This is the first post in our new ‘Ask a Lawyer’ series where Nilan Johnson Lewis, a Minneapolis-based law firm, will answer your startup questions.
“My startup has just a few part-time employees, and I rely on them to make scheduled deliveries. Can I enforce a zero-tolerance policy for absences?”
A true “zero-tolerance” policy might get you in hot water, but you may adjust the policy as it relates to unexcused absences, as long as you consistently apply it. It’s a good idea to spell out exactly what is considered an excused absence in a clear, written policy, because employees have a legal right to take off work for certain reasons, and not all of these reasons are obvious. Even if you have just one employee, Minnesota law requires unpaid time off for things like jury duty, voting, attending school conferences, appearing in court, or time for extra breaks for nursing mothers. Larger employers have additional obligations. Depending on how many employees you have, and whether your employees work in Minneapolis or St. Paul, you may have to provide paid or unpaid sick leave. This requires employees to have time off for the employee’s own illness; caring for family members; absences related to domestic abuse, sexual assault, or stalking; the closure of the business; or for the unexpected closure of a school or childcare center.
“I’m at the point with my startup where I need to hire an employee, but I have little cash flow. Can I just pay employees with stock options?”
Stock options are a very attractive way to attract talent when cash resources are low. It allows you to get the staffing you need to take your business to the next level. However, two words of caution about stock options. First, federal and state wage-and-hour laws require that employees receive at least minimum wage. The federal Fair Labor Standards Act requires employees be paid at least $7.25 an hour. Minnesota state law requires more: $7.75 an hour. And a recent law in Minneapolis requires employees working in the city be paid $15 an hour. Therefore, stock options alone are not lawful as compensation for employees. Second, stock options are really only a good idea if they can be cashed out. Employees may be wary of stock options if they seem illusory. If you are about to secure outside investors, or are likely to go public or be bought by another company, stock options are an attractive way to bring talent on board. Otherwise, they may not be the right incentive to attract the talent you need.
“I am hiring a new employee, should I pay him/her salary or hourly?”
Unsurprisingly, the answer depends on your specific circumstances, as there’s not one right way to do it. Consider the following:
- Stability: Paying a salary allows you to better estimate your operating costs because you know exactly how much your employee is going to cost you each month, which is attractive if you have sufficient funds to hire the employee, and your priority now is to control your budget. If you’re unsure whether you’ll be able to afford the same salary each month, consider the flexibility of hourly wages. If you are tight one month, you may simply need to reduce your employee’s hours temporarily.
- Workload: With one primary exception (overtime, discussed below), a salary compensates your employee for all the hours s/he works. If you believe your employee will be working a significant number of hours, it may be more economical to offer a salary. Whether this holds true depends on many factors such as candidates, the labor market, and the nature of the job. Definitely consider a salary for employees who will work a lot, especially if you expect the workload to remain fairly constant.
- Overtime: A salaried employee may still be entitled to overtime depending on the nature of the job performed. It’s worth doing research to find out the kinds of job duties that make an employee exempt from overtime. If your employee is non-exempt—meaning s/he will be entitled to overtime— it may make the most sense to pay them on an hourly basis, as calculating the overtime rate based on an annual salary is complicated (you’re more likely to make costly mistakes), and the salary no longer compensates the employee for all hours worked. This means that many of the “pros” to salaries are attenuated. Your monthly labor costs will vary, and you may not gain many financial efficiencies if your employee works many hours. If, on the other hand, your employee performs job duties that qualify as exempt, then you’re generally required to pay her/him a salary in order for the employee to actually be exempt. (In other words, to be exempt you have to do specific kinds of things and be salaried.)
This post does not constitute legal advice and does not establish an attorney-client relationship.
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