California Employment Law Traps for the Unwary for Technology and Media Startups

California's laws and court decisions make it one of the most pro-employee (or anti-employer) states in the United States.  Emerging growth technology companies in general, and today's "lean startups" in the Web 2.0 and new media industries in particular, risk running afoul of strict employment-related laws and regulations unless they understand and adhere to some basic requirements.  Here are a few pointers for entrepreneurs:

1. Avoid Misclassifying Employees as Contractors.  Many startups are tempted to treat every service provider as an independent contractor rather than an employee.  Unfortunately, merely entering into a contractor or consulting agreement is not sufficient to make this a sure thing.  The law in California is rather suspicious of independent contractor arrangements; in the event of any dispute, courts and regulators will determine the nature of the relationship based on several factors, including whether the employer has control over the work to be done and the manner in which it is performed -- and will reclassify contractors as employees when appropriate.
2. Avoid Misclassifying Nonexempt Employees as Exempt.  Most startups try to classify every employee as exempt from minimum wage and overtime laws for purposes of the federal Fair Labor Standards Act ("FLSA") and related state law.  If this is ever challenged, the burden of establishing that an employee is exempt is on the employer. Although highly skilled technical employees are generally exempt, there are certain jobs (such as in software Quality Assurance departments) which would likely fail the test.  Consult an employment lawyer sooner rather than later as your headcount grows.
3. Pay Employees for All Overtime Worked.  Startups are notorious for working their people hard, driven by creative entrepreneurial passion and ambitious goals.  Nevertheless, to comply with state and federal employment laws, employees cannot be asked to waive their right to overtime pay.  In California, nonexempt employees must be paid overtime for all hours worked over 8 in a day and 40 in a week.  To minimize overtime wage expense, it's important to control hours worked.  If an employee works unauthorized overtime, the employee must be paid for that overtime, but the employer may discipline the employee for violating company policy requiring preapproval of any overtime worked.  (If your company doesn't have such a policy, it should implement one.)
4. Pay Employees in Cash, Not Just Equity.  Some enthusiastic contributors to early-stage startups are willing to work only for equity.  While this may be attractive to the founders as a way to keep their cash "burn rate" low, minimum wage laws still apply.  Even if your engineers or developers are willing to work only for equity, the safe approach is to pay them the minimum wage in cash and the remainder in equity to compensate them for the full value of their services.
5. Post All Required Notices.  This may sound trivial, but many small employers get in trouble for failing to post certain notices that are required to be posted in the workplace under both California and federal laws.  Many vendors produce standard posters that include all required notices and can be hung in the lunch or breakroom to satisfy these requirements.  As the law changes from year to year, it's important to get the most up-to-date versions of these posters.

Although there are no guarantees, following these best practices can help minimize the risk of class action lawsuits or investigations by government agencies.