or flexible with employees.
One of the bigger mistakes some employees make is misclassifying employees. Some business will classify their labor force as independent contractors, which relieves employers from wage and hour laws or having to provide benefits such as health insurance or workers’ compensation while giving the worker the flexibility to set hours or a degree of independence in their work. However, as I’ve previously discussed, if you treat a worker classified as an independent contractor like a regular employee, you could be subject to penalties for failure to provide proper pay or benefits. Similarly, some employers will classify all of their employees as exempt, usually applied to an employee paid a set salary regardless of the hours worked, in exchange for being exempt from overtime or meal and break requirements. However, if the employee fails to meet the other requirements for exemption they are nonexempt and entitled to overtime and breaks.
On a related issue, some employers try to be flexible with lunch or other breaks by offering to allow employees entitled to meal and other breaks to skip them in exchange for leaving work early. However, some states mandate breaks and their length; giving employees the option to skip them to leave early technically violates the law. While you obviously cannot force employees to actually eat lunch or have a coffee during their break, if your state mandates breaks for employees, you should at least have your employees put their work down during the break period.
Another issue with flexible scheduling and wage employees is employees who work into overtime hours for the week. If you have wage employees, you should be cognizant of whether employees are going into overtime and pay them accordingly or restrict them to full-time hours.
I’ve previously mentioned some of the benefits of unlimited paid leave, but if your company does have limits on sick or vacation time, you should be aware of whether your state prohibits “use it or lose it” policies and considers paid leave as compensation, which must be paid to the employee, usually after a period of time or upon the employee’s departure from the company.
Finally, (and this is a point of particular importance for startups) you should ensure that your nondisclosure and noncompete agreements comport with state law. Although there is no legal penalty for having an employee sign an NDA or noncompete that violates the law, the agreement doesn’t do the company any good if it is voided by a court. Some states employ a vague “reasonableness” test for such agreements, others have hard limits prescribed by either statue or case law (unless a compelling justification for a broader agreement exists), and some states such as California outlaw noncompete agreements almost entirely. Some startups run into trouble because the founders don’t realize or don’t seek the advice to make sure that all founders and employees are operating under non-disclosures or non-competes, and then try to have everyone in the startup sign such agreements mid-stream. You should make sure that a NDA or noncompete signed in the midst of employment has proper consideration in order for the agreement to be enforceable. Many states now consider mere continued employment to be insufficient or past consideration; however, a promotion, a pay raise, or additional benefits might serve as acceptable consideration to enforce the agreement.