Innovation@work: From Entrepreneur to Boss – Compensation Considerations (Part 3)

By: Hilary Holmes Rheaume

The startup environment often lends itself to working long hours, providing compensation in the form of stock or equity grants, and relying on unpaid interns. As a result, startups remain vulnerable to potential wage and hour liability arising from employee claims and/or agency audits. Before hiring your first employee, you should consider state and federal wage and hour issues, including, but not limited to:

1. Administering payroll
2. Complying with minimum wage and overtime law
3. Properly classifying unpaid interns
4. Properly classifying employees as exempt or nonexempt (see last month’s post for more information)

Administration of Payroll

First, you will need to decide whether the administration of payroll will be handled by an employee within your company, i.e. Chief Financial Officer, or outsourced to a professional employer organization (“PEO”) or payroll company. The administration of payroll can be complex, and a mistake can result in significant consequences, such as a wage claim or a tax liability. Generally, we recommend outsourcing payroll, but you will need to determine the best approach for your company. It is important to remember that your company, not the PEO or payroll company, will likely be liable for any mistakes related to wage and hour issues.

Second, you will need to decide on a compensation package for each employee, including either a salary, hourly, and/or commission basis. We will discuss important considerations for commission packages and bonuses in a later post, but, for now, it is important to create a realistic compensation package to avoid a potential wage claim. You may also want to consider providing employees with certain fringe benefits, such as health insurance and/or retirement plans.

Third, you will need to determine when compensation will be paid, which may implicate state wage and hour law. For example, under New Hampshire law, an employer must “pay all wages due to employees within 8 days after the expiration of the work week if the employee is paid on a weekly basis, or within 15 days after the expiration of the work week if the employee is paid on a biweekly basis ….”  R.S.A. 275:43. However, an employer may seek an exception from the New Hampshire Department of Labor, which would allow the employer to pay employees less frequently.

Complying with Minimum Wage and Overtime Laws

Federal and state law impose strict requirements on minimum wage and overtime pay. As we discussed last month, an employer must pay all nonexempt employees in accordance with applicable wage and hour laws.

You will need to ensure that all nonexempt employees are paid at least minimum wage. As of September 1, 2019, federal minimum wage is $7.25 per hour, but applicable state law might have a higher minimum wage requirement. As of September 1, 2019, New Hampshire minimum wage is $7.25 per hour, and ME minimum wage is $11.00 per hour.

Additionally, you will need to ensure that all nonexempt employees receive overtime pay. Under federal law, overtime is calculated at a rate of 1.5 times the employee’s “regular rate of pay” for all hours worked over 40 hours in a workweek. The “regular rate of pay” generally includes all compensation for employment, including an employee’s hourly wage, salary, and other types of compensation. With that said, the “regular rate of pay” generally does not include certain categories of compensation, including, but not limited to, gifts, vacation pay, discretionary bonuses, or payments to a bona fide profit-sharing plan. State law may proscribe a different overtime calculation.

Unpaid Interns

Startups often rely on unpaid interns to perform valuable services during the initial phase of the company. State and federal law provides strict guidelines to establish whether a worker should be classified as an intern or an employee.

The United States Department of Labor (the “DOL”) has adopted a six-part test for analyzing internship status to determine whether a worker qualifies as an intern or an employee. The specific criteria to establish whether a worker is properly classified as an intern varies by jurisdiction. However, the main factors you would need to  consider are:

1. Whether the intern is receiving academic credit
2. Whether the intern is doing work that otherwise would be performed by employees, or the same work other employees are performing
3. The degree of training provided to the intern, and whether the intern is receiving academic credit for the internship
4. Whether the internship’s duration is finite
5. Whether there is an expectation of future employment

State law may also have certain laws and regulations concerning the use of unpaid interns. For example, the New Hampshire Department of Labor requires pre-approval of any program that involves a student working for practical experience with no pay.

The information in this post is intended to provide an overview of certain compensation considerations when hiring your first employee, and it is not intended to be a comprehensive list. Seek advice of counsel to discuss certain issues that may increase liability for your business, such as compliance with wage and hour laws.

I will be back next month to discuss paid time off arrangements. In the meantime, please feel free to contact me with any questions: hrheaume@bernsteinshur.com. Interested in learning more?