Many entrepreneurs start a new business with a vast wealth of knowledge about what the company makes or does but with scant details about the mechanics of running a business.
One potential trouble spot is hiring help because it’s fraught with legal issues that are all too easy to overlook until it’s too late.
“I understand that in the early going, owners of start-ups are under-resourced,” said Megan Anderson, an employment attorney at Gray Plant Mooty in Minneapolis. “But if they put off some of these higher-priority issues, the risk is that neglecting them could threaten their business’ success. The last thing you want is a costly legal battle over an issue that could have been solved on the front end.”
Certain basics apply to anyone who’s hiring an employee for the first time, according to Joseph P. Beckman, an attorney with Hellmuth & Johnson in Edina. One such essential is a working knowledge of trust fund taxes – the money withheld from an employee’s wages, such as income tax, unemployment, Social Security and Medicare taxes.
“When someone forms a corporation, sometimes they assume all they really need to do is keep a separate corporate checkbook,” said Beckman, who added that a good accountant payroll service can help you stay in bounds on this issue. “The first thing you need to know if you’re hiring is that trust fund taxes are an absolute liability. If you forget to pay them and the corporation has no money, as an officer of the corporation, you’re personally responsible.
“If your business goes bankrupt and you have $50,000 in unpaid FICA, they’ll come after you.”
St. Paul employment attorney Mary Budge said she once had a client who was $90,000 in arrears on unemployment taxes, a calamitous situation for a fledgling business. Quarterly contributions toward unemployment can be easy to overlook, but it’s crucial to stay ahead of them.
“When you’re a small business, cash flow is everything,” said Budge. “But you have to make those contributions, even if it means incurring some debt or getting more equity capital in your business.”
Of course, numerous employment law headaches can be avoided by resisting the temptation to hire until it’s absolutely necessary. Budge said that unless the owner of a start-up is in retail, she cautions entrepreneurs that they’re better off going it alone for as long as possible.
“You might be very busy, but not making much money,” she said. “If you hire people, it changes the landscape drastically.”
But once that first hire is made, start-up owners enter a new world of diligence. One important area is how employees are classified. Anderson noted that there’s been an uptick in enforcement by federal and state agencies against business owners who misclassify employees as independent contractors as a way to avoid trust fund taxes.
The IRS rules about what constitutes an employee versus a contractor have to do with how much control the company has over the work being done and how the worker is compensated.
“Start-ups either don’t understand the law, or they think they might save money by classifying people as independent contractors,” said Budge.
Anderson also advises making sure your screening and hiring practices are lawful and brushing up on the legal requirements of at-will employment, a status indicating that either the employer or the employee can end the work relationship for any reason as long as the terms of the termination don’t violate state or federal laws.
“Sometimes with someone at an executive level you might have something other than at-will employment and enter into a contract,” she said. “But at-will offers the most flexibility to end the relationship if there’s a reason to do that.”
Speaking of contracts, consider whether one might be necessary to protect your company’s intellectual property or to shield the company from unfair competition. The rules for protecting intellectual property can vary depending on whether the employee is classified as an independent contractor or as an employee. And contractual clauses called assignment provisions can make it so that inventions or innovations by employees will revert to the company.
Anderson advises taking care with non-compete clauses, especially with independent contractors. “They can be more indicative of an employment relationship,” she said. “But you can have independent contractors sign a non-solicitation agreement saying that they won’t raid your employees or solicit your clients when the work relationship ends.”