California Employment Liability Trends for Tech Startups

Vouch , Gust Partner , The Insurance of Tech
13 Jun 2024

This article originally appeared on Vouch’s Blog. 

Do you know how employee protection laws have changed since the pandemic?

California has some of the strongest employee protections in the U.S., and often sets a precedent for regulations enacted elsewhere. For example, in recent years, state legislators have passed laws mandating increases in hourly minimum wage for companies of a certain size, as well as laws that limit the use of salary history in hiring. However, California’s employment laws can also be complex, because they change and evolve from year to year, often in nuanced ways. These updates can be especially challenging for startup founders, who are often in the position of making hiring decisions for the first time but don’t necessarily have a human resources background.

Underpay Employees, Pay the Price

“At the beginning of a company, everything is optimistic and exciting, and everyone is working to put something together, and they aren’t necessarily focused on high-risk areas or how things could very quickly go wrong,” says Erin McDermit, a partner at M&H, LLP who provides employment advice and counseling and conducts workplace investigations as an outside attorney.

In the last few years, disagreements over compensation have been a major driver for employee litigation. McDermit says even startups with a loose hierarchical structure need to abide by California’s wage and hour laws, which offer strict guidance on subjects such as overtime, how often employees take meal or rest breaks, and how many days in a row people can work.

“Founders will say, ‘Hey, we’re starting this company, come work on this with us. We’ll give you pay, we’ll give you stock when we get to that point,'” McDermit says. “And then months go by, and then you have what can be a pretty serious wage and hour problem. …You can’t just ignore the wage and hour laws for sweat equity.”

Startups with unclear or poorly worded commissions arrangements are also increasingly leaving themselves open to litigation from sales employees that leave companies under not-so-happy circumstances, says Raj Judge, the chair of the emerging companies practice at Wilson Sonsini Goodrich & Rosati. “The CEO says, ‘It’s not working out, I’m going to let you go.’ And the salesperson says, ‘Yes, but you owe me this much in commissions.’ And they look at the commissions agreement, and it doesn’t really answer the question of whether they do or don’t.”

Legal issues also frequently arise when there’s a lack of clarity around bonuses, Judge adds. “The company says verbally to the employee, ‘Oh, we have bonuses at the end of the year.’ And they don’t spell that out in a contract. They don’t say that it’s a contingent bonus that’s completely at the company’s discretion.” This is why legal experts recommend outlining bonus criteria using specifics, such as the amount of the bonus depends on a company’s performance and/or an employee’s individual performances, and doing so in a written contract.


Gust's Mission Control can guide early founders through all sorts of complex startup hurdles, like employment liability.


Know the Law Regarding Discrimination Claims

Both Judge and McDermit say that discrimination claims, which arise from workplace harassment or hostility, sexual harassment, or workplaces mishandling requests for medical or disability accommodations, are also quite common.

Regarding latter situation, “You have an employee who is not performing well, who also has a medical issue or needs to request a disability accommodation,” McDermit explains. “So if those two things are going on simultaneously, and the employer just ends employment for the performance issue, without thinking about something like the person just asked for a medical accommodation last week, it looks on a timeline like they just got terminated for asking for medical

McDermit, who notes she saw an uptick in leave requests in 2020 due to the pandemic, also recommends keeping tabs on any new federal laws that are passed. For example, in 2020, the federal Families First Coronavirus Response Act (FFCRA) required certain employers to provide paid sick leave and time off to employees who were quarantined or caregiving.

Startups also especially need to be aware of how California laws and federal laws intersect and overlap. McDermit notes that under the California Family Rights Act, companies with five or more employees are legally required to hold a job for someone who is eligible for 12 weeks of leave as a medical or disability accommodation. However, the federal Americans with Disabilities Act (ADA) and California Fair Employment and Housing Act (FEHA)—the latter a series of codified civil rights protections, including for gender and disability—can also apply if the employee needs additional time off.

“If the employer just says, ‘Well, you’ve used your 12 weeks. We’re ending your employment,’ that can be a legal claim, because they haven’t thought about the requirement under the disability laws that they reasonably accommodate the employee’s request for further time off as an accommodation under those laws,” McDermit explains.

Take a Proactive Approach to Mitigating Your Risks

Startups can mitigate their litigation risk by addressing employee needs and concerns right away, using proper processes and legal protocols. When an employee asks for an accommodation, McDermit advises, “I would generally say to an employer or a startup, if the employee is telling you they need something, do everything you can to provide that. If they still can’t perform their job, you can hold them accountable for the performance issue.”

The same advice holds true for non-disability-related harassment and discrimination claims, she adds. “I see companies get in trouble with those when they don’t handle the initial employee complaints properly. If an employee is complaining about potential harassment or discrimination, they have a legal duty to investigate the client and their concern promptly and thoroughly and report their findings back to the employee.”

Judge says startups can mitigate their litigation risk further by offering yearly anti-discrimination and anti-harassment training, like those offered by Ethena. These offerings go hand-in-hand with building and fostering a positive, respect-based company culture right from the very beginning. “Culture is so important,” he says. “Because that culture is what everybody starts to coalesce around, and that culture is what really grows the company and its environment in a wholesome way that prevents it from exposure to lawsuits all the time and wrongdoings or bad elements coming into the company.”

“Founders are always better off pairing up with a good law firm that can help them navigate these issues really early,” Judge says, adding that it’s “never too early” to take this step.

“Because if they start with a good firm, the firm will set them up with a wonderful set of forms that they can use that will help them create the discipline in the company, and adopt that approach that serves as the foundation for the company.”

Gust's Mission Control can guide early founders through all sorts of complex startup hurdles, like employment liability.

This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.