Posted on 05-Mar-10 by The Timekeeper

With the uncertain economy today, you may be thinking about starting a business of your own. Maybe you were laid off and you’re having a hard time finding employment otherwise. Perhaps you still have a job, but you’re concerned about job security, or you simply want to ensure you have more financial stability the next time there’s an economic downturn.

It’s an exciting time when, as a new business owner, you start to think about hiring your fist employees. Unfortunately, there are a number of pitfalls of all sorts lurking in the wings waiting to pounce on the unwary entrepreneur. Two common wage and hour issues, for instance, can easily sink your business under an avalanche of back pay, fines and penalties. These are: misclassification and wage deferral.

I’ve mentioned before the problem of misclassification, both in terms of eligibility for overtime and the issue of employees versus independent contractors. Sometimes new business owners are tempted to call everyone who works there an independent contractor in order to avoid having to pay minimum wage. Instead, they’ll “pay” workers in stock or stock options, calling them “contractors” or “consultants” to (apparently) exempt them from minimum wage requirements.

Problem is, there are very specific criteria that must be met before a worker can be considered an independent contractor. Too many business owners want to treat their workers as employees while calling them contractors — a practice that can get you in hot water with the DOL very quickly.

The other classification issue is that of overtime eligibility. The assumption under the law is that every employee must be paid overtime unless they meet certain very specific criteria for exemption. Sometimes, in an attempt to manage cash flow, a new entrepreneur might be tempted to ask overtime-eligible employees to work without being paid for overtime. Unfortunately for the business owner, employees cannot “agree away” their rights, so even if they’re amenable to the owner’s suggestion, it’s not legal.

Knowing this, the business owner might instead try to classify as exempt employees who otherwise should be overtime-eligible, figuring this as a workaround way to save the overtime money. Of course, you know this is also illegal.

The second major pitfall is wage deferral. Again, as with overtime, sometimes a new business owner has cash flow issues and wants to ask employees to work only for “sweat equity” for now, with the promise of pay in the future once the business gets on its feet.

As it happens, though, the law is very clear on this. Employees must be paid at least minimum wage, and in at least some states must be paid at least semi-monthly. (In many states, hourly employees must be paid even more frequently, within a certain number of days after the end of each pay period.)

Sadly, it isn’t simply new businesses that get tripped up by these issues. Even major multi-national corporations have been caught by classification issues, for instance. Whether you’re a new entrepreneur or an experienced business owner, it’s a good idea to invest a few dollars in a consultation with your employment law attorney from time to time just to make sure your payroll practices are — and continue to be — in line with the law.

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