Now that you’re a VC-backed company, chances are you’re about to go hire a bunch of employees with those funds. Your investors are looking to you and your board to comply with the law and protect their investment from employee-related risks.
There are numerous federal and state regulations, agencies, and laws that regulate employer-employee conduct. While we do not attempt to describe them all here, the following is a list of employee issues that VC-backed startups may encounter:
- Federal and state law obligations regarding equal opportunity and workplace discrimination, harassment, and retaliation.
- Wage-and-hour requirements.
- Exempt/nonexempt classification.
- Hiring considerations, including I-9 verification and criminal background checks.
- Offer letters and employment agreements.
- Agreements containing noncompetition, nonsolicitation, and nondisclosure of confidential information clauses.
- Employment-related filing, reporting, and insurance requirements.
- Obligations regarding the handling of employee pension and health benefits.
- Privacy concerns and corporate policies and procedures relating to the maintenance and safeguarding of computer and other corporate records.
- Fines, taxes, and liability associated with the misclassification of independent contractors and interns.
Given all of the potential issues surrounding your much larger workforce, below are some next steps to protect yourself, your company, and your investors.
Create Sustainable Employee Policies
With a significant increase in funds will come an influx of employee growth. Putting policies and procedures in place early on will be critical for attracting/retaining talent and maintaining healthy company culture. These policies should ensure that employees feel safe, heard, and valued—key policies to prioritize are whistleblower compliance, employee feedback, termination processes, and workplace issues.
An employee feedback management platform such as AllVoices can aid in many of these critical policies as a whistleblower-compliant feedback platform that makes sourcing, tracking, managing, and responding to feedback, issues, or breaches of policies easy.
Keep in mind that your policies should be evolving constantly. A tool like AllVoices also allows you to proactively identify issues in your workplace, ensuring that you always have valuable and timely insights and can adjust your policies to meet the current needs of your workforce.
Develop an Employee Handbook
Communicating your employee policies and procedures in a single source of truth that is readily available to your employees will help ensure understanding, trust, and clear expectations.
An employee handbook should address the critical topics mentioned above, as well as other matters such as:
- Hiring processes.
- At-will employment.
- Employee vs. contractor classification.
- Wages and hours.
- Travel and expense reimbursement.
- Computer/device use, information security, and privacy.
- Accommodation, leave, vacation, and personal time off.
- Dress code, attendance, and punctuality.
- Performance management.
- Safety and accident reporting.
- Workplace violence and drug and alcohol use.
- Cash and equity compensation policies and guidelines.
- Termination processes.
- Code of conduct.
- Workplace issues, including discrimination, harassment, and retaliation.
- Diversity, equity, and inclusion initiatives (adopting Mansfield Rule, creating affinity groups, etc.).
Obtain Employment Liability Insurance
Policies, compliance, and best practices can only take you so far. Even the most careful of employers can still face employment liability, and you should obtain an insurance policy with adequate limits to protect the company in the event of claims. Speak with your broker and your board to determine the appropriate limits of employment liability insurance, which depends in part on the size of your workforce.
Get Employee Classification Right
After you’ve raised VC funds, your company will be under even more scrutiny regarding misclassification of employees and independent contractors. So, if you haven’t done it already, now is the perfect time to review your current and past employees/consultants for misclassification issues with the help of Perkins Coie’s employment team. The tests used to determine the proper classification vary under federal law and by state; however, when push comes to shove, it is unlikely that an individual person doing work related to the business of the company will be determined to be a true contractor. When in doubt, it’s best to assume that all individuals doing work for the company (including founders) will be treated as employees absent clear and convincing evidence to the contrary. Therefore, you should comply with all minimum wage-and-hour, withholding, and other applicable requirements as if all of your service providers are employees.
Use the Right Employment Agreements
You should already have a form of plug-and-play employee offer letter for use with most regular employees of the company. But after you’ve raised VC funds, the company may onboard C-level executives who negotiate for a more extensive employment agreement containing provisions such as severance, bonuses, and perquisites. If you have any questions regarding offer letters or need a form of offer letter or a more fulsome C-level executive employment agreement, please reach out to your Perkins Coie team member.
Avoid Noncompetition Agreements
Noncompetition agreements (noncompetes) are a hotly litigated area with laws varying from state to state. In California, post-employment noncompetes are virtually banned, and in Oregon and Washington, the laws regarding noncompetes are fraught with a variety of issues for employers. As a result, you should discuss with your Perkins Coie team member before you enter into a noncompete with an employee or other service provider.
Comply With Tax Withholding Requirements
Employers who pay taxable wages to employees must withhold federal and state income tax and Social Security (FICA) taxes. Each employee must fill out a Form W-4 withholding allowance certificate or exemption from withholding and must provide this information to the company for its records.
Comply With Immigration and Customs Enforcement
All employers are required to obtain U.S. Immigration and Customs Enforcement Form I-9 from each employee and maintain completed forms with employee personnel files. There are substantial penalties for failing to comply with this requirement. Please consult with your Perkins Coie team for assistance with Form I-9 compliance as well as questions regarding the employment of foreign workers (e.g., work visas).
The following post was co-written by Jaagriti Sharma with AllVoices.
As startup lawyers, we often receive inquiries from passionate entrepreneurs and founders seeking guidance on when they should consider taking their side projects to the next step by forming a legal entity. Forming a company is a “crossing the Rubicon” moment for any startup. It’s an essential step…
Given this week’s headlines, many emerging companies may be asking themselves: “Why am I holding so much cash?” The Investment Company Act of 1940 (the 1940 Act) may be to blame. “But I don’t have any intention of being an investment company. Aren’t those mutual funds or…
In the three days since federal authorities announced sweeping measures to protect depositors of Silicon Valley Bank (SVB) and Signature Bank and help prevent additional bank failures (as discussed in our update of March 12, 2023), the U.S. banking system appears to have stabilized, at least temporarily.…