You can find plenty of literature on worker misclassification and the topic couldn’t be hotter in light of Uber’s business model (and high profile litigation). But for you early stage founders starting companies which are expected to be in stealth mode for the foreseeable future, you might be asking yourselves two questions:
1. Is this something I need to really worry about given the company’s early stage and low profile?
2. How would a misclassification actually come to light?
The following example, comes by way of anecdote from an on-boarding client (fictitious names used), and serves to answer those questions:
Robin is starting a company and decides to bring on her first employee and dear friend, Brian. With the understanding that they don’t have money right out of the gate, they get comfortable with the idea that they will each start as a “consultant,” and save some money by not setting up payroll while they see if they can get this idea off the ground. 1 year in they are ready to close on their first investor money but over the past couple months Brian has gotten side tracked with another venture and isn’t pulling his weight so Robin decides to fire Brian. Brian, being a recent college graduate, decides to file for unemployment. 3 months later, Robin receives a notice in the mail from the Massachusetts department of labor informing Robin that Brian had been misclassified as a consultant and Robin owes payment to cover the unemployment taxes she should have been withholding while Brian was technically employed by the company. Panic ensues. And Robin starts looking for a new attorney.
The moral of the story? It is critical for founders of start-ups to classify their service providers appropriately, right out of the gate, regardless of size, reach, publicity or development. Otherwise, risk getting bit in the a**.