Start-up Businesses and Growing Companies: Handling Key Employment Law Issues Checklist (Federal and CA)
This checklist provides guidance on the various employment and labor law issues that may arise when opening a start-up or expanding a business. It covers federal law and also highlights California law, particularly in subject areas that federal law does not typically address. Many venture capital-financed start-ups are in California, and California law generally tends to be more protective of employee rights than the law of other states.
For a practice note on employment law issues related to start-up companies, see Start-up Businesses and Growing Companies: Key Employment Law Issues (Federal and CA). Also see Equity and Incentive Compensation Arrangements for Startup Companies. For guidance on employment law issues related to start-up companies in New York, see Start-Up Businesses and Growing Companies: Key Employment Law Issues (NY) and Start-Up Businesses and Growing Companies: Key Employment Law Issues Checklist (NY).
Applicable Labor and Employment Laws
Conduct a due diligence review of the employer’s compliance with applicable federal and state employment and labor laws to help ensure that the start-up or growing company can secure venture capital financing in the future.
Consider the following major areas when drafting agreements and policies for start-up and growing companies:
• Discrimination and harassment. Federal anti-discrimination law prohibits discrimination against employees or job applicants based on race, color, religion, national origin, ancestry, age, sex, sexual orientation, gender identity, pregnancy, citizenship, disability, military or veteran status, and genetic information. See Discrimination, Harassment, and Retaliation – EEO Laws and Protections Practice Notes Page.Consider state discrimination laws as well, which may provide additional protections. See Discrimination, Harassment, and Retaliation State Practice Notes Chart.
o Disability accommodation. The federal Americans with Disabilities Act (ADA) generally prohibits employers from asking about an applicant’s disabilities, asking whether the applicant needs a reasonable accommodation to perform the job, or conducting a medical examination before extending a job offer. If an applicant has an obvious or known disability, however, an employer can ask if he or she requires an accommodation to perform the job. For more information on an employer’s obligations under the ADA, see Americans with Disabilities Act: Guidance for Employers.
o Religious accommodation. Make sure the start-up employer understands its obligations to accommodate employees’ religious beliefs. For more information on religious accommodations, see Religious Accommodation Requirements.
• Retaliation. Many state and federal laws prohibit employers from engaging in retaliation against employees who engage in protected activity. For more information on retaliation claims generally, see Retaliation Claim Elements: Key Considerations, Retaliation Claims: Evaluating Risks of Potential Claims, and Retaliation Claim Avoidance. For more information on retaliation under California laws, see California Fair Employment and Housing Act (FEHA), Non-FEHA Employment Discrimination Protections and Rules (CA), and Leave Law (CA).
• Family and Medical Leave. The federal Family and Medical Leave Act (FMLA) and the California Family Rights Act both generally require employers to grant employees up to 12 weeks of unpaid family and medical leave. For more information on the FMLA, see the Attendance, Leaves, and Disabilities – Family and Medical Leave Practice Notes Page. For more information on California’s family leave laws, see Leave Law (CA). For information on leave laws in other states, see Attendance, Leaves, and Disabilities State Practice Notes Chart.
• Unions. The National Labor Relations Act protects employees’ rights to organize and engage in collective bargaining. It also protects employees’ rights to refuse to engage in union activity and includes some protections for employers. For more information on prohibited conduct under the National Labor Relations Act, see NLRA Section 8 Unfair Labor Practices by Employers and Unions: Key Considerations.
• Wrongful discharge. Generally, there are no wrongful discharge claims under federal law unless a specific statute, such as Title VII, applies. California law, in contrast, recognizes public policy exceptions to at-will employment. See Stevenson v. Superior Court, 941 P.2d 1157, 1160 (Cal. 1997); Smith v. Brown-Forman Distillers Corp., 241 Cal. Rptr. 916, 922 (Cal. Ct. App. 1987).
• Workers’ compensation. In all states, employers must provide workers’ compensation insurance to cover employees’ job-related physical injuries. In California and certain other states, job-related mental or emotional injuries are also compensable. For information on workers' compensation laws in California and other states, see Workers’ Compensation State Practice Notes Chart.
• Workplace safety. The federal Occupational Safety and Health Act requires most employers to adopt and communicate detailed employee injury and illness prevention plans. See OSH Act Requirements, Inspections, Citations, and Defenses. California’s Occupational Safety and Health Act imposes criminal liability on corporate managers who knowingly expose employees to workplace hazards. See Cal/OSH Act: Compliance Requirements.
• Hiring considerations. Advise the employer to comply with all applicable laws during the hiring process. See Screening and Hiring – Hiring and Onboarding Practice Note Page. See also Screening and Hiring State Practice Notes Chart.
• Job interviews and screening. Avoid questions that are not job-related or that would reveal an individual’s membership in a protected class. For more information on pre-employment inquiries, see Screening and Hiring – Recruiting and Screening Practice Note Page and Interview Questions Checklist: Permissible and Impermissible Inquiries to Job Applicants and. See also Screening and Hiring State Practice Notes Chart.
o Background and credit checks. Pursuant to the federal Fair Credit Reporting Act (FCRA), employers must comply with extensive notice, consent, and disclosure rules when they use third parties to prepare certain background reports on employees or applicants. For more information on the FCRA, see Consumer Reports and Credit History Checks under the Fair Credit Reporting Act (FCRA) and Fair Credit Reporting Act (FCRA) and State Mini-FCRAs: Step-by-Step Guidance for Compliance. California has its own mini-FCRA law that severely restricts how an employer may use an applicant or employee's credit history to make employment-related decisions. For more information on California’s mini-FCRA, see Screening and Hiring (CA). For information on mini-FCRA laws in other states, see the References and Background Checks column of Screening and Hiring State Practice Notes Chart.
o Arrest and conviction records. In jurisdictions with ban the box laws, an employer may not ask about criminal convictions on job applications and, in many cases, not until after the employer has extended the applicant a conditional offer of employment. California’s ban the box law prohibits employers from inquiring into or considering an applicant’s conviction history until after the employer has given the applicant a conditional offer of employment. California law also prohibits employers from asking employees and applicants about arrests that did not lead to convictions. For information on California law governing criminal history inquiries, see Screening and Hiring (CA). For information on the laws governing criminal history inquiries in other states, see the References and Background Checks column of Screening and Hiring State Practice Notes Chart.
o Accessing social media. There is no federal law governing employer access to employees’ social media accounts. California employers may not ask or require job applicants or employees to disclose social media log-in credentials, access personal social media in the employer’s presence, or divulge any personal social media content. See Screening and Hiring (CA). For information on state laws governing employers' ability to access the social media accounts of employees and applicants, see Social Media: Employer Access to Employees’ Accounts State Law Survey.
Offer Letters and Formal Employment Agreements
Consider the following key points on offer letters and formal employment agreements.
• Offer letter considerations. Start-ups and growing companies commonly deliver offer letters to successful candidates for non-executive positions. While offer letters often provide less detail than formal employment agreements, they should set forth the key terms of employment. For annotated non-jurisdictional and state-specific offer letters, see the Employment and Compensation Contracts column of Employment Contracts State Expert Forms Chart.
• Formal employment agreements considerations. Start-ups and growing companies generally use formal employment agreements when hiring executives or top managers and other highly compensated individuals. For information on executive employment agreements, see Executive Employment Agreement Negotiation and Drafting (Pro-employer) and Executive Employment Agreement (Pro-employer).
Consider a restrictive covenant to help the start-up employer prevent an employee from working for a competitor, misappropriating a company’s trade secrets or other confidential information, soliciting customers, or soliciting other employees to leave the company. But, as addressed below, note California’s particularly restrictive stance towards non-compete agreements.
• Covenants not to compete. California law prohibits virtually all non-compete agreements, even if they are standard and enforceable in other states. Most states outside of California permit non-compete agreements if they support a legitimate business interest. For more information about covenants not to compete in California and other states, see Non-competes and Trade Secret Protection State Practice Notes Chart. For annotated state-specific non-compete agreements and clauses, see Non-competes and Trade Secret Protection State Expert Forms Chart. For more information on covenants not to compete generally, see Non-compete Agreements: Key Negotiation, Drafting, and Legal Issues.
• Customer and employee non-solicitation agreements. The purpose of a customer non-solicitation agreement is to prevent the former employee from siphoning off the company’s customers, not to prevent the employee from working for a competitor. Similarly, an employee non-solicitation agreement prohibits a former employee from poaching the employer’s employees. It is unclear in California whether customer and employee non-solicitation agreements are enforceable. Most states do not prohibit such agreements. For more information about customer and employee non-solicitation agreements in California and other states, see Non-competes and Trade Secret Protection State Practice Notes Chart. For annotated state-specific customer and employee non-solicitation agreement clauses, see Non-competes and Trade Secret Protection State Expert Forms Chart. For more information on customer and employee non-solicitation agreements generally, see Customer and Employee Non-solicitation Agreements: Key Negotiation, Drafting, and Legal Issues.
• Confidentiality / non-disclosure agreements. An employer must justify a confidentiality agreement, also known as a non-disclosure agreement, by showing that the information to be protected is in fact confidential and proprietary. For more information on confidentiality agreements, see Non-disclosure Agreements: Key Negotiation, Drafting, and Legal Issues (Pro-Employer), Confidentiality Agreements Checklist (Best Drafting Practices for Employers), and Trade Secrets and Confidential Information Protection upon Hiring Checklist. For information about state laws governing non-disclosure agreements, see Non-competes and Trade Secret Protection State Practice Notes Chart. For an annotated non-jurisdictional confidentiality agreement and annotated state-specific confidentiality agreements, see Non-competes and Trade Secret Protection State Expert Forms Chart.
Employee Handbooks and Key Workplace Policies
Advise the start-up employer to help avoid misunderstandings about the employer-employee relationship by distributing well-crafted employee handbooks.
• Employee handbooks and required employment policies. An employee handbook that contains clear policies can protect the employer from employee allegations of harassment, wrongful termination, and discrimination. It can establish clear expectations for appropriate behavior in the workplace by articulating a code of employee conduct. For an annotated employee handbook, see Employee Handbook. For checklists of provisions to include in both non-jurisdictional and state-specific employee handbooks (including required workplace policies), see the Employee Handbooks column of Employment Policies State Expert Forms and Checklists Chart.
Risks of Using Independent Contractors in Lieu of Employees
Start-up employers often hire workers and classify them as independent contractors who are exempt from coverage under many labor and employment laws. If done properly, this may be an effective way to for the start-up employer to save money and reduce administrative burdens. But it is also necessary to advise the start-up employer of the risks of improperly classifying workers as independent contractors, including the following:
• Potential tax liability. The U.S. Internal Revenue Service (IRS) and/or the corresponding state revenue agency may decide that the workers should be classified as employees, which would result in tax liability for the employer.
• Potential liability for unpaid wages. The U.S. Department of Labor could also decide that the workers should be classified as employees entitled to overtime pay and other benefits.
• Potential unemployment compensation liability. The state unemployment agency may decide that the workers should be classified as employees entitled to unemployment compensation.
• Potential workers’ compensation liability. There is also the risk of liability for worker’s compensation coverage should a worker’s compensation commission conclude that independent contractor status was unsupported.
For more information on tests for determining if workers are independent contractors and potential misclassification risks, see Independent Contractor Tests and Risks of Worker Misclassification. See also Independent Contractor Red Flag Checklist. For information on independent contractor tests in California, see Independent Contractor Tests (CA). For additional information on state laws on independent contractors, see the Independent Contractors State Practice Notes Chart.
For information on independent contractor agreements, see Independent Contractor Agreements: Major Negotiation, Drafting, and Legal Issues and Independent Contractor Agreement Drafting Checklist. For an annotated non-jurisdictional independent contractor agreement and state-specific annotated independent contractor agreements, see the Independent Contractors and Interns column of Wage and Hour State Expert Forms Chart.