Employment Compliance

Employment Compliance

Overview

Hiring is a legal minefield. Misclassify an employee as a contractor and you owe back taxes, penalties, and benefits — plus the state of California wants to have a word. Forget the IP assignment and a departing employee takes your code with them. Terminate someone without documentation and you're paying COBRA for 18 months plus a settlement. The mistake: thinking "we're too small for HR." You need compliance from employee #1. This skill covers everything from classification to termination.

Authoritative Foundations

• IRS — Worker classification (20-factor test, ABC test) — Worker classification (20-factor test, ABC test)
• California AB5 / Prop 22 — Gig economy classification — Gig economy classification
• DLSE (California) — Employment regulations — Employment regulations
• SixFifty — Employment law automation (Wilson Sonsini) — Employment law automation (Wilson Sonsini)
• Rippling / Gusto — HR compliance platforms — HR compliance platforms
• Stacey Nordwall (Culture Amp / Pyn) — Revenue-team HR ops (onboarding, manager enablement) — Revenue-team HR ops (onboarding, manager enablement)

When to Use

Trigger phrases: "contractor vs employee", "employee classification", "offer letter template", "employee handbook", "PIIA agreement", "IP assignment for employees", "termination procedure", "multi-state hiring", "international employee compliance", "employment law for startups"

Step-by-Step Process

Phase 1: Contractor vs Employee (Get This Right)

The most expensive mistake in startup hiring is misclassification.

IRS 20-Factor Test (simplified):

California ABC Test (stricter than IRS): A) Worker is free from control and direction B) Worker performs work outside your usual business C) Worker is customarily engaged in their own independent trade

Rule of thumb: If they work full-time for you, use your equipment, have set hours, and you control what they do day-to-day = EMPLOYEE. If they work on a specific project, set their own hours, use their own equipment, and have other clients = contractor. When in doubt: EMPLOYEE. The penalties for misclassification are severe.

Consequences of misclassification:

• Back taxes (both halves of FICA — you'd owe the employer AND employee share)
• Penalties: $50-5,000 per misclassified worker
• Benefits owed: health insurance, retirement, stock options
• Overtime wages if applicable
• California: additional PAGA penalties ($100-200 per employee per pay period)
• Class action risk

When you can use contractors:

• Specific project with defined deliverables and end date
• Worker has their own business (LLC, other clients, website)
• Worker sets their own schedule and methods
• Worker invoices you (not on your payroll)

GTM-specific — SDR/BDR classification: Full-time SDRs on your sequencer, your CRM, manager-assigned lists, and team quotas are employees (W-2) in virtually all US scenarios. "1099 SDR" models fail ABC test in California and invite federal misclassification penalties. Commission plan documentation → gtm-role-descriptions comp templates. HR onboarding system → gtm-role-descriptions/references/hr-gtm-playbook.md. Escalate borderline cases to qualified counsel — this skill is not legal advice.

Phase 2: Hiring Employees

Before employee #1:

1. Register for EIN (if not done at incorporation)
2. Register with state tax agency (unemployment insurance, withholding)
3. Get Workers Compensation insurance (required in most states)
4. Set up payroll (Gusto, Rippling, Justworks — don't DIY payroll)
5. Post required labor law posters (physical or digital — Gusto handles this)

Offer letter essentials:

1. Role, start date, reporting structure
2. Compensation: salary, bonus, commission (if applicable)
3. Equity: ISO/NSO grant, vesting schedule, exercise details
4. At-will employment statement
5. Confidentiality and IP assignment (PIIA) — attach, must sign
6. Benefits summary (health, dental, 401k, PTO)
7. Contingencies: background check, reference check, I-9 verification

New hire paperwork (every employee):

• Signed offer letter
• Signed PIIA (IP assignment) — CRITICAL
• I-9 (employment eligibility verification) within 3 days of start
• W-4 (tax withholding)
• Direct deposit form
• Emergency contact
• Benefits enrollment
• Employee handbook acknowledgment

Phase 3: Employee Handbook

Every company needs one — even at 2 employees. It protects you legally, sets expectations, and documents policies that courts and regulators will ask about.

Essential handbook sections:

1. Welcome and Company Overview — Mission, values, culture
2. Employment At-Will — Either party can terminate at any time, with or without cause (must be in bold/all caps)
3. Equal Employment Opportunity — Anti-discrimination statement
4. Harassment and Discrimination Policy — Zero tolerance, reporting procedure, no retaliation
5. Classification — Exempt vs non-exempt, full-time vs part-time
6. Work Hours and Attendance — Core hours, remote policy, time tracking
7. Compensation — Pay schedule, overtime (if non-exempt), bonuses
8. Benefits — Health, dental, 401k, PTO, sick leave, holidays
9. Leave Policies — FMLA, state leave laws, parental leave, jury duty
10. Code of Conduct — Conflicts of interest, confidentiality, social media
11. IT and Data Security — Acceptable use, password policy, data handling
12. Discipline and Termination — Progressive discipline, grounds for termination, final paycheck rules
13. Acknowledgment — Signed by employee, kept in personnel file

Handbook tools:

• SixFifty (Wilson Sonsini) — AI-generated, state-specific handbooks
• Gusto — Built-in handbook builder for customers
• Rippling — HR + IT + compliance platform
• Orrick — Free startup forms library

Phase 4: Multi-State Hiring

Every state has different employment laws. Hiring remote means you're subject to the laws of each state where you have employees.

What varies by state:

• Minimum wage
• Overtime rules
• Paid sick leave (mandatory in CA, NY, MA, CO, and many others)
• Paid family leave (state-by-state)
• Final paycheck timing after termination (immediate in CA, next payday in TX)
• Non-compete enforceability (banned in CA, restricted in many others)
• Pay transparency requirements (salary ranges in job postings)

Compliance checklist for each new state:

1. Register with state tax agency
2. Register with state unemployment insurance
3. Get Workers Comp for that state
4. Update pay practices to meet state minimum wage
5. Provide required state-specific notices
6. Update handbook policies for state-specific leave laws
7. Post required state labor law posters (digital or physical)

Use a PEO for multi-state: Gusto, Rippling, or Justworks handle state registrations, tax filings, and compliance for you. Worth every penny.

Phase 5: International Hiring

Three ways to hire internationally:

EOR providers: Deel, Remote, Oyster, Rippling Global.

International compliance considerations:

• Local employment laws (notice periods, severance, vacation minimums)
• Mandatory benefits (many countries require more than US)
• Data privacy (GDPR for EU employees)
• Equity: granting stock options internationally is complex — use a platform like Carta's international module

Phase 6: Termination

How to fire someone without getting sued:

Before termination:

1. Document performance issues in writing. Multiple times.
2. Follow progressive discipline (verbal → written → PIP → termination).
3. Consult with legal counsel if: over 40 (age discrimination risk), recently returned from leave, whistleblower, or any protected class issue.
4. Prepare: final paycheck calculation, benefits continuation info, equipment return list, offboarding checklist.

During termination meeting:

1. Two people in the room (manager + HR or witness)
2. Direct: "We've made the decision to end your employment effective [today/ date]." No negotiation. This is not a discussion.
3. State the reason (documented, factual, not personal)
4. Review: final paycheck details, benefits (COBRA), equity (vested shares retained, exercise window), equipment return
5. Give termination letter with all details in writing
6. Collect company property

After termination:

1. Final paycheck: timing depends on state (immediate in CA, next payday in some states)
2. Revoke access: email, apps, code repositories, building — immediately
3. COBRA notification: within 14 days (federal requirement)
4. Communicate to team: brief, professional, no details ("X is no longer with the company. We wish them the best.")
5. File: keep all documentation in case of claim

Output Format

EMPLOYMENT COMPLIANCE — [Company]

CURRENT HEADCOUNT: X employees, Y contractors
STATES: [list all states with employees]

CLASSIFICATION AUDIT:
- [Worker 1]: [Employee / Contractor] — proper classification? [Yes / Review]
- [Worker 2]: [Employee / Contractor] — proper classification? [Yes / Review]

KEY DOCUMENTS (status):
- [ ] Offer letter template — [created / needs update]
- [ ] PIIA (IP Assignment) — [all employees signed? all contractors signed?]
- [ ] Employee Handbook — [published / draft / needed]
- [ ] Harassment Policy — [in handbook / separate / needed]
- [ ] Termination procedure — [documented / needed]

PAYROLL & HR TOOLS:
- Payroll: [Gusto / Rippling / Justworks]
- Handbook: [SixFifty / Gusto / Custom]
- International: [Deel / Remote / N/A]

COMPLIANCE CALENDAR:
- [ ] Annual handbook review — [date]
- [ ] Multi-state compliance check — [date]

Implementation Checklist

• All workers properly classified (employee vs contractor)
• PIIAs signed by ALL employees and contractors (no exceptions)
• Employee handbook published and acknowledged by all employees
• Harassment policy includes reporting procedure and non-retaliation
• Workers comp insurance in place for all states with employees
• Payroll tax registrations complete for all states with employees
• Employment posters posted (physical or digital) in all states
• I-9 forms complete for all employees
• Termination procedure documented

Quality Check

Before delivering, verify:

• Output matches the user's stated request
• Named frameworks or sources are reflected in the recommendation
• The deliverable is specific enough for an agent to execute
• Any assumptions, risks, or dependencies are explicit
• No unsupported claims, invented facts, or private/internal references are included

Common Pitfalls

1. Misclassifying employees as contractors. "They're a contractor" but they work 40 hours/week, use your laptop, have a company email, and report to a manager. If it walks like an employee and quacks like an employee... Fix: Use the IRS 20-factor test. When in doubt, classify as employee and use Gusto/Justworks.

2. No IP assignment from contractors. You pay a contractor $50K to build your product. They own the code. You don't. Fix: Every contractor signs a PIIA or work-for-hire agreement BEFORE starting work.

3. Firing without documentation. "It wasn't working out" with no paper trail = lawsuit risk. Fix: Document performance issues. Give feedback in writing. Follow progressive discipline. The paper trail is your defense.

4. Ignoring state-specific laws. "We're based in Texas, but we hired a remote employee in California." California has completely different overtime rules, sick leave requirements, and final paycheck timing. Fix: Your PEO (Gusto/Rippling) handles this — but you need to tell them about every hire in every state.

5. No handbook for employee #1. "We're only 3 people — we don't need a handbook." You need it BEFORE there's a problem. The handbook is evidence that you communicated expectations and policies. Fix: SixFifty generates a handbook in under an hour.

⚠️ Disclaimer

This skill provides general informational guidance based on publicly available frameworks and operator experience. It is NOT legal advice, accounting advice, tax advice, financial advice, insurance advice, or professional services advice.

Consult qualified professionals for your specific situation — attorneys for legal/equity matters, CPAs for tax and accounting, licensed brokers for insurance, and certified security assessors for compliance. This skill does not create a professional-client relationship. Use it as a starting point for research and preparation.

Execution Artifacts

• references/framework-notes.md — Named frameworks and reference tables
• templates/output-template.md — Deliverable shell for agent output
• scripts/check-output.py — Lightweight deliverable validator
• ../gtm-role-descriptions/references/hr-gtm-playbook.md — Revenue-team HR ops (Stacey Nordwall; Pattern 28)

Related Skills

• first-hires-playbook — First 10 hires, compensation, interview process
• hiring-contractors — Contractor management, rates, IP assignment
• legal-for-founders — Foundational legal docs and compliance
• equity-management — Stock options, cap tables, 409A
• business-insurance — Workers comp, EPLI