The BIG Risk Trigger: Hiring

Part 4 in a series in Startup Stages

The hiring of employees is probably the most significant compliance and risk trigger for a startup, (especially in the State of California). This includes the case where the founders are placing themselves on the payroll as employees, rather than compensating themselves as partners. Beyond the risk issue, to attract and retain employees, the startup may need to offer benefits and stock incentives, each of which has its own set of compliance issues.

Knowing this, some startups try to minimize their employer obligations by treating everyone as independent contractors. Unfortunately, Federal and state laws restrict the degree to which this can be done and businesses that run afoul of these guidelines can find themselves owing serious back taxes, benefits, and penalties.  (See my prior post on this subject.)

Compliance requirements now include:

• State of California EDD (or equivalent) Filings:  DE-1, DE-34, and Employer Account Number
• Federal and state laws governing wages and hours, discrimination, and wrongful termination
• Federal and state withholdings for various payroll taxes
• Worker’s compensation insurance coverage (mandatory in California, different by state)
• Benefits provider rules
• Federal and state securities laws with respect to stock options and/or restricted stock grants

(A detailed discussion of employment law compliance is beyond the scope of this blog post.)

The step up in administrative overhead can be quite significant. New policies and processes need to be put into place to ensure compliance, manage risk, and lower insurance costs. These include:

• Payroll and taxes
• Personnel management policies and procedures covering hiring, evaluation, retention, and termination
• “At Will” offer letters or employment contracts
• Worker health and safety
• Insurance policies: worker’s comp, employment practices, general liability
• Benefits administration
• Stock option/restricted stock grant program
• Intellectual property protection (see earlier post)

Of these, payroll and taxes can be readily outsourced, with a wide range of third party payroll processing services available. With respect to the art of managing a workforce, the best generic risk management advice is: think once, twice, thrice before hiring and do the reference & background checks! Believe it or not, there is one thing worse than not filling a critical vacancy and that is filling it with a problem employee.

Firing is not fun.

Next post:  Space!

Related posts in this series:
The "Nitty Gritty" of Startup Formation
Intellectual Property Creation and Startups
Startup Stage:  Buying Stuff and Independent Contractors