A growing company – whether a new startup or an existing business that is expanding – needs to be aware of a number of legal requirements as the company begins to hire employees. The following is a summary of some of the laws and other considerations for new and growing employers.

1. Employee paid time off

There is currently no federal law that requires private employers to provide employees with paid time off. However, many states, cities, and counties have enacted laws requiring employers to provide employees with paid time off or paid sick time. For example, Massachusetts currently requires most employers to allow employees to accrue up to 40 hours of paid sick leave per year. Separately, most states require employers to provide non-exempt employees with mandated break and/or meal periods, which may be paid or unpaid, depending on the state. Employers should consult with an attorney regarding the requirements applicable to their operations.

2. Payroll and tax withholding requirements

All employers are required to withhold applicable federal (and, where applicable, state and local) tax withholdings, including income, FICA, FUTA and Medicare. For many small employers, complying with payroll laws is most easily accomplished through the use of a third-party payroll provider. In addition, many states have specific requirements regarding how frequently – e.g., bi-weekly – employees are required to be paid.

Although independent contractors are exempt from payroll taxes and withholding, employers should use caution in classifying workers as independent contractors. Misclassification of workers can be very costly, and is considered a hot-button issue for the IRS, the federal and state departments of labor, and plaintiffs’ attorneys.

3. Health and welfare benefits

Whether or not an employer is subject to the ACA mandate, many employers choose to offer health and welfare benefits, e.g., dental, vision, group life insurance, and short and long-term disability, as a way of attracting and retaining employees. If other employers in your industry offer such benefits, your company may be at a recruiting disadvantage if you choose not to do so. Most small employers that offer health and welfare benefits do so by contracting with one or more insurance carriers, such as AETNA, BlueCross BlueShield or Humana, through a local insurance broker.

If an employer offers health and welfare benefits, the employer will be subject to and must comply with the requirements of the federal laws governing health and welfare plans, including the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code of 1986 (IRC) and the Health Insurance Portability and Accountability Act of 1996 (HIPAA).

4. Retirement plans

There is no legal requirement that private employers offer any form of retirement plan to their employees. If an employer does choose to sponsor a retirement plan, the employer becomes subject to and must comply with the requirements, including annual reporting requirements, applicable to retirement plans under the IRC and ERISA. Even if an employer utilizes a retirement plan provider and a third-party administrator for its plan, the employer will still be directly liable for failures to comply with such laws.

A 401(k) plan is the most commonly known and understood type of retirement plan offered by private employers. However, there are more simplified types of retirement plans that small employers may choose to offer, such as a Simplified Employee Pension Individual Retirement Arrangement (SEP-IRA) or a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA. These plans are easier to administer and are exempt from certain reporting and testing requirements applicable to other qualified retirement plans, such as 401(k) plans.

5. Incentivizing key employees

Attracting and retaining talented and capable personnel is critical to the success of any business. However, new and growing companies often do not have sufficient cash flow to properly compensate key employees. To address this issue, many growing companies choose to offer incentives that do not require current cash payments, such as equity (i.e., granting an ownership interest in the company), phantom equity (i.e., awards that provide benefits similar to equity, but that do not grant actual ownership interests) and grants of bonuses that are tied to a sale of the company. Such equity incentives typically will include stock options, restricted stock and stock appreciation rights. Similar types of awards can be made for partnerships and limited liability companies.

Providing equity and equity-based awards encourages employees to contribute to the growth and profitability of the company. Additionally, each of these types of awards can be structured as a form of retention tool by requiring an employee to remain employed for a set period of time in order to receive the benefit of the award. Equity and other incentive arrangements can often have complex tax and securities implications, and employers should consult with their legal counsel to ensure compliance.

6. Employee handbooks, policies and agreements

New and growing companies need to decide when to enact written employee policies. Documenting company policies helps employees to understand an employer’s expectations, helps to ensure legal compliance, and can provide defenses to the employer in the event of employment litigation. Although startups may not consider it a priority, as a company grows it becomes increasingly important to implement a comprehensive employee handbook. Additionally, even for employees treated as at-will, written employment agreements or offer letters with signed acknowledgements can serve to clearly define employee job duties and responsibilities, including confidentiality and non-disclosure obligations. The content and phrasing of employee handbooks and employment agreements can have significant legal ramifications. Accordingly, these documents should be prepared or reviewed by legal counsel.

The Takeaway

This article provides a brief overview of employment and benefits law considerations for new and growing companies. We recommend you contact your legal counsel if you have any questions regarding your obligations as an employer, and before implementing any type of employee benefit plan or incentive arrangement.

Brandon Sherlinski is an associate in SGR’s Executive Compensation and Employee Benefits Practice. He specializes in employee benefits law with a specific concentration in qualified plans, deferred compensation, equity plans, and health and welfare matters, including compliance with ERISA, COBRA, FMLA, and HIPAA.