5 Employment Law Tips for Startups

Stay on top of employee-related legal issues as a new employer.

learn more about Sofia Aguilar

By Sofia Aguilar


Opinions expressed by Entrepreneur contributors are their own.

As a business owner of a startup, you wear many hats. In all the rush of running a startup, it's easy to forget one of the most important hats you'll ever wear: the employer. Here are five employment law traps that every startup founder needs to know.

Related: 9 Questions Employers Need to Answer Before Firing an Ashley Madison Customer

1. Know the difference between an employee and an independent contractor.

Many companies prefer hiring independent contractors rather than employees. Hiring independent contractors generally reduces overhead costs, because employers do not have to comply with wage and hour requirements or include contractors on their worker's compensation or medical insurance. However, many employers wrongly classify employees as independent contractors in order to avoid these obligations, and doing so puts their companies at risk for costly litigation.

In determining how to classifying your workers, consider the following factors:

Independent contractors:

  • The person performing services is engaged in an occupation / business distinct from that of your company. For example, if you run a tech company, and you hire a trainer to teach networking skills, the trainer's business is distinct from yours.
  • The person supplies and uses their own tools and equipment to complete the work.
  • The person can perform the work when they want, where they want and how they want.
  • The skills required by the work are specialized.


  • The company provides directions and retains control over how the work is completed.
  • The person uses the employer's tools and equipment.
  • The person completes their work at the employer's facilities and / or on a schedule set by the employer.
  • The person is paid by time (by the hour, daily rate, etc.) rather than by the project.
  • The employer can terminate the person at any time, for any reason.

2. Keep your trade secrets SECRET.

In California, a trade secret is defined as information, including a formula, pattern, compilation, program, device, method, technique or process, that derives its economic value from not being generally known to the public and is protected by reasonable efforts to maintain its secrecy.

Basically, if you have information like customer lists, process methods or other formulas that you've developed, they can be protected as trade secrets as long as you use reasonable efforts to keep them secret. This could include storing the information in a password protected place, only disclosing the information on a need-to-know basis and making sure the information isn't posted in a public place (like the Internet).

It's highly recommended that all employees sign confidentiality agreements outlining what the company believes are its trade secrets, and the employees promise not to disclose them.

Related: The One Question All Businesses Must Ask About Protecting Trade Secrets

3. Know who are exempt employees.

Exempt employees are those who are exempt from overtime laws. In California, exempt employees generally must earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment. Most commonly, these include executives and professionals. But they also include certain employees in specific fields such as software developers, outsider salespersons and creative arts workers. Drafting well thought-out job descriptions help companies properly classify their employees.

4. Draft your workplace policies and procedures to protect your business.

It's common for employers provide their workforce with computers, email and free Internet access. What are less common are well-drafted company policies that govern how these systems can be used. In order to protect yourself, ensure that your polices restrict employee abuse (accessing restricted websites or sharing confidential information), provide notice to your employees that the company can and will monitor their use and make clear that these systems are designed primarily to enhance their work, not for fun.

5. Consider whether employment practices liability (EPL) insurance is right for you.

Being an employer in California is full of pitfalls that can result in costly litigation. You should consider whether obtaining an EPL insurance policy to cover employment claims makes sense. Not all policies provide the necessary coverage, so be sure your policy covers the type of disputes you are most concerned about. For example, if you are a company with many employees, coverage of class actions may make sense.

Related: The Types of Insurance You Need for Your New Business

Sofia Aguilar

Attorney, Greenberg Glusker’s Litigation Group

Sofia Aguilar is an attorney in Greenberg Glusker’s Litigation Group. Aguilar's practice includes a variety of litigation matters in the areas of employment, entertainment and real estate. Additionally, she works collaboratively with her clients to find ways to substantially minimize their risk of employment litigation, wage claims and other employment related claims.

Related Topics

Editor's Pick

This 61-Year-Old Grandma Who Made $35,000 in the Medical Field Now Earns 7 Figures in Retirement
A 'Quiet Promotion' Will Cost You a Lot — Use This Expert's 4-Step Strategy to Avoid It
3 Red Flags on Your LinkedIn Profile That Scare Clients Away
'Everyone Is Freaking Out.' What's Going On With Silicon Valley Bank? Federal Government Takes Control.

How to Detect a Liar in Seconds Using Nonverbal Communication

There are many ways to understand if someone is not honest with you. The following signs do not even require words and are all nonverbal queues.

Starting a Business

Selling Your Business? Do These 6 Things Right Now.

If you want the maximum price you need to make these moves before you do anything else.

Business News

Carnival Cruise Wants Passengers to Have Fun in the Sun — But Do This, and You'll Get Burned With a New $500 Fee

The cruise line's updated contract follows a spate of unruly guest behavior across the tourism industry.

Celebrity Entrepreneurs

'I Dreaded Falling in Love.' Rupert Murdoch Is Getting Hitched for the Fifth Time.

The 92-year-old media tycoon announces he will wed former San Francisco police chaplain Ann Lesley Smith.


5 Practical Strategies Founders Can Use to Improve Their Mental Health

Supporting your mental health is one of the most important investments you can make in your company. If you're unsure where to begin, choose one of these strategies and focus on implementing it in your everyday life.

Business News

What Does the Banking Crisis Mean for Startups and Small Business Owners?

Author, CPA and business owner Gene Marks break down everything entrepreneurs need to know about the impact of the SVB collapse.