WEBVTT
00:00:01.502 --> 00:00:03.025
In the world of business.
00:00:03.025 --> 00:00:06.434
Not all deals are what they seem.
00:00:06.434 --> 00:00:12.592
Fortunes rise, empires crumble, all with the stroke of a pen.
00:00:12.592 --> 00:00:19.303
Mergers, acquisitions, hostile takeovers Welcome to Mergers.
00:00:19.303 --> 00:00:32.231
She Wrote where we examine strategies and stories behind the biggest deals in business, because in M&A, the real risks are the ones you don't take.
00:00:36.140 --> 00:00:38.970
Welcome back to Merger she Wrote, episode 7.
00:00:38.970 --> 00:00:45.661
I'm your host, paloma Goggins, the owner of Nocturnal Legal, a business law firm devoted to mergers and acquisitions.
00:00:45.661 --> 00:00:48.146
I'm here today with Sarah O'Keefe.
00:00:48.146 --> 00:00:52.054
She is a partner at Shields, petit and Zoldan.
00:00:52.054 --> 00:00:59.966
She has broad experience with everything from litigation and workplace investigations to OSHA compliance and disability accommodations.
00:00:59.966 --> 00:01:08.793
She advises clients on compliance, risk management and employee training, all with a focus on fostering fair, safe and legally sound work environments.
00:01:08.793 --> 00:01:18.831
She's recognized as a best lawyers once to watch and super lawyers rising star, and Sarah brings not only her legal acumen but a passion proactive solutions in the workplace.
00:01:19.140 --> 00:01:20.605
Thanks so much, sarah, for being on today.
00:01:20.605 --> 00:01:27.421
Oh, thank you being on today.
00:01:27.421 --> 00:01:27.682
Oh, thank you.
00:01:27.682 --> 00:01:33.438
So, as you know, merger she Wrote is really centered around trying to help people who are building and scaling their business with the idea and plan to eventually exit.
00:01:33.438 --> 00:01:45.561
And today Sarah and I are going to kind of discuss back and forth what are really common topics that we have with business owners about, generally speaking speaking, their relationship with their employees being an employer.
00:01:45.561 --> 00:02:05.313
So first, on our list of questions, our Q&A is when a business is scaling and thinking about exiting in the future, what do you think is the most common mistake you see founders make when it comes to classifying workers employee versus independent contractor yeah, that's a big one and it can definitely be like a bet.
00:02:05.459 --> 00:02:12.762
The company problem Probably the number one is sort of like misunderstanding what the legal tests really are.
00:02:12.762 --> 00:02:19.540
And then you know if you're doing that you're you're misclassifying the employee kind of from the jump.
00:02:19.540 --> 00:02:29.175
And a lot of the tests are really about control and like how much control the employer can exert over the independent contractor slash employee.
00:02:29.175 --> 00:02:31.099
And there's also a bunch of different tests.
00:02:31.099 --> 00:02:35.752
So like there's the IRS test and each state's have their own different tests.
00:02:35.752 --> 00:02:41.771
There's Department of Labor, economic Realities and California has their own test.
00:02:41.771 --> 00:02:42.473
There's a whole bunch.
00:02:42.473 --> 00:02:45.027
So it's a trap for the unwary.
00:02:45.027 --> 00:02:51.401
If you're, you know, not well versed in that, definitely consult an attorney before you go down that road, for sure.
00:02:52.502 --> 00:03:09.894
Would you say that if somebody was just trying at a baseline to determine whether they have things right or wrong before consulting with an attorney, is there one test they should look at just for their own sanity, or gut check first before having to dive deep into getting an advisor?
00:03:11.381 --> 00:03:13.384
Control is definitely the focus, right.
00:03:13.384 --> 00:03:19.264
So you, for an employee, you can dictate everything, all of the terms and conditions of employment.
00:03:19.264 --> 00:03:27.633
For an independent contractor, however, you need to make it seem like that person is free to go and compete with you, work with other businesses, etc.
00:03:27.633 --> 00:03:33.712
And so you can't have too much control or the discretion to exercise too much control over that person.
00:03:33.712 --> 00:03:41.733
You do not want to set schedules, you don't want to provide materials, you want them to bring like their own tools and everything you don't want to share.
00:03:41.733 --> 00:03:47.662
Branding, all of that stuff is indicia of employment, so avoid all of that.
00:03:47.662 --> 00:04:01.764
But if it's somebody who's like integral to your business, like the business can't function without them, you're probably an employee space opposed to independent contractor so you had kind of hit on something that I would like to get your thoughts on.
00:04:01.824 --> 00:04:11.670
In addition to like just the general classification and I think control is a great way to put it when you're talking about not necessarily limiting someone from competing.
00:04:11.670 --> 00:04:16.189
Can you, in fact, for a 1099, can you put some parameters in there?
00:04:16.189 --> 00:04:41.269
Because I think there's always some level of concern, especially those businesses that are creating deliverables or work product, where, if you don't have something in there that prevents them or limits them from competing in some capacity or taking their you know, you know hard, hard fought after clients away from them after they've worked with them internally in your business, can you do that on a baseline level and to what degree?
00:04:41.269 --> 00:04:43.502
And and answer how you feel comfortable?
00:04:43.502 --> 00:04:52.389
Because I know, you know, sarah and I are both lawyers and I feel like we both know the idea of like answering questions on a podcast that exists in perpetuity is not necessarily disclaimer.
00:04:52.389 --> 00:04:54.252
This is not legal advice.
00:04:54.252 --> 00:04:56.586
Thank you, this is for informational purposes only.
00:04:56.586 --> 00:04:59.321
Thank you, continue, perfect, thank you for that.
00:04:59.882 --> 00:05:00.204
Yeah.
00:05:00.204 --> 00:05:05.800
So there's a lot that you can do and when you're doing it, just kind of be careful, right?
00:05:05.800 --> 00:05:20.648
So you definitely want agreements like confidentiality, non-disclosure, how the IP is going to be treated, that whatever work the independent contractor is doing for you, when they're working for you, is your product, not the independent contractors.
00:05:20.648 --> 00:05:22.211
All of that you can do.
00:05:22.211 --> 00:05:26.031
Just be careful when you're doing it, basically, and don't.
00:05:26.031 --> 00:05:28.507
A lot of people were like oh, can I put in a non-compete?
00:05:28.507 --> 00:05:35.129
No, no, please, don't do that, because you're really saying like that person's your employee by by just doing that.
00:05:35.129 --> 00:05:44.081
So, yeah, have confidentiality, non-disclosure, assignments of rights and IP and all of that good stuff in there.
00:05:44.081 --> 00:05:44.923
That's totally fine.
00:05:51.040 --> 00:06:08.872
So when we talk about non-compete and maybe this is digging a little too deep on this specific topic but like when you say not putting in a non-compete, can you still potentially limit their ability to steal just your client specifically, like instead of a more general concept of non-compete which is like going out and doing the exact same thing that you're doing out in the marketplace, yeah, yeah.
00:06:09.019 --> 00:06:15.312
So typically and this varies by jurisdiction, of course, but generally courts are more lenient.
00:06:15.312 --> 00:06:32.629
When you have things like non-solicitation agreements, so like you can't target our customers clients, prospective clients, employees, vendors, suppliers that gets a little dicey, but mostly those are all fine and they make sense.
00:06:32.629 --> 00:06:39.045
Right, because you just want to have reasonable restrictions to keep your business competitive and that's okay.
00:06:39.045 --> 00:06:43.810
For the courts On the non-compete side is a little bit more tricky.
00:06:43.810 --> 00:06:53.009
Right, because those you need to have reasonable scope define what the job is really, clearly the duration of time and a geographic space.
00:06:53.009 --> 00:07:02.552
You don't necessarily have to have that with a non-solicit, but it could be good to help make your agreement potentially more enforceable if, god forbid, it got challenged.
00:07:02.552 --> 00:07:02.791
Right.
00:07:03.581 --> 00:07:05.668
That's fair and for listeners.
00:07:05.668 --> 00:07:11.012
You know geographic region and I'm, you know, coming from a place of general business knowledge.
00:07:11.012 --> 00:07:16.050
Geographic region, I think, can be a really key piece of the enforceability.
00:07:16.050 --> 00:07:22.682
And correct me if I'm wrong, but like I think, generally speaking, the broader the scope, the potentially less enforceable, correct.
00:07:22.923 --> 00:07:23.946
Definitely yeah.
00:07:23.946 --> 00:07:33.149
And I mean, if you think about it, like, if you're going to do a provision where you're like, okay, nobody within five miles, you can't solicit any of these people, you can't compete.
00:07:33.149 --> 00:07:40.011
It's a five mile like radius, right, and when you're talking about like that, that's probably reasonable.
00:07:40.011 --> 00:07:51.786
But if you go with something like all of Phoenix, not not reasonable, not going to be reasonable, because you're basically saying that that person can't, you know, work in their chosen field, in that space you have to move.
00:07:52.247 --> 00:07:58.632
Yes, very true, and I will put this as a caveat because the podcast is geared towards people buying and selling businesses.
00:07:58.632 --> 00:08:07.028
This conversation is about employee and 1099 type restrictions, is about employee and 1099 type restrictions.
00:08:07.028 --> 00:08:11.274
The non-compete language in like a purchase agreement for an exit, is far different.
00:08:11.274 --> 00:08:13.175
Don't think that this applies the same.
00:08:13.175 --> 00:08:20.939
You can make that much more enforceable with more general, broad strokes than if you had to try and do this with the 1099.
00:08:20.939 --> 00:08:21.120
For sure.
00:08:22.103 --> 00:08:24.620
Yeah, definitely your key man agreements are going to be very different.
00:08:24.740 --> 00:08:47.403
Like somebody who is the business, that's okay On a personal level, when you saw recently in the past year, all of those you know news updates about how potentially the non-compete generally was was at risk of being just completely wiped out, did you think that that was going to survive and get passed?
00:08:47.403 --> 00:08:50.740
Like what was your personal opinion, just coming from an employment lawyer perspective?
00:08:51.061 --> 00:09:00.423
Yeah, the FTC's potential, you know, non-compete ban got everybody all really excited and worried about like, what's that going to look like?
00:09:00.423 --> 00:09:05.528
Because obviously that would be a huge measure, right, you would not have non-competes.
00:09:05.528 --> 00:09:08.365
The FTC was trying to say that that's their area to regulate.
00:09:08.365 --> 00:09:18.744
From kind of knowing what the, what the background is and how these things go, it wasn't too worried that it was actually going to, you know, pass without legal challenge.
00:09:18.744 --> 00:09:20.828
And there are still many pending legal challenges.
00:09:20.828 --> 00:09:22.801
So, um, we'll see what happens.
00:09:22.801 --> 00:09:32.684
But a lot of people take the position that that's like not within the FTC's jurisdiction to regulate really, and there's some sense to that right, like who knows what the business is.
00:09:32.684 --> 00:09:36.943
There's a whole lot of things in their proposed rule that like didn't really account for everything.
00:09:36.943 --> 00:09:41.461
So it's probably for the best that nothing else has happened.
00:09:41.461 --> 00:09:50.120
But definitely there is this perception and I probably share that that like you shouldn't be able to restrict your competition out of business.
00:09:50.120 --> 00:09:54.407
Like it's not about competition, it's about unfair competition.
00:09:55.509 --> 00:09:57.831
Well said, I think, to your point.
00:09:57.831 --> 00:10:20.993
There was a lot of humdrum of like yes, I can go out and immediately compete with the business.
00:10:20.993 --> 00:10:27.890
You know, free reign as like a standard right now, in lieu of any of that being passed.
00:10:27.890 --> 00:10:55.451
Every state, like you had said at the outset of what you were describing, has its own restrictions, and there's even some I've come to learn just in doing deal work that are industry specific, like medical field has some specific carve out sometimes, and so I like to say that as a caveat to anyone listening it really depends on jurisdiction where you're located, potentially where your employee is located, right?
00:10:55.451 --> 00:11:18.654
Because I think, too, one of the big questions that always gets asked of me and I'm not really entirely sure how to answer it other than go talk to an employment lawyer is whether you, being an employer here in the state of Arizona and then your employee is, you know, based in a different state, what laws apply, and is that on a case by case basis, or is it typically where the employee is based?
00:11:18.895 --> 00:11:23.481
It's typically where the employee is based, right, just be cognizant.
00:11:23.481 --> 00:11:27.274
You definitely want to know where all your workers are for compliance purposes, right.
00:11:27.274 --> 00:11:41.581
And then you want to comply with your own home state laws, but for the most part, if you have an employee that's in California, they are going to try to avail themselves of all of the wonderful California rights that exist, which are like a different world from here.
00:11:42.361 --> 00:11:43.063
Oh, it's so true.
00:11:43.063 --> 00:11:58.722
For anyone listening who has employees, or especially independent contractors, based in California, please know that there are all sorts of specific rules and limitations that make having a 1099, especially in California, a very dangerous proposal.
00:11:58.722 --> 00:11:59.625
Yeah, don't do it.
00:11:59.966 --> 00:12:00.307
Don't do it.
00:12:00.307 --> 00:12:01.932
Don't do it Better yet, get out of.
00:12:01.951 --> 00:12:04.600
California, All right.
00:12:04.600 --> 00:12:07.883
So, related to classification of employees, you know.
00:12:07.883 --> 00:12:20.764
Can you walk us through the legal and financial risks that a business might have for misclassifying an employee, especially thinking about how a lot of these issues only come to light during due diligence?
00:12:20.764 --> 00:12:27.803
If a business has been growing and scaling for 30 plus years, the owners are ready to retire.
00:12:27.803 --> 00:12:30.418
They're now just gathering all the information.
00:12:30.418 --> 00:12:36.635
Perhaps they haven't worked with advisors as they should have along the way and there's some noncompliance.
00:12:36.635 --> 00:12:40.240
What are some issues that could come up, especially from a liability standpoint?
00:12:40.240 --> 00:12:46.678
Right, Because nobody's going to close and buy a business with outstanding liabilities, right, they're absolutely going to want to know who gets what.
00:12:47.902 --> 00:12:48.910
So there's a ton of risks.
00:12:48.910 --> 00:13:11.025
Basically, like you have your normal employment law issues, which could be like wage and hour under the Fair Labor Standards Act, so that could be things like you're not meeting the minimum wage, you're not paying overtime, you're not dealing with like meal breaks and rest periods, and then you have like laws that are going to apply that otherwise wouldn't like potential.
00:13:11.025 --> 00:13:26.090
You know anti-discrimination laws, so your misclassified workers may be entitled to some additional protections under like the ADEA or the ADA, and then you could have the normal sort of run of run of the mill wrongful termination or like retaliation claims and leave entitlements.
00:13:26.090 --> 00:13:26.871
That's a big one.
00:13:26.871 --> 00:13:32.976
So, post COVID, you know there's all these laws that we have to comply with with paid sick leave and all that good stuff.
00:13:34.341 --> 00:13:50.278
Then, apart from employment law risks, you're really talking about like tax violations, which is the big, the big, scary um, which can be like your income tax, withholding, social security, medicare, um, fica, all those, all those taxes that you have to worry about.
00:13:50.298 --> 00:14:00.837
So if you've misclassified an employee, you're going to owe those back taxes, plus um penalties and interests and all those terrible things that could potentially put you out of business and a lot of things.
00:14:00.837 --> 00:14:11.419
We also see some benefits issues right, like if there are some discrepancies in the plan, people will argue that that's potentially discriminatory.
00:14:11.419 --> 00:14:21.879
So you want to have, like, all of your ERISA docs in a row and also, like the state level enforcement can be pretty vigorous depending on where you are.
00:14:21.879 --> 00:14:25.541
So you want to be worried about, like, the audits and all those kinds of things.
00:14:25.541 --> 00:14:34.554
Obviously it's going to risk your deal potentially right, like somebody is not going to want to take on this company with potential unlimited liability.
00:14:34.554 --> 00:14:41.522
You need to know what those liabilities are and you guys need to break them down in the deal process so that everybody is clear about who gets what.
00:14:42.951 --> 00:14:44.461
That was exceptionally comprehensive.
00:14:44.461 --> 00:15:07.513
I appreciate that answer and I think too, the potential for having outstanding liabilities when it comes to employee classification is something that's probably overlooked in comparison to something like outstanding taxes or liabilities on the business from like an annual filing perspective or collateralization of assets and having taxes pull those assets back.
00:15:07.513 --> 00:15:34.644
Obviously, if you're buying an asset, you know sale as opposed through stock sale or an equity maybe there's you could get the buyer on board with the fact that you're like leaving behind a lot of the liability from the old company's employment practices and like that's you know predominantly their problem, and everybody that comes over from an asset purchase will get a new employment document of some form with the new company buying all the assets.
00:15:34.644 --> 00:15:47.037
So in some cases I would argue that if you did discover that you had all these potential misclassifications and extending liabilities, that you were doing an equity an audit.
00:15:47.037 --> 00:15:48.437
You know okay, fast forward.
00:15:48.437 --> 00:16:07.841
Someone sells an asset you know all their assets to the business, to a new buyer.
00:16:07.841 --> 00:16:11.779
They have essentially walked away from the liabilities related to that.
00:16:11.779 --> 00:16:16.375
You know old LLC that had all the misclassifications An audit occurs.
00:16:16.830 --> 00:16:22.996
Is it like taxes, where the audit can look backwards for a number of years, how and so like what?
00:16:22.996 --> 00:16:24.822
What would like if you were a business owner?
00:16:24.822 --> 00:16:29.302
You sold all your assets and, like all of a sudden discover that you're getting audited by the state?
00:16:29.302 --> 00:16:31.773
What does that look like, just on a baseline level, for someone?
00:16:32.836 --> 00:16:38.356
um, besides, immediately like paranoia and fear, because you're like, oh god, um, yeah, so it, it absolutely can look backwards, right.
00:16:38.356 --> 00:16:41.951
And typically because you're like, oh God, um, yeah, so it, it absolutely can look backwards, right.
00:16:41.951 --> 00:16:53.914
And typically the timing is like two to three years, generally, generally two, three, if someone can argue that like it's willful, um, for things like misclassification or like not not following Fair Labor Standards Act et cetera.
00:16:53.914 --> 00:17:01.429
Um, so those, those are a little bit scarier, but but it's all really like fact intensive, right.
00:17:01.429 --> 00:17:22.465
So if you don't have that documentation and like you didn't have a good housekeeping in order, it's going to be really quite terrifying, right, and one audit may trigger another audit and that also may trigger litigation from your former employees, right, and so there's a lot to unpack there.
00:17:25.817 --> 00:17:26.701
That's frankly just terrifying.
00:17:29.109 --> 00:17:39.508
So, like before that happens, you know you can self audit, you can like consult with a professional you know, labor and employment council or M&A person who can really like put your ducks in a row so that you don't have that problem.
00:17:39.508 --> 00:17:42.958
But after the fact, oh man, that's scary.
00:17:42.958 --> 00:17:48.634
You just hope that the deal has accounted for, you know who's going to own what potential liabilities.
00:17:48.634 --> 00:18:09.636
And then there's also some risk with, like, even if you do sell it and it's just assets, some you know wayward employees might argue like oh well, you know these are the issues that were ongoing before and so new company are not necessarily off the hook and that's super fact, intensive too.
00:18:09.636 --> 00:18:11.857
But like there's a little bit more risk with that.
00:18:11.857 --> 00:18:20.884
So just avoid it entirely and like have all of that, have the T's crossed and the I's dotted, before you go down that road.
00:18:21.790 --> 00:18:28.817
That is excellent advice and, honestly, I think people underestimate how you know a penny.
00:18:28.817 --> 00:18:29.439
What is?
00:18:29.439 --> 00:18:30.079
What's the phrase?
00:18:30.079 --> 00:18:30.721
Like a dollar?
00:18:30.721 --> 00:18:32.502
Yeah, it was dollar, save now.
00:18:32.963 --> 00:18:33.904
Penny wise pound foolish.
00:18:33.924 --> 00:18:59.401
Yes, something, something like that, where it's like you know, know, doing it in advance of a closing is honestly it's, it's a pain and maybe it shows that you really didn't have good housekeeping to the potential buyer and, like you said, maybe the buyer does walk away but it gives you the opportunity to clean house and make sure that you don't have liabilities that pop up later and potentially that you know, new buyer gets clawed into.
00:18:59.401 --> 00:19:12.486
This disagreement and I think one thing that can be also beneficial doing it early and even early as in the beginning part of a transaction where you realize holy smokes in the process of due diligence.
00:19:12.486 --> 00:19:20.673
Someone has brought to me or brought to my attention because I didn't know it before that I have misclassification and potentially all these liabilities is.
00:19:20.673 --> 00:19:35.959
At least if you know what the liability is going into closing, you can take a portion of that purchase price and apply it to those liabilities, because when else are you going to have that much liquid money come into your business?
00:19:36.559 --> 00:19:41.673
I would hate for someone to close not realizing that the misclassification has occurred for all these years.
00:19:41.673 --> 00:19:57.434
That money gets swept into, you know, investments that are not liquid or they spend it rapidly I've seen that too or they take it and they reinvest it in another business and now all of a sudden, all that liquid cash is gone.
00:19:57.434 --> 00:20:00.219
And how do you pay the liability liabilities back sufficiently?
00:20:00.219 --> 00:20:02.862
Yeah, so excellent points.
00:20:02.862 --> 00:20:18.277
Um, how it's kind of on the same topic, how early in the process of building and scaling your business should someone start creating standardized employment policies and procedures, and and what should those look like?
00:20:18.678 --> 00:20:27.002
Yeah Well, I'm kind of risk adverse, paranoid, you know, conservative, so I would say there's no, that, no time.
00:20:27.022 --> 00:20:59.640
Like the present, and like immediately, like before you start making your business and like creating your baby, you should have it well-papered, um, definitely, if you know, if you want to start it and see if things are working, before you spend the money on like lawyer fees okay fine, but for sure before you hit like 10 employees, because once you hit like 10 to 15, all these kinds of other laws are going to come into play and you will want to have like a paper documenting your compliance and that you thought about it.
00:21:07.029 --> 00:21:11.182
Also, like, probably when you're going to start offering like different employee benefits, like 401k or things like that.
00:21:11.182 --> 00:21:15.333
That can be another like risk point, but definitely the sooner the better.
00:21:15.333 --> 00:21:31.519
And the things like employment contracts, offer letters, um, you want a handbook, ideally, and your handbook is just going to spell out, like you know, these are the things that we expect as a company for you to do, as an employee or independent contractor potentially.
00:21:31.519 --> 00:21:50.038
Um, and like code of conduct, you're gonna have your basic eeo principles and we comply with the law, no retaliation, all those kinds of things you want in there because it can potentially lead you to like get an affirmative defense later, or at least it's going to be fodder for a defense, if you know.
00:21:50.038 --> 00:21:51.442
God forbid litigation happens.
00:21:52.550 --> 00:22:25.343
I was just going to ask that and so I'm glad you answered it, because I feel like a lot of people think it's just P's and Q's and in fact, if you have policies really well drafted and someone decides that they're going to sue for some, like wrongful termination for example, and you have something in your handbook that shows that you actually told them that that was not something they should be doing or you know, was not allowed by code of conduct, to your point, it provides that layer of defense or level of protection in the event someone was to sue.
00:22:25.343 --> 00:22:50.693
Tell me briefly I know we're a little off topic here but from a lay person's perspective, you know what's the difference, because I hear, you know, from my business clients, when they have issues with employees, like wage claims, versus true litigation like when does it fall into more of that, like state-based investigation where they make a wage claim or what I call a wage claim?
00:22:50.733 --> 00:22:59.857
and I feel like lay people call it wage claims, you know, with the state, as opposed to full-blown litigation, which I you hear about that too in wrongful termination.
00:22:59.857 --> 00:23:01.619
But like does it?
00:23:01.619 --> 00:23:04.903
Is there some things that fall into one bucket or the other?
00:23:04.903 --> 00:23:13.854
Or is there, I guess from a business owner's perspective, what could you at?
00:23:13.894 --> 00:23:15.876
least try and protect yourself from one versus the other.
00:23:15.876 --> 00:23:31.680
Yeah, wage claims are really scary, and mostly because the if, if you are an employer who hasn't paid wages, then you are subjecting yourself potentially to like the other, the, the employees attorneys fees and costs your own attorneys fees and costs, and then up to like treble damages.
00:23:31.680 --> 00:23:34.773
So just you know that that's a little nuts.
00:23:34.773 --> 00:23:55.296
So we do not want that generally for, um, like, if you're an employee, you know, and you have like a smaller wage claim, typically the industrial commission of arizona is gonna like handle that or can handle it for you and that person maybe doesn't need to get an employer, a plaintiff's you know attorney involved in that scenario.
00:23:56.037 --> 00:24:11.160
Um, if you're talking about like fair labor standards act violations, that's almost always litigation because from the plaintiff's attorney perspective, like you might, you file it because there's all these penalties and fees that start accruing pretty much immediately.
00:24:11.160 --> 00:24:15.634
So those are bigger, much bigger risk points.
00:24:15.634 --> 00:24:21.892
But if typically under like 15,000 or something and they're they're changing some of this right now.
00:24:21.892 --> 00:24:23.695
So, um, there's a pending law.
00:24:23.695 --> 00:24:26.020
Don't ask me all the details please.
00:24:26.040 --> 00:24:40.576
Um but generally, like 15,000 and under, you can go straight to the industrial commission and just file like a one pager complaint on there, um, and that the industrial commission will like reach out to the employer and like basically try to get you to settle it.
00:24:41.518 --> 00:24:50.141
Okay, no, that's helpful, yeah, even for me, and I'm sure it's helpful for the listeners, but I was wondering for my own benefit as well, like what the major difference was between the two.
00:24:50.141 --> 00:25:15.558
So, thank you, before we run out of time today, I feel like we'll definitely have to have another episode because the topics are so in depth that I want to make sure we cover some of the stuff you know on more of a detailed level, so that somebody who is actively building their business with the intention of at some point exiting whether that's for private equity or at retirement one of the same.
00:25:15.558 --> 00:25:28.638
These topics are so critical and I cannot tell you how important they become during the diligence process, when a buyer comes in and is turning over every stone and all of a sudden, all of your skeletons in every closet are visible.
00:25:28.638 --> 00:25:37.023
So, talking about we talked a lot about classification and misclassification and the potential liabilities there.
00:25:37.891 --> 00:25:41.501
You talked briefly about handbooks and documents that you should have.
00:25:41.501 --> 00:26:12.718
Tell me you know, just in a short way, what is the difference, because I feel like a lot of people proactively and very incorrectly go to the Internet and pull things off to essentially hire employees, not knowing that there's a huge difference between an employment contract and an employment offer, and I find that so many businesses that come to me later on in their evolution have everyone on employment contracts and they're not the type of employees that should have full-blown contracts.
00:26:12.718 --> 00:26:17.596
So just for everyone listening at home, what's the big key difference between the two?
00:26:19.045 --> 00:26:55.509
Yeah, so, an offer letter, right, is generally not going to be seen as like a binding contract, but like absent your compensation terms, really, Whereas your employment agreement is going to be like your 10 page document spelling out here are all of the rights, obligations and duties that you have, and you generally only need that with like a like a C-suite person, right, right, you don't need that with like your regular run-of-the-mill hourly employee typically, and there's some risk in trying to like put employment contracts into everybody because it doesn't fit.
00:26:56.490 --> 00:26:59.196
But also, why would you change the at-will status?
00:26:59.196 --> 00:27:04.009
That's a huge benefit for employers in Arizona, right, like as it stands right now.
00:27:04.009 --> 00:27:19.577
If you are a true at-will employee, which most are, then an employer or the employee can separate ties and as long as it's for a reason that is not illegal, then you're good to do that.
00:27:19.577 --> 00:27:24.617
But once you start mixing in employment contracts, that can imply a specific duration.
00:27:24.617 --> 00:27:41.692
Somebody can now bring a breach of contract, claim that there's an Arizona statute that entitles you to fees or attorney's fees and costs, and so it can just like blow up something that should have been so much simpler and that the state really, you know, says that we should be able to do as at-will employers.
00:27:42.575 --> 00:27:48.829
Totally, and I was going to say to piggyback off of that just for clarity purposes for the business owner that's listening.
00:27:48.829 --> 00:27:57.231
You know the difference between at will and someone who has contractually some form of employment.
00:27:57.231 --> 00:28:07.705
The difference, really, what you're saying, is an at will employee, unless it's for an unlawful reason, you can terminate them truly pretty much at any time.
00:28:07.705 --> 00:28:08.598
Whereas someone who's under an employment contract that says like you can terminate them truly pretty much at any time.
00:28:08.598 --> 00:28:23.454
Whereas someone who's under an employment contract that says like you can only terminate me for these reasons, for cause, yeah, and for cause, I feel like too, and with us both, you know working in contracts all the time how for cause is defined can really make or break the contract.
00:28:23.575 --> 00:28:37.858
Oh, yes, so just another reason why it's a poor decision to pull things off the internet, because you just don't know what you're putting in your contracts necessarily, or perhaps you're giving your employees lots of rights and you didn't intend to.
00:28:37.858 --> 00:28:46.450
So, yeah, well, I feel like we got a really great conversation and we did not cover like half the questions I wanted to ask, so we'll definitely have to have you back.
00:28:46.450 --> 00:28:50.497
But I think, as a final, final question that I always ask everyone you know.
00:28:50.497 --> 00:28:58.107
Is there a book or a podcast or anything that you know you would recommend to a listener who's trying to you know just better themselves?
00:28:58.107 --> 00:29:00.695
It could be employment law related or unrelated.
00:29:01.005 --> 00:29:07.218
Yeah, so I did some thinking about this, actually, and found a couple books that I would probably suggest.
00:29:07.218 --> 00:29:24.351
There's the Founder's Pocket Guide, term Sheets and Preferred Shares that one seems like a good bet by Joe Whalen and Nathan McDonald, and there's also High Growth Handbook by Elad Gill and then Built to Sell by John Warwillow.
00:29:24.351 --> 00:29:32.615
Those all seem like really great intros for anybody who's considering this, and you can probably consider that at any point when you have your business.
00:29:32.615 --> 00:29:35.294
Thank you for those recommendations, thanks.
00:29:35.675 --> 00:29:47.839
So you had talked about how employee policies can be really important to have when you're essentially starting to offer your employees benefits, 401k things like that.
00:29:47.839 --> 00:30:02.459
I think a super common and unfortunate thing that I see out in the world with especially main street businesses, is that they offer benefits to employees on a disparate basis.
00:30:02.459 --> 00:30:05.851
Some employees have benefits that others don't enjoy.
00:30:05.851 --> 00:30:09.217
Can you talk about whether that's okay?
00:30:10.719 --> 00:30:14.069
Yes, so for any time.
00:30:14.069 --> 00:30:23.337
In theory, right, you can have like different benefits, but there needs to be a tie to like a proper legal reason, like exempt or not exempt, or full-time or part-time.
00:30:23.337 --> 00:30:36.417
Otherwise you're opening yourself up to some potential legal liability and somebody is saying, oh well, I'm this full-time employee but you give this other employee who's similarly situated to me all these other benefits and opportunities.
00:30:36.417 --> 00:30:37.161
That's not fair.
00:30:37.161 --> 00:30:38.685
What's wrong with me?
00:30:40.230 --> 00:30:51.491
And from like an ERISA perspective, you really only want to do that with like the top hat agreements with your super key players and you don't want to do that with like the top hat agreements with your super key players and you don't want to do that with anybody else.
00:30:51.491 --> 00:31:00.136
Because, again, it's just your plan can be unwound, you can get all of these crazy penalties and it is not worth it.
00:31:00.136 --> 00:31:21.287
So in an ideal world, right, like have your plan documents, have all that spelled out Maybe it's in your employment handbook or maybe it's in like special memos later on who and why these people are getting disparate benefits, so that it's clear, like transparency can eliminate those potential disputes.
00:31:21.287 --> 00:31:26.910
Right, if people understand why and it makes sense and it's legally proper, you can get away with it.
00:31:26.910 --> 00:31:37.070
But if there's a lot of kind of cloak and dagger stuff and you're not being real clear about who's getting what, that can just invite problems.
00:31:38.032 --> 00:32:23.020
So, from a best practices perspective, if you have a bunch of people who aren't C-suite executives and they're just at-will employees and there's really nothing to classify them in a different way, those should all have the same benefits oh, for sure, okay, yes, and and I think the one, I think that I see really common out there that you know is a red flag immediately when talking with businesses who have been, you know, operational for a very long time and have these disparate benefits is, you'll see, like the daughter, who's also an at-will employee that you know has no other special classification other than their daughter that they're getting reimbursed for all of their healthcare costs and all sorts of like crazy, you know?
00:32:23.542 --> 00:32:26.075
or you know one person's getting an all expense trip paid once a year, as like their.
00:32:26.075 --> 00:32:26.256
You know?
00:32:26.256 --> 00:32:27.924
You know one person's getting an all-expense trip paid once a year, as like their.
00:32:27.924 --> 00:32:30.030
You know bonus instead of like a cash bonus.
00:32:30.030 --> 00:32:31.454
Everybody else is getting cash bonuses.
00:32:31.515 --> 00:32:35.035
Yeah, don't do that, don't do that sarah says don't do that please.
00:32:35.035 --> 00:32:54.157
Um, I think relatedly on this topic, you see a lot of people who have family members, especially kids, that they have on payroll because one they're trying to shelter, you know, income from a tax perspective but also in a roundabout way, kind of benefit their kids through the business.
00:32:54.157 --> 00:32:59.046
You know what are some best practices for those people to make sure that they're doing it compliantly.
00:32:59.346 --> 00:33:02.992
Yeah, hiring family is is like a whole.
00:33:02.992 --> 00:33:05.396
It's a whole nother podcast, um.
00:33:05.396 --> 00:33:12.720
But I would say like this, a one point where, like documentation really matters, even though you would think it wouldn't.
00:33:12.720 --> 00:33:21.717
But like from people, people are absolutely going to look, you know, on the outside and sort of scrutinize well, that's the owner's daughter and look at all of the benefits that she's getting.
