April 24, 2014

Lean Start-Up Business Tactics:

HR Issues and Your Start Up

Presented and Authored By

Attorney Andrea G. ChatfieldCook, Little, Rosenblatt & Manson, p.l.l.c.

603-621-7118 ▫ a.chatfield@clrm.com1000 Elm Street, 20th Floor ▫ Manchester, New Hampshire 03101

University of New Hampshire

Innovation Catalyst Seminar Series

Hosted by

“Green Clean”You have developed a new cleaning solution that is environmentally friendly and organic-based. You are successful in getting funding for your new business (“Green Clean”), and now you need a chemical engineer to help develop more diversified applications of the solution, and you need a business manager to handle paperwork, administration, and finance (so you can work on sales and overseeing the manufacturing which is outsourced).

Inevitably, every successful start up will need the services and/or skill sets of other people (you can’t do it all!). Even if you only have 1 or 2 other people, your business is not too small to avoid the radar – but you can navigate your way. When you start to add people to your lean start-up, the initial question will be whether or not each person will be an employee or independent contractor.

Independent Contractors • You cannot simply “make” a worker an

independent contractor by agreeing to issue a 1099, even if that’s what the individual wants.

• Independent contractor status is something for which the worker must qualify by meeting legal tests.

• Classifying a worker implicates many federal and state laws. Each law has a different set of factors and criteria and is designed for different purposes (wage and hour, unemployment benefits, payroll taxes, workers compensation coverage, employee benefit plan eligibility, etc.).

• While not a guarantee, using a well written independent contractor agreement can help to establish an independent contractor relationship, especially in close cases.

• If a worker is misclassified as an independent contractor, there can be a variety of negative consequences for your business – fines, unpaid tax liability, failure to pay proper wages, liability if the individual gets hurt on the job, etc.

In New Hampshire, there are two main statutory tests: 1. The New Hampshire Department of Labor

(NHDOL) test for purposes of wage protection, workers compensation and minimum wage laws – ALL factors must be met.

2. The New Hampshire Department of Employment Security (NHDES) test for purposes of unemployment insurance coverage – ALL factors must be met.

NHDOL test: a) The person has a federal employer identification number or

alternatively agrees in writing to carry out the responsibilities imposed on employers under state law.

b) The person has control and discretion over the means and manner of performance of the work.

c) The person has control over the time when the work is performed. However, employer and person can agree to completion schedule, range or maximum of work hours.

d) The person hires, pays and supervisors own assistants, if any.

e) The person holds himself or herself out to be in business for himself or herself with continuing or recurring business liabilities or obligations.

f) The person is held contractually responsible for failure to complete the work; AND

g) The person is not required to work exclusively for the employer.

NHDES Test: “Services performed by an individual for wages shall be deemed to be employment subject to this chapter unless and until it is shown to the satisfaction of the commissioner of the department of employment security that:

a) Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact; and

b) Such service is either outside the usual course of the business for which such service is performed OR such service is performed outside of all the places of business of the enterprise for which such service is performed; AND

c) Such individual is customarily engaged in an independently established trade, occupation, profession, or business.

This is one of the more restrictive tests for determining independent contractor status, and is often referred to as the “ABC test.”

Federal Law Under Federal Law, there are several tests for determining employment status for purposes of determining income withholding tax responsibility, wage and hour laws, and coverage under various other federal employment statutes (ERISA, Fair Credit Reporting Act, OSHA, etc.). The most commonly applied standard is the IRS’ multi-factor test under which all information that provides evidence of the degree of control and independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories: a) Behavioral: Does the company control or have the right to control

what the worker does and how the worker does his or her job?

b) Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

c) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Consequences of Misclassification • Fines per misclassification and/or per day of violation.• Unpaid payroll taxes, the individual's income taxes

that were not withheld, plus interest.• Unpaid minimum wage and/or overtime pay for each

misclassified individual. • Potential criminal implications. • Individual Lawsuits: A misclassified worker can sue an

employer for back wages, overtime, value of lost employee benefits, etc.

Employment Status

• Set Up Payroll System• Register with NHDES• Obtain Workers Compensation

Insurance• Set Up Calculation for Withholding

Taxes and Payment of Payroll Taxes• Decide if Offering Employee Benefits

Offer Letter

• State the Basic Terms (rate of pay, job title, benefits – if any)

• Conditions to Offer (sign an employee agreement, background check, funding availability, etc.)

• At-Will Statement• Individual’s Signature

Compensation and Classification of Employees

• Exempt vs. Non-Exempt• Hourly vs. Salaried• White Collar Exemptions (Executive, Administrative, Professional,

Outside Sales)

• Incentive Pay (Bonuses vs. Commissions)• Commissions are earnings based on a transaction carried out by

employee• Bonuses are earnings based on performance by more than employee

NH Law requires written notice (signed by employee) regarding all terms and conditions of pay (not on the back of a napkin!)

Employee Agreements (Restrictive Covenants) Seek Legal Assistance! Yes, they are still enforceable – If Done Right. Tailored to scope of your business and the person’s

job duties Discuss during the recruitment/interviewing process Attach to Offer Letter

Current text of NH Law (RSA 275:70): “275:70 Notice of Non-Compete and Non-Piracy Agreements Required. Prior to or concurrent with making an offer of change in job classification or an offer of employment, every employer shall provide a copy of any non-compete or non-piracy agreement that is part of the employment agreement to the employee or potential employee. Any contract that is not in compliance with this section shall be void and unenforceable.”

This may be amended by current legislature: Stay tuned . . . .

Employee Agreements:

An employer’s legitimate business interests that can be protected by employee agreements include:

1. Trade secrets and confidential information2. Customer goodwill3. Business goodwill

Examples of Confidential Information to be protected:

• Trade secrets• Customer information• Financial information (but not employees’ pay)• Business plans and strategies• Operational procedures that are internal or unique to

your business• Technical information• Inventions and other research and development

Types of Employee Agreements:

• Nondisclosure – protects trade secrets and information that does not qualify as a trade secret

• Assignment of developments – protects inventions and IP

• Non-solicitation of employees• Non-solicitation of customers• Non-competition

Restrictive covenants must be reasonable:

1. The restriction must be no greater than necessary to protect the legitimate business interests of the employer;

2. The restrictions must not impose an undue hardship on the employee; and

3. The restriction must not be injurious to the public interest.

Restrictive covenants must be reasonable:

Not every employee will have access to confidential information or will create customer or business goodwill.

Consider a customized approach to avoid overly broad restrictions and enhance the chances of enforcement.

In considering a customized approach, ask yourself:

• Will the employee have access to confidential information? Unfettered or limited access?

• Will the employee have customer contact?• What is the extent/geographic reach of my business?• How long is the typical transaction/sales cycle?• How long should the restrictions run?• Will the employee be involved in developing or

inventing anything?

Other terms in employee agreements

• Return of company property• Employee is not bound by prior agreements and will not

bring prior employers’ information to your workplace• Authorization to disclose agreement to future

employers• Severability Clause• Choice of Law• Ability to assign agreement by employer• Injunctive relief and payment of costs and attorneys

fees if employee breaches

When the New Employee Starts:

• Employment Verification Process (Form I-9)• Form W-4 (Tax withholding status)• New Hire Report (for new employees and

unincorporated independent contractors)• Notice of Health Care Options (if your business is

covered by the Fair Labor Standards Act – generally this means you have $500,000 or more in annual dollar volume of business)

Back to the Beginning:So, how do you want to treat your:

Chemical Engineer?Business Manager?