Your startup company is taking off, and you find yourself wanting to share the workload with others. Now’s the time to bring on new people. You know (perhaps from your own previous work experience) that organizations and companies bring on unpaid volunteers, interns, employees and independent contractors, but you are not quite sure about the distinctions between these various groups. Ideally you’d like to bring on unpaid volunteers or interns to keep your costs low. But before you do this, make sure you understand the legal requirements associated with each type of worker to better inform your decision.
1. Volunteers are only permitted for non-profit organizations
Generally speaking, under the federal Fair Labor Standard Act, a business must pay any employee (except for certain “exempt” employees) minimum wage. As such, volunteering is only allowed for non-profit organizations and the only type of volunteering permitted is that which is “for public service, religious, or humanitarian objectives.” This means that most for-profit startups are not allowed to have volunteers working for them. This is true even if someone agrees to volunteer. Under federal labor laws, even a willing volunteer can come back later and make a claim for back wages, for which the startup owners can be personally liable.
2. Many startups won’t be able to host unpaid interns
The Department of Labor has articulated six criteria to determine whether an intern is exempt from the Fair Labor Standard Act’s minimum wage coverage. The six criteria are as follows:
1. The training the intern receives should be similar to that which would be given in an educational environment.
2. The training is for the benefit of the intern not the employer.
3. The interns do not replace regular employees, but rather, they work under the close supervision of existing employees.
4. The employer derives no immediate advantage from the activities of the trainee, and, on occasion, the employer’s operations may actually be impeded.
5. The interns are not necessarily entitled to a job at the end of the internship.
6. Both the employer and the interns understand that the interns are not entitled to wages for the time spent in training.
A startup must satisfy all six factors in order to comply with federal law. Startups must additionally satisfy state wage requirements. Factor four should particularly concern startups looking to take on interns to keep costs low while still advancing the business. Furthermore, lean startups may not be in a position to provide the adequate training required by factor one. As such, many startups won’t be able to host unpaid interns.
3. Independent contractors and employees are the better options
Startup companies can hire either independent contractors or employees. The distinction between an employee and an independent contractor focuses primarily on the level of control an employer has over the worker, and misclassification of an employee as an independent contractor can result in legal consequences. Generally speaking, factors to consider (such as those provided by the IRS) in classifying a worker as an independent contactor versus an employee include whether the worker operates under a separate business name, whether they have their own employees and offices, whether they maintain a separate business checking account, whether they advertise their services, whether they use their own tools for the job and set their own working hours, and whether they serve more than one client. Note that different agencies apply slightly different tests.
Employees in contrast are often characterized by the fact that they perform duties dictated and controlled by the employer, they are given training to perform such functions, and they work for only one employer. If someone falls within the definition of an employee, there are numerous additional requirements the employer should be aware of including withholding income taxes and Social Security taxes; paying unemployment taxes; offering benefits such as sick/vacation days, health insurance, retirement accounts, workers compensation; verifying the employee’s right to work (Form I-9); and complying with anti-discrimination laws.
There are many benefits associated with hiring contractors (vs. employees) that are particularly attractive to small startups. These benefits include savings in labor costs and reduced liability to federal regulations including the family disability act. Furthermore, employers more retain flexibility in hiring and firing independent contractors. But, as mentioned above, a startup should take care not to misclassify an individual as an independent contractor if they are in fact performing the duties and meeting the requirements of an employee. If your “independent contractor” meets the legal definition of an employee, you expose yourself to liability which can include reimbursement for wages you should have paid them as well as payment for employee benefits which include health insurance, retirement, etc., as well as payment for back taxes and penalties for federal and state income taxes, social security, and unemployment.
After you have decided who can and cannot work for you, be sure to put your agreement in writing. Should the new hire become disgruntled with their classification at some point in the future, it would be advantageous for you to have a document that clearly lays out the intentions of both parties involved in the employment.