By Lynne C. Hermle, Michael D. Weil, and Richard D. Harroch
Employers can fall into a myriad of employment-related traps. Numerous state and federal laws impact the hiring process and apply a wide variety of employment-related protections, including to discipline and termination issues.
For many startup and emerging companies developing technology, the issues associated with the creation of intellectual property by employees and consultants are crucial. Employment litigation is expensive, disruptive, and distracting, and emerging companies should implement appropriate steps and agreements from the outset.
This article discusses 13 key employment and labor law issues for startup and emerging companies.
1. Know what hiring questions you may not ask
Federal and state laws prohibit employers from making hiring decisions based on protected categories: gender, race, age, color, religion, disability, and others. Asking the wrong questions could lead to a discrimination claim against the company, even if decisions are not made on that basis. Here are examples of the types of questions to stay away from:
- How old are you?
- What is your religion?
- Do you have any medical conditions we should be aware of?
- Have you ever been arrested?
- Do you have any disabilities that would hinder you in performing the job?
- Have you had any recent illnesses or operations?
- Are you married?
- Do you have children or plan to have children?
- How long do you plan to work until you retire?
- Do you drink or smoke?
- What is your political affiliation?
- Is English your first language?
- What type of discharge did you receive from the military?
- What country are you from?
- Where do you live?
- Do you take drugs?
Some of these may be obvious. But these questions may also be prohibited:
- What is your maiden name?
- Do you own or rent your home?
- Where is your family from?
- What was the date/type of termination of your last employment?
- Can you give me the name of a relative to be notified in case of emergency? (The problem is asking for the name of a relative. But you can ask “In case of an emergency, whom can we notify?”)
2. Ask each candidate to fill out an employment application
An employment application can serve several useful purposes. First, it provides key information that will enable the employer to determine whether an initial or further interview makes sense. Second, it serves as a representation and warranty from the candidate as to the truthfulness of the information provided (which may be useful later on if problems arise). And, the information provided can facilitate reference checking. There are plenty of examples on the web of Employment Applications, including a comprehensive one at AllBusiness.com. In any case, be sure you don’t have any of the prohibited inquiries (including arrest questions) on the application.
3. Perform a comprehensive reference check before you hire the employee
Many employers conduct a limited and incomplete reference check as part of the hiring process, often leading to issues with the candidate’s inability to perform their required duties or to get along with others. A comprehensive reference check includes:
- Verification of job titles and dates of employment
- Verification of educational degrees and dates of attendance at schools
- Verification of starting and ending salary
- Verification of job role and responsibilities
- Inquiry as to why the applicant left the prior employer
- Conversations with prior supervisors as to the applicant’s strengths and weaknesses
- Inquiry as to the applicant’s ability to get along well with other employees and customers
- Inquiry as to the applicant’s ability to take on the new role
- Inquiry as to punctuality or absenteeism issues
- Reference checks with other people not listed by the applicant as a reference
The purpose of these checks is to make sure that the applicant will fit into the company’s culture and to ensure that the applicant has been truthful in their resume and employment application. However, the process is carefully regulated by the federal government (through the Fair Credit Reporting Act) and the laws of many states; failure to follow the highly technical process can lead to class action lawsuits. Consider consulting legal counsel and, for general information, see the EEOC’s Background Check: What Employers Need to Know.
4. Use a good form of offer letter or employment agreement
Oral agreements often lead to misunderstandings. If you plan to hire a prospective employee, use a carefully drafted offer letter, which the employee is encouraged to review carefully before signing. For senior executives, a more detailed employment agreement often makes sense. A good offer letter or employment agreement will address the following key items:
- The job title and role of the employee
- Whether the job is full time or part time
- When the job will commence
- The salary, benefits, and any potential bonuses
- Whether the position is “at will” employment, meaning either party is free to terminate the relationship at any time without penalty (although employers may not terminate employees for legally prohibited reasons, such as for age discrimination or retaliation from sexual harassment allegations, etc.)
- Confirmation that the “at will” agreement may not be changed unless signed by an authorized officer of the company
- Confirmation that the employee will need to sign a separate Confidentiality and Inventions Assignment Agreement (described below)
- If the company chooses, a statement that any disputes between the parties will be resolved solely and exclusively by confidential binding arbitration (also discussed below)
- Any stock options to be granted to the employee and the terms of any vesting (details usually laid out in a separate Stock Option Agreement)
- To whom the employee will report
- Language stating that the offer letter constitutes the entire agreement and understanding of the parties with respect to the employment relationship, and that there are no other agreements or benefits expected (unless additional provisions are laid out in a handbook, which should be referenced if so)
Companies should ensure that the employee and the Company sign the letter, the Confidentiality and Invention Assignment Agreement, any Stock Option Agreement, and any first day paperwork (such as the IRS W-4 Form for withholding and the I-9 form mandated by law).
The following is an example of a form of employee Offer Letter. Sample forms of Employment Agreements can be found here. See also 14 Key Issues in Negotiating Employment Agreements.
[ Name of Company]
[Date]
Re: Terms of Employment
Dear ________:
We are pleased to inform you that [Name of Company] (the “Company”) has decided to make you this offer of employment. This letter sets forth the terms of the offer which, if you accept, will govern your employment.
- Position; Duties. Your position will be __________, reporting to the __________ of the Company. Your duties and responsibilities will be as designated by the Company, with an initial focus on (i)___________ and (ii)________________.
- Full-Time Employment. The employment term will begin on _____, 20__.
- Compensation. Your compensation will be $___a year, paid [every two weeks] consistent with the Company’s payroll practices. Your package will include participation in the health and other benefit plans of the Company pursuant to their terms as may be amended by the Company from time to time. You will be entitled to ____weeks paid vacation (equivalent of business days) for each year of full employment. Unused vacation time should be taken and may not be carried over into subsequent years.
- Stock Options. Subject to approval of our Board of Directors, we expect you will be granted options to acquire___ shares of the Company’s Common Stock, vesting over a [four (4)] year term with one (1) year cliff vesting for 1/4th of the options. The options are expected to be granted at a strike price of $__ per share. The terms and conditions of your stock options are contained in a Stock Option Agreement of today’s date and must be executed by you and returned to us immediately.
- Employment at Will. Our employment relationship is terminable at will, which means that either you or the Company may terminate your employment at any time, and for any reason or for no reason. Our at will agreement can only be modified by a writing signed by both you and the CEO of the Company.
- Confidentiality and Invention Assignment Agreement. You will be subject to the Company’s Confidentiality and Invention Assignment Agreement, which is enclosed with this letter and must be signed and returned by you before any employment relationship will be effective.
- Certain Acts.During employment with the Company, you will not do anything to compete with the Company’s present or contemplated business. You will not engage in any conduct or enter into any agreement that conflicts with your duties or obligations to the Company. You will not during your employment or within one (1) year after it ends, directly or indirectly solicit any employee, agent, or independent contractor to terminate his or her relationship with the Company.
- Representations. You represent that you are aware of no obligations legal or otherwise, inconsistent with the terms of this Agreement or with your undertaking employment with the Company. You will not disclose to the Company, or use, or induce the Company to use, any proprietary information or trade secrets of others. You represent that you have returned all proprietary and confidential information belonging to all prior employers. You also represent and warrant that all information provided to the Company (including any information in your resume and any Employment Application) is true, correct, and complete.
- Arbitration.
a) Disputes can arise even in the best of relationships. Rather than fighting it out in court, both you and the Company agree that any controversy, claim, or dispute arising out of or relating to this Agreement or the employment relationship or your compensation, either during the existence of the employment relationship or afterwards, between the parties hereto, shall be settled solely and exclusively by confidential binding arbitration in the city in which you work.
b) Such arbitration shall be conducted in accordance with the JAMS Employment Rules & Procedures (which can be reviewed at http:http://ift.tt/2qyB1dQ) in existence at the time of the commencement of the arbitration, with the following exceptions if in conflict: The Company will pay the arbitration filing fees and the arbitrator’s fees; one arbitrator shall be appointed by JAMS; and arbitration may proceed in the absence of any party if written notice (pursuant to the JAMS’ rules and regulations) of the proceedings has been given to such party.
c) The parties agree to abide by all decisions and awards rendered in such proceedings.
d) You and the Company agree that any claim for breach of this Agreement and any claim regarding or related to your employment, including disputes regarding compensation, discrimination, wrongful termination, harassment, and any and all other conflicts or claims will be resolved solely and exclusively by confidential final and binding arbitration on an individual basis only, and not on a class, collective, or private attorney general representative basis on behalf of other employees, to the extent not prohibited by applicable law.
e) We both agree to waive any rights to a jury trial or a bench trial in connection with the resolution of any dispute under this Agreement (although both of us may seek interim emergency relief from a court to prevent irreparable harm pending the conclusion of any arbitration).
f) This Section 9 arbitration provisions shall not apply to the following matters: (1) claims for workers’ compensation; (2) claims for unemployment compensation benefits; (3) claims or charges before an administrative agency having jurisdiction over the matter; or (4) claims that are forbidden to be arbitrated as a matter of law.
g) Any dispute or claim concerning the scope or enforceability of the arbitrations provisions of this Section 9 shall be determined exclusively by an arbitrator pursuant to the procedures set forth above.
h) The arbitrator shall have the power to award all relief available in law or equity requested by the parties and supported by credible, relevant, and admissible evidence.
i) Arbitration is not a mandatory condition of your employment. If you wish to opt out of the arbitration provisions of this Section 9, you must notify the Company by email to _______@____.com, stating your decision to opt out, within 10 days of your signing this Agreement.
- Miscellaneous. Upon your acceptance, this letter will contain the entire agreement and understanding between you and the Company and supersedes any prior or contemporaneous agreements, understandings, term sheets, communications, offers, representations, warranties, or commitments by or on behalf of the Company (oral or written). The terms of your employment may in the future be amended, but only by writing and which is signed by both you and, on behalf of the Company, by a duly authorized executive officer, provided, however, that you agree to comply with the provisions of the Company’s Employee Handbook, as may be amended or adapted by the Company from time to time. In making this offer, we are relying on the information you have provided us about your background and experience, including any information provided us in any Employment Application that you may have submitted to us. The language in this letter will be construed as to its fair meaning and not strictly for or against either of us. If any provision of this Agreement is held invalid, in whole or in part, such invalidity will not affect the remainder of such provision or the remaining provisions of this Agreement. This Agreement is governed by [State] law (without regard to conflicts of law principles) and the Federal Arbitration Act (FAA), but in case of a conflict the FAA controls.
If these terms are acceptable, please sign in the space provided below and return this letter to us. Again, we’re very excited to have you join the Company.
Yours truly,
[Name]
[Title]
IMPORTANT
I agree that I have been given a reasonable opportunity to read this Agreement carefully. I have not been promised anything that is not described in this Agreement. The Company encourages me to discuss the Agreement with my legal advisor. I have read this Agreement, understand it, and I am signing it voluntarily. By signing the Agreements, I understand that the parties are agreeing to arbitration for any disputes as set forth above.
Agreed and Accepted:
[Name]
5. Adopt a well-drafted anti-harassment and anti-discrimination policy
The company should have a carefully drafted anti-harassment and anti-discrimination policy (which is required by some state laws and expected by many jurors if litigation were to arise).
Helpful policies typically run 2-3 pages in length and samples can be obtained from experienced employment lawyers or HR consultants. A good policy typically addresses the following:
- The company’s zero tolerance of any forms of harassment, discrimination, bullying, or violence in the workplace
- The definition of sexual and other types of harassment or discrimination (i.e., based on race, color, religion, national origin, age, disability, etc.)
- Examples of conduct constituting prohibited harassment
- Rights of the employees to complain about harassment, discrimination, and retaliation, and to whom such complaints should be made (consider making HR the designated recipient of complaints to ensure they are properly handled)
- The company’s policy to investigate claims
- Assurance that the employer will protect the confidentiality of complaints to the extent possible
- Strong prohibitions on any retaliatory conduct
- The disciplinary actions that may be taken upon determination that the policy has been violated
- State and federal remedies available to the employee
The company should distribute the policy, ideally annually, to all employees with a cover email or other communication insisting on its importance and the need for compliance.
6. Promptly and thoroughly investigate any sexual harassment or discrimination complaints
The company should promptly investigate sexual harassment or discrimination complaints (including those which may initially appear to be meritless). Failure to treat a complaint seriously can exacerbate the problem and the liability to the company.
Investigations should be conducted by persons with training and experience and who have the ability to be neutral and impartial (i.e., who don’t report to or have relationships with those individuals involved in the complaint). Legal counsel should provide advice as needed, including on any thorny evidentiary or credibility issues which could arise during the investigation.
The investigator should create an initial plan for thoroughly analyzing the complained about activities, ideally in consultation with counsel. Here are some basic steps which may be appropriate for that plan, depending on the facts:
- Determination of the appropriate scope of the investigation
- Interviews with the complaining party
- Interviews with the accused employee
- Interviews with other employees and third parties (contractors, outside witnesses, etc.) who may have relevant information
- Review of emails, memos, and other relevant communications
- Review of the personnel files of the parties (including any prior disciplinary write-ups)
- If needed, consideration of how to resolve credibility in assessing conflicting reports
- Assessment of whether the initial scope of the investigation needs to be broadened
- Action taken to address the concerns raised, potentially including training and discipline, which should be clearly documented
- Determination of the form of any report that should follow
Here are some tips for an appropriate investigation:
- Determine the appropriate scope of the investigation; the scope will vary depending upon the allegations and should be reassessed if facts change.
- Choose an investigator who has good people skills and judgment. Both will be important in almost every investigation. If you don’t have a qualified neutral candidate inside, hire an experienced one from outside. One good resource is the Association of Workplace Investigators.
- If the initiation of the investigation is delayed (for example, because the appropriate internal investigator is traveling or
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