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In 2005, a curious entrepreneur asked the question on Quora,

“Does a startup company need an HR department?”

Startups in 2005 were riding the crest of a boom, with many business owners having a cavalier attitude toward human resources. Employers were often demanding much time and effort from employees, many of whom labored for love, and the phrase, “HR is dead” was widely circulated in start-up circles. In fact, many believe that the startup culture was established as a reaction against the standard employee practices of companies with organized HR departments.

With time, the company cultures of startups who ignored human resources standards gradually began to suffer from the lack of employment law enforcement.

  • Women in the startup community began facing systemic discrimination issues like barrier to advancement.
  • Some of the biggest tech startups began having harassment accusations leveled at them because any view of the legal status of employees were ignored.
  • Provisions of federal wage and hours laws were misinterpreted and ignored by many large startups. Workers were paid a flat rate regardless of overtime provisions and the hours spent in sales training sessions.
  • Employees were getting paid in stock rather than wages.

While these are just a few examples of legal situations that many startups dealt with, and continue to deal with, one additional issue has been found to be especially detrimental for startups; classifying workers.

Many startups often make the mistake of improperly classifying their workers as independent contractors, rather than full time/W2 employees. These independent workers can be referred to by a number of names, including consultants or freelancers. Even interns can be improperly classified as independent contractors.

According to TechCrunch, “the determination of who is a “contractor” and who is an “employee” is governed by both the parties’ own understanding of the relationship and federal and state wage-hour laws. This guides whether someone is an employee or contractor based on multi-factor tests, and these tests vary based on jurisdiction.” The Fair Labor Standards Act (FLSA) of 1938 also comes into play when reviewing the status of a worker.

These types of misclassifcation cases are becoming extremely prevalent due to the rise of the “sharing economy.” Court filings show that a number of lawsuits and class actions were launched against companies that work with drivers, cleaners, and other flexible workers who rely on their startup companies to maintain a living, but are subject to fluctuation in their working conditions.

In 2015, two federal judges in San Francisco allowed labor lawsuits filed against Uber and Lyft to move ahead. Drivers for both of these services sued in attempt to be classified as employees so they would have access to fair employment standards, rights and benefits not traditionally granted to non-employees. These include minimum wage standards, overtime, workers’ compensation, standards regarding harassment, and more. The 9th Circuit Court of Appeals actually ruled in one case that drivers are, in fact, employees.

The repercussions for improperly classifying an employee can be destructive to a startup, so it’s best to get assistance. An HR outsourcing organization, or PEO, can assist startups with recruitment and hiring, with an emphasis on employment law and HR compliance. HR outsourcing teams also consist of payroll, tax, workers’ compensation, and employee benefit specialists that can eliminate other administrative challenges for startup owners.