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The Top Five Employment Law Threats to Technology Companies

As you grow your technology company and expand your workforce, following employment laws may not be on the forefront of your mind.  But technology companies in particular are needlessly subjecting themselves to employment lawsuits by failing to heed some particularly important employment practices. Although there are many issues to consider, we’ve consistently observed the following top five employment law threats (and resulting lawsuits) to the technology sector:

        1. Violating wage and hour laws by paying in equity; missing meal and rest breaks, etc.

Technology companies are increasingly becoming targeted for wage and hour class actions, many of which settle for millions, effectively putting a company out of business.  Even if your company isn’t large enough to face a large class-action lawsuit, you can still face an expensive and time-consuming individual actions.  For these reasons, we recommend spending time to ensure that your company is complying with the various wage-and-hour laws in California.  

One of the more obvious ways that companies fail to comply with the law is by paying their employees with stock or equity only.  While you may have a good business reason for doing this and employees seem enthusiastic about the idea, this practice does not comply with the law. Eventually, most employees tire of this practice and challenge it at the Labor Commissioner or in court.  When that happens, companies are left with no defense, since wage and hour laws are essentially strict liability. Other common problems include failing to record meal and rest break times, paying overtime, or following the correct payday laws.  Many of these issues go hand in hand with misclassification of employees, and all of them are common mistakes made by technology companies. 

        2.  Misclassifying employees as exempt because they are salaried or highly paid 

Misclassifying an employee as exempt when they are, in fact, non-exempt, is a very common and expensive problem for technology companies.  Technology companies that grow very rapidly and determine exemption status without consulting an attorney or human resources professional often face this problem.  These companies falsely assume that if someone makes a salary, they are automatically exempt.  California law not only presumes that employees are non-exempt, but it also has strict requirements for classifying employees as exempt.  Few employees meet these requirements.  The vast majority of employees are non-exempt, which means they need to receive meal and rest breaks, overtime pay, etc.  Also keep in mind that because California’s salary threshold is tied to minimum wage, the salary threshold for exempt employees will change at the start of each new calendar year.  Also, if you treat an exempt employee as a non-exempt employee by, for example, docking her pay when she only works a half day, you will lose the benefit of the exemption.  It’s critical to understand what makes an employee exempt and all the rights exempt and non-exempt employees are entitled to.  Otherwise, you risk jeopardizing exempt status.

        3. Following certain employment practices because “other tech companies do it this way.”

We’ve heard our clients tell us that they are complying with the law because they are following the “industry standard.” In many cases the “industry standard,” does not meet the legal standard. This is particularly true with wage and hour practices where the legal requirements are very non-intuitive and thus routinely ignored or misunderstood.  

For example, your company may hire “consultants,” “contractors,” or “freelancers” at various points.  Don’t assume that these individuals are true independent contractors just because other tech companies classify them this way.  When determining whether someone is an “independent contractor,” California’s Division of Labor Standards Enforcement (“DLSE”) starts with a rebuttable presumption that the worker is an employee. The actual determination of whether a worker is an employee or independent contractor depends upon several factors.  The most important factor is whether the employer has control or the right to control the worker.  The EDD has a helpful worksheet about determining independent contractor status. 

        4. Encouraging a “laidback” atmosphere and hiring employees without much prior job experience. 

Companies with a workforce of many first-time workers (and first-time managers) can be more informal than other work environments.  While there are many great reasons to have a less formal work environment, you just need to be aware that a work environment that is too relaxed can lead to inappropriate behavior.  Inappropriate behavior, in turn, may lead to a problems in the workplace if managers are not trained to adequately recognize and address employee issues.

We recommend that technology companies train all new managers not only on sexual harassment laws, but also on the basics of wage and hour law and effective workplace communication and employee management. 

        5.  Failing to have harassment policies and not responding appropriately to complaints.

California requires that employers develop and distribute specific anti-harassment and discrimination policies and create an internal complaint processes to address employee complaints. If your company does not have a policy that complies with the law or does not adequately respond to employee complaints under the policy, you can face significant liability and negative publicity.  Following the recent news about sexual harassment claims against Uber, companies are becoming more aware of the importance of these policies and practices. 

As a final tip, we strongly encourage our clients to obtain Employment Practices Liability Insurance (EPLI).  If you have questions or would like to consult with one of our experienced employment attorneys, please contact us at info@maierlawgroup.com. We specialize in providing employment law advice to technology, health, and  life sciences companies.

This article has been prepared for general informational purposes only and does not constitute advertising, solicitation, or legal advice. If you have questions about a particular matter, please contact the Maier Law Group directly.

Beth Arnese