News & Insights

Worker ClassificationNovember 6, 2023by Todd StantonAre employers their own roadblocks to their own success?

The pursuit of entrepreneurial excellence is a crucial component of success. However, many employers unintentionally hinder their pursuit with simple missteps in defining roles and expectations.

Building an entrepreneurial culture fosters ownership, buy-in, innovation, and growth within your company. However, there are common missteps that employers make when it comes to fostering this within their teams. Getting these wrong can have an impact on more than company culture. It can also have legal, financial, and operational ramifications, as well. 

When it comes to developing a healthy workplace culture, clearly defining roles and expectations between employees and employers, partners, and co-owners is essential. When team members know their role and how it plays into the ultimate mission, they’re more likely to contribute beyond their set tasks. Clarity is kindness — clear compensation, contracts, and compliance specifically.

Clear Roles: What’s the difference between an employee and an independent contractor?

The distinction between an employee and an independent contractor is often misunderstood. An employee is hired by an employer and participates in an ongoing employment relationship. A contractor is self-employed and, therefore, plays a very different role. This overlooked distinction has legal and financial implications. Accurately classifying workers is essential for employers to ensure compliance with labor regulations and maintain a fair and ethical work environment for all parties involved. 

Keep all parties on the same page, literally, with written agreements. This aligns expectations, gives a reference point, and keeps you compliant under a myriad of acts and laws. Fostering a culture of entrepreneurship starts with the ownership you enable employees to feel in their roles, the way you leverage contractors, and most importantly, how you model it as the leader.

Contracts: Performance management begins with hiring and engagement

Hiring decisions have a significant and lasting impact on an employer’s overall performance management. To mitigate these risks, investing in thorough and effective hiring processes is always worth it. It is important to identify the nature of a relationship in employment and vendor/contractor agreements. Both types of agreements are crucial for businesses (see above regarding expectations), but they serve different purposes and have distinct legal requirements. Pay special attention to overlaps of these agreements:

  • Compensation
  • Restrictive Covenants
  • Choice of Law/Forum
  • IP
  • Confidentiality
  • Dispute Resolution

The similarities between employment and vendor/contractor agreements, though, are only part of the story. The contracts will differ significantly with respect to risk allocation, insurance, resource allocation, and other important terms. Read this: don’t use employment agreements and vendor/contractor agreements interchangeably.  

Compliance: Applicability of State and Federal Employment Laws

Let’s get down to the brass tacks: Understanding and complying with relevant employment laws is critical. This includes staying informed about changes in legislation, seeking legal counsel when necessary, implementing fair and consistent HR policies and practices, and promoting a culture of respect and compliance within the organization. Complying with employment laws not only mitigates risks but also fosters a positive work environment and enhances the employer’s reputation as a responsible and ethical organization. If you’re unfamiliar with the Fair Labor Standards Act (FLSA), Title VII Americans with Disabilities Act (ADA), Family and Medical Leave Act (FMLA), and Age Discrimination in Employment Act (ADEA), it’s time to brush up on your knowledge — or get in touch with a Stanton attorney to make sure you’re setting your team up for success.

Protecting Your Equity

Finally, when it comes to entrepreneurship within your company, equity or true ownership is literally what it’s all about. Equity is a multifaceted concept that encompasses partnership, ownership, and obligations. It represents a stake or share in a company, which is not to be misinterpreted as mere compensation. Thinking about the long game is important for anyone with ownership and it sets the tone for a healthy organization overall. Here are tips to use equity to drive your organization forward:

  1. Avoid 50/50 arrangements without a tie-breaker: It’s important not to have an equal ownership split without a mechanism to resolve disputes or deadlocks that might arise between partners. You may be getting along with your partner now, but it’s prudent to anticipate disagreements and tension.
  2. Have a buy-sell plan or exit strategy: In the case of disagreements or changes in circumstances, have a well-defined plan in place for buying out or selling shares.
  3. Use phantom stock or pseudo-equity: These tools can offer financial incentives and benefits to key employees without creating the rights and obligations of ownership.
  4. Invest in a formal equity plan: An equity plan can help allocate ownership, define roles, and set clear expectations, reducing the potential for conflicts and ensuring the long-term success of the business. A professionally prepared equity plan will also help ensure ownership compliance with the tax and security laws.

It is crucial to go about every business day as an employer knowing that 1) compliance is an investment, 2) the operations and governance should work into the business plan and budget, 3) making yourself more attractive is key, and 4) you must curate and nurture your team. At the end of the day, remember that what might seem mundane — compliance, communication, and compensation — can actually really set the foundation for the culture you want to create. If you need assistance as you ramp up or refine, schedule a consultation with one of our attorneys.