This week, Ivan Gaviria walks us through the 5 mistakes startups make with their people… A mistake a day.

Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.

MISTAKE #3 OF 5:
Employees versus Independent Contractors

As a related matter to yesterday’s post about employee wages, founders in their new role as an employer need to also be aware of the distinction between employees and independent contractors/consultants.

Often, early stage companies will seek to characterize an individual as a consultant to avoid wage issues. Unfortunately it is not as simple as calling someone a consultant and giving them a consultant agreement.

If the characterization is challenged, the relevant test is highly fact-specific and looks at questions like whether the individual works for multiple firms, sets his/her own schedule, is obligated to comply with company policies, has to personally provide the services, offers his/her services to the general public, etc. In short, if the individual acts like an employee, they may well be an employee.

The risk, of course, is that in characterizing an individual as an independent contractor, the company does not issue a W-2 and does not take income tax withholding or pay the employer portion of taxes like social security and disability.

If the individual is found to have been an employee, the Company will be on the hook for the failure to withhold and there can be late penalties and interest as well.

In addition, you can find yourself right back in the position of having an overhang of potential claims for unpaid wages, overtime and other benefits.

Again, this is an area where startups need to be thoughtful about how they manage the issues. Always keep in mind that the risk averse public companies who may potential buyers may take a sharply different view of what level of audit risk is acceptable. Getting good advice on these matters from professionals who have “seen the movie before” is essential.

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MISTAKE #1 OF 5 (posted on Monday): Not understanding obligations to prior employers.

MISTAKE #2 OF 5 (posted on Tuesday): Failing to be informed about employee rights with respect to wages

ABOUT GUNDERSON DETTMER:
Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.