July 15, 2020

Educational episode #7 - major mistakes while hiring new employees and how not to get sued, by Kristina Subbotina.

This is the 7th educational episode by Fundraising Radio and in this episode Kristina Subbotina, corporate and securities attorney at Ross Law Group explains what are the major mistakes that founders make while hiring new employes.

Video explanation that Kristina made specifically for this episode: https://www.youtube.com/watch?v=LogLsQ-xky4

Ross Law Group: https://www.rosslawgroup.co/


Transcript

All right, this is fun. Reason redo educational episode number seven, and today's a guest speaker. We have Christina corporate and securities attorney at Ross Law Group, and Lisa will discuss the legal side of hiring new employees. 

So, I've seen a lot of founders just heavily struggling with the legal issues. So I started focusing on that a little bit more. And today, Christina will tell us main mistakes that she sees. Founder is making while hiring new people. 

And she also explained to you what to focus on during that process, which documents you just have to file, not to get sued. So, Christina last kickoff by giving us just a little bit of your background. 

And then we'll dive straight into the hiring. Sure. Thank you. For introduction,
inviting me,
I do work as a corporate security attorney at Ross Law Group, where boutique law firm in the heart of Manhattan, 

financial district located in Wall Street, 

and all of our clients startups and investment funds and individual investors and we basically represent them on all the stages of their business lives starting from information, 

then financial rounds, 

then day to day business transactions exit strategies. 

Ebony. 

And for startups, we do a lot of work with formation and then Series C Series A. B and also we represent investment funds and investors investing in those startups on those stages of lives. 

So, we kind of have that perspective what investors are looking for in the startups and what kind of due diligence they do because we basically doing those due diligence on their behalf. 

And that helps us to guide the startups in the right direction to avoid some mistakes along the road and basically reached that point of or other exit strategies 

the companies selling. 

Right? So, speaking of mistakes, let's first discussed the major mistakes that you see, founders making while trying to hire a new employee, whether it's going to be a full time employee, or a contractor. 

Yeah, 

so the the main mistake that I see among the founders not understanding the difference between an employee and consultant, 

so employees,
they received W,
two and consult consultants, 
independent contractors they receive ten ninety nine, but that's not the real difference right?
Them is classification comes from desire,
I guess, 

to just do an easy way and call everybody independent contractor and that way you kind of avoid the compliance with a lot of laws and regulations, 

but you may get large penalties for back wages overtime, pay tax and insurance obligations employee benefits,
so,
for example, 

in two thousand seventeen more than thirty thousand and the card shoppers, they filed a lawsuit against the card saying, 

basically alerts that the company misclassified them as independent contractors and failed to reimburse business related expenses. 

So long story. Short Instacart settle that class action lawsuit for four point six million and many startups. They just don't have the money, or that's all they have. And they're gonna go down and go investors. 

No investor will want to invest in a company with such a risk. So, in my. 

So you could choose when where, and how those people perform services that's an implication that that person is an employee. 

If you provide facilities equipment, tools, supplies, if you repaid their business travel expenses if you set the hours of work. 

If you require exclusive services, 

meaning individual cannot work for your competitors while working for you if you require attendance at meetings or training sessions, 

you ask for written report, 

oral reports. 

And as an example for California, for example, it has three it has a BC task. 

It has three main criteria and the first criteria is that the worker is free to perform services without the control or direction of the company. 

The second is that the worker is performing work tasks outside of the usual course of the startups business and the third one that the workers performing the job duties of the, 
their regularly, 
stable,
loose trade,
occupational business and let's just take an example. 

So, I can walk you through how the thought processes working. So, let's imagine your start up that makes software and then you have an office, and you have a problem with your toilet. So you inviting the plumber to fix it. 

And so, when you call a plumber, and the plumber sets the date time, when you recall, and he fixing the toilet, something that you cannot do, because you're not specialized in that. 

And that plumber normally does fixed toilets. So that's his trade occupation business. 

And according to this ABC tasks, these plumber will be an independent contractor, and you do not need to classify him as an employee of your business. 

But let's imagine you got a really locker to contract with Tesla to produce software. And that contract would last for three months. 

And you just realize you don't have enough manpower to, to deliver that. And then you invite him your brother in law to help you out for three months. So you don't need to hire software engineer for long term. 

You just needed this help right now, 

and you bring him in and that person maybe may be able to set his own schedule, 

but she will be performing the, 

the task that is part of your regular business doing software. 

And because of that, you would like to, you would likely to have to classify that rather as an employee even if he's only a temporary employee. 

And to kind of wrap it up, 

if you if, 

you know, 

for sure that that person is independent contract, 

I would encourage you to draft or have lawyers drafted independent and independent contractor agreement, 

which will emphasize,
and summarize those factors. 

That will distinguish a person from an employee. So, even if you know that okay, this is the independent contractor agreement I swear to God, that's it. Still have an agreement in place to emphasize, summarize and formalize that. 
Got it, so, let me make sure I understood correctly. So basically, if the person is doing something, 
that's very similar to what you do on daily basis. That means that probably that person is should be classified as an employee, right? 

Yes, yes. Actually, the the company has to prove has to prove those things for example, company engages and independent contractor. 

It has to prove that the work that that person is performing work outside of the usual course of the company's business. So, the the duty to prove is on the start. 

Oh, no, I thought it's much easier than that's alright. Let's at first. I want to discuss the the contractors, because I thought that's most, you know, most common thing for early stage startup founders to do. 

But now, it feels like the employee is a more classical classification of those people. So let's talk about the major things that it started. Founder should look at while actually hiring someone even for. 

Couple of months, period. Yes, there are many things but I would I understand that, you know, start up is just bootstrapping and there are not many resources. 

So, I would just emphasize two, most important things that I recommend my clients on a tight budget to have in place. First is offer lateral and there are two reasons why I really recommend having an offer letter. It's short and sweet. 

So it wouldn't take a lot of time to put it together, but it's also sometimes required by law. So, for example, California and New York, they require all commission agreements to be in writing and contain certain information. 

New York City requires that certain independent contractor agreements. Also. Be writing, 

and the last reason is that many states they required the companies to put in writing and regular pay date and you kind of want to have it in one place that you saved it in your draw 

box or somewhere. 

Instead of going through the emails later, you've got for bees. There's a lawsuit. So it's always nice to have this short and sweet offer letter way. 

You summarize title and position, reporting, relationship, start the term of employment if any rate and frequency of pay, how you will be, how you will be paying. 

And also to emphasize whether that employee is exempt or non, exempt,
meaning that when non exempt employees there,
they entitled to minimum wage and overtime requirements, 

and usually exempt employees of those employees who a white collar,
administrative executive,
professional outside sales sales in place.
But other employees non, exempt there, they have certain rights to the overtime payment. 
For example, also, you can put in that offer letter, hours of work, full time for part time you can put eligibility eligibility for benefits, conditions for employment. 

So, for example, back up, nine compliance.
And if you're performing some background check, 

so you can also say that the condition of the employment is you passing that background check and emphasizing whether that's that's the confirmation whether the employment relationship will be at will. 

So you can terminated at anytime. So, all those things. I would recommend to include in the offer letter and together with this with the offer letter, I would have confidentiality agreement and proprietary rights agreement. 

And usually, Swan document, confidentiality in proprietary rights agreement, and the second document I would recommend, especially for startups with sensitive product development and design information. 

And when you have this agreement, it serves three major purposes. First it protects information. 

So you do not share confidential information with the person before he, 

or she executes disagreement second executing this agreement serves as the employment, 

and the offer letter serves as a consideration for executing this confidentiality and proprietary rights agreement. 

And also, these document establishes. 

That standard that the employee assigns any inventions created during the employment to the employer and that all the works are made for hire that belong to the company. 

And that's something that I personally pay a lot of attention when I perform due diligence for our investors because I wanna make sure that investors usually they invest in and people is a huge part of it. 

And if you do not have that confidentiality and proprietor rights agreements, that's a huge red flag. 

And I usually, if startups don't have that, and investors still really interested in invested in that startup, we would make the startup to have those agreements in place before the investor invest money. 

I actually did not not that big of a fan of right. So, I'm probably not as focused. I was more interested in the. 

The tax returns. So how, how should you deal with that? Should you is it like, super important part or you just ignore the taxes? What do you mean? How are you supposed to? 

I have absolutely no experience hiring full time employees. So excuse my ignorance here. How would you deal with the taxes there? Do you have to file some paper to the arrest that you hired someone full time? 

Or do you have to do it at the end of the year? How does that work? Yeah, you do have to make federal and state filings and for employees, it's kind of complicated. 

That's why I would recommend if you hire employees, you can engage a professional employee organization they are called g. E. O. 
for example,
our law firm uses, 

and many of my clients that use sakoya what this organizations do is they manage new hire reporting and payroll administration and that kind of elevates all the, 

all the, 

a headache from you to that organization. 

But still startups and companies. They remain on the hook for compliance. 

So the startups have to remain vigilant about legal compliance in any state where this company operates and in every state that, in which you employee workers. 

Got it. Alright. So, yeah, I'll definitely make sure to include those two companies that you mentioned in the description of this episode. But other than that, I think we'll wrap it up here. Last question. What's your cultivation was? 

So, what's the one thing that you want to do as soon as that is over? I would guys tell you to go to my YouTube channel. 

I recently while on karenteen, I decided to create this YouTube channel about business and investments, and after this episode is over, I'm gonna record it view summarizing everything that we just discussed. 

So, if you learn better by seeing and seeing the written text, you might benefit from watching that YouTube video in addition to listening to this podcast. 

Ironically, I actually learned by viewing. Salt definitely took a look because we'll wrap it up here. Thanks. A lot of Christina for coming up and for sharing your knowledge, and the legal side of the hiring process. 

I personally didn't know that you have to focus so much on it. And I was so confident that most early stage employees, or are just contractors. 

So, yeah, a lot of new stuff for me so thanks a lot for that. And every day you too Thank you. Bye. Bye.