Employment law considerations for entrepreneurs

Is your start-up company ready to hire its first employee? The decision to form a start-up company is complicated enough; however, once you decide to grow your business and become an employer, you will find yourself navigating through a maze of employment laws and regulations. While there are a number of laws and regulations that start-up companies and their founders need to know, entrepreneurs can benefit by keeping these five employment law considerations in mind: 

Federal, State, and Local Laws

Employers are subject to various nondiscrimination laws and wage and hour laws throughout the entire employment process. The size of your start-up company often dictates whether a particular law applies to your business.  For instance, Title VII – the federal law prohibiting discrimination on the basis of race, color, religion, sex, or national origin – applies to employers with 15 or more employees. Iowa’s Civil Rights Act, on the other hand, applies to employers with four or more employees. As your workforce grows, so too will your legal obligations. 

To help start-ups, the EEOC offers a simple guide to discrimination laws, which is available at EEOC Start-Ups.  In addition, the following websites offer good resources to Iowa employers on wage, hour, and discrimination laws: 

• Department of Labor

• Iowa Workforce Development

• Iowa Civil Rights Commission

• Dickinson Law’s Wage and Hour Watch blog is also a good resource for employers throughout the country 

Employee Handbooks

Federal, state, and local laws often times require employers to provide certain notices to employees.  In addition, employment policies establish a good foundation for what you expect from your employees and what your employees can expect from you.  An employee handbook provides a centralized location for such policies and required notices.  Without a handbook, a disgruntled employee may use the absence of a handbook or policy as evidence that you were not following the law.

Reporting Requirements and On-Boarding Paperwork

In Iowa, there are seven primary reporting requirements for employers. 

First, employers must obtain an Employer Identification Number (EIN or FIN). This is a nine-digit number, similar to a social security number for an individual.  An employer may obtain an EIN by completing Form SS-4 and submitting it to the Internal Revenue Service.  An online application can be found at EIN Application and completed by answering a series of questions.  An EIN can also be obtained by telephone, fax, or mail. 

Second, every Iowa employer is required to withhold Iowa and federal income tax from compensation paid.  To do so, the employer must register as a WITHHOLDING AGENT.  To register as a withholding agent in Iowa, the employer must complete an Iowa Business Tax Registration form. An online application can be found at State of Iowa Business Tax.

Third, employers are required to issue a W-4 form to employees, which enables the employer to withhold the correct amount of federal income tax from an employee’s pay. Iowa also requires a withholding form for state income tax purposes, which is available at Iowa W-4.

In addition to the W-4 form, employers are required to issue W-2 forms to certain employees at the end of the calendar year. The forms must be sent to the employees at their last known address by January 31 of each year. 

Fourth, most employers are required to report wages and pay job insurance taxes to the Iowa Workforce Development. Each quarter, every employer liable under unemployment insurance laws is required to electronically submit a detailed wage report using the myIowaUI. 

Each employer must establish an account with the Iowa Workforce Development and display an unemployment insurance poster in a location where it can easily be seen by all employees. 

Fifth, most employers will be liable for any and all personal injuries sustained by an employee arising out of and in the course of employment and are required to obtain workers compensation insurance to cover such liability. 

Sixth, Iowa law requires every employer doing business within the state who hires or rehires an employee to file a report with the Centralized Employee Registry maintained by the Child Support Recovery Unit of the Iowa Department of Human Services. This report must be field within 15 days of hiring or rehiring the employee.

Seven, all employers are required to complete an “I-9.” Form I-9 is used to verify the identity and employment authorization of individuals hired for employment in the United States. 

Classification of Employees

Employees, unless specifically exempt, must be paid a minimum hourly wage, as well as time and one-half of their regular rate, for all hours actually worked in excess of 40 in a workweek.  These types of employees are known as “non-exempt employees.” Certain executives and

professionals are exempted from minimum wage and overtime provisions.  These types of employees are known as “exempt employees.” Whether an employee should be classified as an exempt employee or non-exempt employee depends upon the nature of the work performed.  A person must receive a salary to be exempt, BUT a person is NOT exempt simply because he or she is paid salary. 

Misclassifying employees as exempt when they are not places employers at significant legal and financial risk, including potential class action lawsuits that seek unpaid wages, overtime, penalties, and attorney’s fees.  

The same risk applies if an employer fails to correctly classify a worker as an independent contractor.  Financially, hiring an independent contractor is much cheaper than hiring an employee; however, the penalties for misclassifying a worker as an independent contractor are astronomical (i.e., lost wages, overtime, IRS penalty, etc.).  The test to determine whether a worker is an employee or contractor is not simple and depends on a variety of factors depending on the law that applies. Before classifying workers, entrepreneurs should contact employment counsel for assistance. 

Non-Compete and Non-Solicitation Agreements

Start-up companies, and their employees, are increasingly mobile in today’s global workplace.  Start-up companies also rely upon trade secrets to form their business, prepare a business model, and succeed. As a result, protecting confidential information is critical.      

A start-up company can protect their confidential information by requiring their employees to execute post-employment restrictive covenants. Common types of post-employment restrictive covenants include non-competition agreements, non-solicitation agreements, and confidentiality agreements. Such restrictive covenants are not a “one-size fits all.” For instance, they vary in duration, geographic restriction, and the type of employees that can be restricted. State law also dictates whether non-competes and non-solicitations are enforceable. Therefore, entrepreneurs should be knowledgeable about their home state’s law governing post-employment restrictive covenants as well as the law in states where their employees reside and work.

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If you have questions about employment considerations, please contact the Dickinson Law Firm at (515) 244-2600 to speak with an experienced attorney.

This material is not intended, nor should it be construed or relied upon, as legal advice.  Please consult with an attorney if specific legal information is needed.

- Melissa Schilling