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It’s an exciting time for start-ups when you’re getting ready to hire your first employees. But it’s also a scary time as even one bad hire can cripple or even sink the company. And as you know, about 46% of new hires will fail within 18 months.
I sat down recently with a top corporate attorney, Jonathan Wilson with Taylor English Duma LLP in Atlanta, to get his input. He shared with me the following six things that every new company that is hiring its first employees needs to do:
Make sure each employee:
- is properly classified as exempt/non-exempt for Fair Labor Standards Act (“FLSA”) purposes,
- is subject to a non-disclosure agreement,
- agrees to assign intellectual property created within the scope of employment to the company,
- is subject to the company’s policies and procedures (including those that will be adopted in the future),
- is paid through a payroll service that properly calculates and withholds state and federal income tax, social security, unemployment tax and similar withholding amounts, and
- is legally permitted to work in the U.S.
As a new company, you’ll want to comply with all the various employment laws, but your new company also needs to work efficiently. If you were recently funded with a few million dollars to complete the launch of a product or to scale-up sales and revenues, investors will not be happy if you squander a lot of their investment money on over-kill HR solutions.
“Management needs to be smart about how it implements its HR and hiring systems” says Jonathan. “The first step is using a lawyer that’s experienced in striking the balance. I usually recommend an Employment Offer Letter that covers most of the basic items along with a combination of a Confidentiality and an Assignment of Intellectual Property Rights Agreement for the other points.”
An Employment Offer Letter identifies the employee, provides the job title, states whether the job is exempt or non-exempt for FLSA purposes, identifies the compensation and states that the job is subject to the employee’s compliance with the company’s other policies and procedures.
FLSA was passed by Congress in 1938. It was one of the first pieces of national legislation on basic employment standards. “The most important item for entrepreneurs to know is that this is the law that requires employers to pay employees time-and-a-half for hours worked over 40 hours in a week,” says Jonathan. “That national requirement applies to all employees, except those that are “exempt” from the requirement.”
Sometimes it’s tricky to know that jobs are “exempt.” “There was an initial exemption concept placed in the law in 1938,” says Jonathan,” but it’s become more and more difficult to analogize between modern jobs and those that were treated as exempt or non-exempt in 1938. The Department of Labor issued new regulations a few years ago, but even these are difficult to apply and are not intuitive.”
For example, an employee who makes less than $23,660 may not be exempt, but an employee who makes more than that may be exempt if they meet the “duties test” which asks whether the employee’s duties primarily involve executive, administrative or professional duties (as defined in the regulations). But if the employee makes more than $100,000 (defined as a “highly compensated employee”) the employee may be exempt if the employee meets a different duties test (that is different from the text applied to the non-highly compensated employee).
Because the FLSA exemption regulations are so complicated, Jonathan advises clients to work with an employment lawyer when they are designing job descriptions so that they can be certain their jobs fall clearly into the exemption category they expect to apply.
When I asked Jonathan about non-disclosure agreements and whether employees are obligated to keep employer confidential information secret, he responded “Not without an agreement of some kind.” He often advises clients to have an “employment-style” confidentiality agreement signed by each new employee on or before their first day of work.
The employment-style confidentiality agreement is slightly different from the confidentiality agreement that might apply to vendors, investors or other corporate entities. Employers should work with their outside counsel to get an appropriate form.
“Having a signed confidentiality agreement in each personnel file will be important if the start-up is successful and has another financing or a strategic exit,” says Jonathan. “As part of the due diligence process, the purchaser or underwriter is likely to ask for a representation that every employee has signed a written confidentiality agreement. If the new company has made confidentiality agreements part of the on-boarding process since inception, it can have confidence that it will stand up during due diligence.”
Regarding intellectual property (“IP”), Jonathan advises “Some forms of intellectual property that are created by an employee are automatically owned by the employer. But, in general, without a written assignment of IP rights, it’s easy for disputes to arise over the ownership of IP that an employee creates during employment.” In addition, due diligence for any major transaction is also going to look for IP assignments from employees involved in product development or software development. Jonathan advises employers to have an employee assignment of IP rights signed during the employee on-boarding process.
There are other important documents to consider during on-boarding. “Every employer should be certain to complete Form I-9 on or before the first day of work,” says Jonathan. This is the form that asks the employee to provide documentation to demonstrate eligibility to work in the U.S. In addition, along with the language in the employment offer letter that states that the employee must abide by all of the employer’s policies and procedures, if there are any specific policies that employees should acknowledge, there should be an acknowledgement form that the employee signs during the on-boarding process.
For those companies who have mandatory pre-employment drug testing or background testing, Jonathan says it is prudent to document that testing as part of the on-boarding process. For example, if employment is subject to pre-employment drug testing, the employee should sign a consent to that testing to be included in the personnel file. There should also be a consent for any criminal background checks or other pre-employment testing or verification procedures.
March 10, 2019 at 10:32AM
Forbes – Entrepreneurs