This document provides an overview of key California employment law issues for startups. It discusses when various employment laws take effect based on company size, such as wage and hour laws applying to all employers while discrimination laws apply to companies with 5 or more employees. It also summarizes exemptions from overtime laws, highlighting tests for executive, administrative and professional exemptions. Finally, it outlines factors for determining whether a worker is properly classified as an employee or contractor.

1. Startup Legal 101: Employment Law
Issues
May 31, 2011
Palo Alto, CA
Brian K. Nagatani
(bnagatani@hixsonnagatani.com)

2. Overview
 When will you be covered by California’s
employment laws?
 Appropriate compensation of early hires
 Appropriate classification of contractors and
consultants
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3. Employment Law Coverage
 Wage and hour laws: all employers
• Minimum wage
• Overtime
• Meal and rest periods
 Fair Employment & Housing Act: 5 or more
employees
• Harassment
• Discrimination
• Retaliation
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4. Employment Law Coverage
 Leaves of Absence
• FMLA/CFRA: 50 employees within 75 mile radius
• Pregnancy disability leave: 5 or more employees
• Other disability leaves: 5 or more employees
• Other forms of leave: various coverage thresholds
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5. Wage and Hour Laws
 Common Mistakes:
• Classifying employees as contractors/consultants
• Classifying all employees as exempt
• Compensating employees only with stock options
• Deferred compensation
 Potential Exposure:
• Class action liability
• Four year statute of limitations
• Plaintiffs’ attorneys’ fees
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6. Wage and Hour Laws
 Recommendations:
• Regardless of employer size, ensure that employees are
appropriately classified for overtime purposes
• Observe all minimum wage, overtime, and meal and rest
period requirements for non-exempt employees
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7. Exemption Test
 2 Requirements (Must Satisfy Both)
• Salary Test
• Duties Test
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8. “Salary” Requirement
 Federal: $23,660/year
 California: $33,280/year
• Must Equal or Exceed Monthly Salary for Full-Time
Employment at Two Times the California Minimum Wage
 Generally No Deduction for Missing Time During
the Week (Some Exceptions)
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9. Key Duties Tests
 Executive
 Administrative
 Professional
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10. The Executive Exemption
 California “Duties” Requirements
• Primarily Engaged in Management of the
Enterprise or Recognized Department or
Subdivision
• Supervises At Least 2 Full Time Employees (or
Equivalent)
• Authority to Hire or Fire (or Strong
Recommendation Authority)
• Discretion and Independent Judgment
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11. The Administrative Exemption
 California “Duties” Requirements
• “Back-Office” Duties
o Not “Production” Work
• Discretion and Independent Judgment
o Distinction: Exercise of Skill
• Work Involves Either:
o Assisting Owner/Executive
o Highly Specialized Technical Tasks, or
o Special Projects
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12. The Professional Exemption
 Can Cover Employees Performing “Production”
Work (Unlike Administrative Exemption)
 Exempt Professionals Include:
• Formally Licensed Professionals (Law,
Medicine, Dentistry, Pharmacy, Optometry,
Architecture, Engineering, Teaching, or
Accounting)
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13. Computer Professionals:
Special Exemption
 Duties Test: Same as For Computer Workers
Under the General Professional Exemption
• Excludes entry-level employees, and those who do not
primarily exercise independent judgment and discretion.
 What it Adds: Exception to the Rule that Hourly-
Paid Employees Are Non-Exempt
• Minimum Pay Rate: $27.63/Hour
 California Computer Professionals:
• $37.94/hour, or
• $79,050/year
• Caution: the California rate may increase each year!
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14. Other Commonly Used Exemptions
 Outside Sales
 Certain Commissioned Employees
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15. Important Classification Issues:
Employee Versus Contractor
 Common Mistake: Retaining a Worker as
a “Contractor,” But Treating the Worker
More Like an Employee.
 One Misclassification Results in
Simultaneous Violation of Numerous
Laws
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16. Why It’s Important
Tax ERISA
Breach
Violation Violation
Of Contract
Unemployment
ADA ONE Violation
Violation MISCLASSIFICATION
Workers
FMLA Comp
Violation FLSA Violation
Violation
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17. The Main Test: “Right to Control”
 The worker is a contractor only if he/she
retains the “right to control the manner and
means by which the product is
accomplished” Community for Creative
Non-Violence v. Reid, 490 U.S. 730 (1989)
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18. Key Factors
 Amount of Supervision
 Discretion Over When/How Long to Work
 Location of Work
 Right to Discharge/Quit
 Duration of Relationship
• Is the Contractor a Former Employee?
o How Similar is the Work?
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19. Key Factors
 Right to Assign Additional Project
 Method of Payment
 Skill Required
• How Different than Skills Possessed by
Employees?
 Intent of the Parties
• Is There a Signed Contractor Agreement?
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20. Key Factors
 Is Work Part of Company’s Regular
Business?
• Do Employees Perform Same Type of Work?
 Does the Worker Own/Come From a
Separate Business?
• Does Worker Perform Work for More than
One Company?
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21. Key Factors
 Is Worker Subject to Risk of Profit or
Loss?
• Are the Workers’ Expenses Reimbursed?
• Who Pays for Assistance?
• Source of Instrumentalities/Tools?
 What Support Does the Company Provide?
• E-mail?
• Voice Mail?
• Business Cards?
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22. Conclusion
 Thank You!
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