Common Mistakes Startups Make When Hiring Employees: Part 4

Last week, we examined the third in a series of mistakes that Startups commonly make when hiring employees.  (You can read that post here).  In the final post of this series, we examine another mistake Startups commonly make:

Violating Wage and Hour Laws.  

Once a startup hires employees, compensation becomes a chief issue.  One question we hear often is: how much should we pay our employees?  The answer to that question is generally up to the employer.  However, employees must be paid at least minimum wage.  Under Federal law, most types of employees must be paid a minimum wage of $7.25 per hour.  Some states have higher minimum wage requirements.  For instance, in 2015, Illinois increased the minimum wage, requiring private businesses to pay their employees a minimum of $8.25 an hour.  A related problem startups encounter is the failure to pay employees overtime.  Both Federal and Illinois law classify employees as either “exempt” or “nonexempt.” Exempt employees are generally salaried employees (as opposed to hourly employees) who are paid at least $23,600 per year and perform exempt job duties, such as executive, professional or administrative duties. Employees who perform “computer” duties under Federal law are exempt when paid at least $23,600 annually or at least $27.63 an hour.  All other employees are nonexempt and they are entitled to 1.5 times their regular rate of pay for time worked in excess of 40 hours in a week.  Therefore, it is important for Startups to track employee hours and to pay overtime.

Another issue is a startup’s failure to pay its employees timely and in-full.  As many startups commence with an unpredictable revenue stream, it is important to ensure that employees are paid according to Federal and Illinois law.  Illinois law requires employers to pay employees all wages earned at least semi-monthly.  Further, all wages are to be paid no later than 13 days after the end of the pay period in which the wages were earned.  Additionally, for employees who receive commission, employers must pay commissions at least once per month.  Failure to pay employees their full compensation can result in Department of Labor actions or private lawsuits for backpay and statutory interest and penalties.

Startups must ensure that they are in compliance with all wage and hour laws.  In addition to having severe consequences for the business, in certain instances, business owners themselves can face personal liability for violating wage and hour laws.  Startups should establish a proper timekeeping system with appropriate records.

In sum, all of the above-mentioned mistakes are avoidable and preventable.  Working with legal counsel to establish proper procedures and craft necessary documents and records is a good start to paving a relatively smooth path forward in running your business and managing your employees.

This post is not intended to be legal or tax advice.  Formeller & Formeller LLP’s Chicago startup attorneys have helped numerous clients form and operate their businesses.  Our skilled Chicago attorneys can help counsel you with employment issues and assist you with establishing proper employment hiring and employee management procedures .  Please contact our law firm today for a free legal consultation if you would like to discuss employment or operational issues.

Click here to visit the Formeller & Formeller LLP website.