Ignorantia legis neminem excusat. That is, “ignorance of the law is no excuse.” Under this principle, those to whom the law applies are presumed to know the law and will be held accountable for violating it. Now, consider how much the owner of a start-up company is likely to know about all the federal, state, and local legal requirements that govern an employer’s treatment of its employees! The thought is downright frightening.
What’s at stake? Wage law violations can result in damage awards consisting of the unpaid wage amount as well as liquidated damages and attorney’s fees. Conduct that amounts to an unfair labor practice can result in orders to pay compensation to employees if the practice caused, or is likely to cause, financial harm. Wage and tax penalties and other potential damages lurk for worker misclassification—these are just to name a few. Being called to task for even a single violation can get expensive in a hurry, particularly where multiple employees are affected by an oversight.
When a young company hires its first employees or a small business really starts to take off, the last thing they need is an assessment of fines or penalties or a lawsuit to slow them down. Because “knowledge is power,” here are some of the most common employment law blunders.
- Unauthorized wage deductions: Many employers do not realize that failing to obtain a written and signed wage deduction authorization before deducting from an employee’s earned wages violates the law in many states. Laws in some states, such as Indiana, limit deductions to only certain purposes while other states prohibit taking certain deductions (for example, it is illegal in California and New Hampshire to deduct from wages the cost of company property that the employee damages or loses). In some states, it is nearly impossible to take any deduction from an employee’s wages, beyond benefit premiums, taxes, and other required withholdings. When employers take an impermissible deduction from an employee’s wages under the applicable state law, they may be held liable for not only the amount deducted, but for liquidated damages (a multiple of what was withheld), penalties, and attorney’s fees.
- Unpaid overtime: Did you know that many bonus payments to non-exempt (typically hourly) employees must be treated as part of the employee’s “regular rate” for the purpose of paying overtime? With few exceptions, when the employer informs non-exempt employees in advance of the potential for a bonus and how they can work to achieve one, the employer needs to recalculate the overtime owed to the employee for the period covered by the bonus. As the U.S. Department of Labor’s Wage & Hour Division recites in a fact sheet, this is true even where the employer retains discretion over whether to pay out promised bonuses. Many employers unwittingly commit this regulatory violation.
- Illegal vacation forfeiture: Laws governing forfeiture of vacation and paid time off can differ widely from state-to-state, with some states placing no restrictions on how employers handle payout of accrued, unused vacation/PTO, others permitting forfeiture at year-end or upon separation only if a policy to that effect is clearly communicated to employees, and a few states prohibiting any forfeiture. A forfeiture that violates the law of the state where the employee works will result in that employee possessing a valid wage claim. Even if forfeiture is legal where the employer is headquartered, the employer must depart from its policy in favor of applicable law for any employees who work primarily in anti- or limited-forfeiture states.
- Failure to provide paid sick leave: Employers must also be aware that a growing number of states are passing paid sick leave laws (often referred to as “earned sick and safe time” laws). Some employers do not realize that if they hire an employee who lives in a state with a paid sick leave law, or if one of their employees moves to such a state and commences working there under a remote working arrangement, they must accrue paid sick leave for that employee and otherwise adhere to a variety of requirements associated with the law (use, carry over, notification of rights, recordkeeping, etc.). Failure to provide paid sick leave can usually be challenged via claims to the state labor agency or by filing a lawsuit in court, and damages may be assessed. For example, under Minnesota’s law, the employer can be held liable for the pay that should have been provided and an equivalent amount as liquated damages.
- Imposing wage secrecy: Having a rule or policy directing employees to not discuss their wage rates or salaries with other employees presents a legal risk. Why? The National Labor Relations Board (NLRB) considers such commands as interfering with employees’ right to discuss with each other the terms and conditions of their employment. As such, employees who are restricted by such a rule may file an unfair labor practice complaint with the NLRB. Some state laws also prohibit such rules or policies.
- Worker misclassification: Knowing when workers must be classified as employees and when they may be properly classified as independent contractors often eludes start-up companies. When a worker who is paid on a contract basis does the same work as W-2 employees, performs services that are integral to the employer’s business, or works essentially on a full-time basis for the employer, there is a risk that the worker will be found to be misclassified, which can result in liability for employment and tax law violation reasons. A small number of states (for example, California and Massachusetts) have very stringent laws governing classification of workers that make the potential for liability much higher.
- Separation agreements “on the cheap”: Entering into a separation agreement with a release of claims can often be a very effective way to eliminate potential liability in connection with a particular employee. The mistake employers often make, however, is either basing the separation agreement on a previously used form, or, worse, grabbing one off the internet, and not having the agreement reviewed by an attorney who specializes in employment law. While some provisions in separation agreements are consistent from one employee to the next, important legal nuances exist depending on the employee’s circumstances and age. In some cases, incorrectly worded or missing provisions will render the agreement unenforceable.
Given that all U.S. states have enacted employment laws and regulations, with some providing additional or greater protections than the federal law provides, employers must not approach employment law compliance as one-size-fits-all (unlike the famous song, if you can make it here, you will not necessarily make it anywhere). Simply put, when it comes to employment law compliance, what employers don’t know can hurt them. Skilling up in the above areas and getting sound legal advice from employment law counsel along the way will help smooth the start-up’s transition to a savvy, sophisticated, and legally compliant company.
