Many startups are tempted to treat every service provider as an independent contractor rather than an employee. Unfortunately, merely entering into a contractor or consulting agreement is not sufficient to make this a sure thing. The law in California is rather suspicious of independent contractor arrangements; in the event of any dispute, courts will determine the nature of the relationship based on several factors, including whether the employer has control over the work to be done and the manner in which it is performed.
Avoid Misclassifying Nonexempt Employees as Exempt
Most startups try to classify every employee as exempt from minimum wage and overtime laws for purposes of the federal Fair Labor Standards Act (FLSA) and related state law. If this is ever challenged, the burden of establishing that an employee is exempt is on the employer. Although highly skilled technical employees are generally exempt, there are certain jobs (such as QA) which would likely fail the test. Consult an employment lawyer sooner rather than later as your headcount grows.
Pay Employees for All Overtime Worked
Startups are notorious for working their people hard, driven by entrepreneurial passion and ambitious goals. Nevertheless, to comply with the law, employees cannot waive the right to overtime pay. In California, nonexempt employees must be paid overtime for all hours worked over 8 in a day and 40 in a week. To minimize overtime wage expense, it's important to control hours worked. If an employee works unauthorized overtime, the employee must be paid for that overtime, but the employer may discipline the employee for violating company policy requiring preapproval.
Pay Employees in Cash, Not Just Equity
Some enthusiastic contributors to early-stage startups are willing to work only for equity. While this may be attractive to the founders as a way to keep the burn rate low, minimum wage laws still apply. Even if your engineers or developers are willing to work only for equity, the safe approach is to pay them the minimum wage in cash and the remainder in equity to compensate them for the full value of their services.
Post All Required Notices
This may sound trivial, but many small employers get in trouble for failing to post certain notices that are required to be posted in the workplace under both state and federal laws. Vendors produce standard posters that include all required notices and can be hung in the lunch or breakroom to satisfy these requirements.
Additional resources provided by the author
The Division of Labor Standards Enforcement (DLSE) of the California Department of Industrial Relations has an excellent website with information for both employers and employees. See link below.