Starting a law practice is an exciting endeavor, full of decisions large and small. Whether to hire an employee is one the most consequential of those decisions. Due in large measure to California’s expansive labor laws—which strongly favor employees—hiring is full of pitfalls. Even a well-intentioned decision can lead to serious liability.

While most employers are aware of laws protecting employees from unlawful practices such as harassment, discrimination and retaliation, they are generally unaware of the significant liability that can accrue for violations of the Labor Code, known as “wage and hour” violations. To make matters worse, insurance rarely covers wage and hour claims and when coverage is available, it is usually limited to a low value, defense-only policy that pays nothing towards a settlement or judgment. (See Andrea Christensen’s article for more information about insurance coverage for your practice.)

I advise all business owners to take the following initial steps before becoming an employer:

1) Write a Job Description.
Before you make your first hire, write out an accurate and honest job description for each position. This should include the requisite qualifications and experience as well as an outline of duties and responsibilities.

2) Classify each position.
Once you have a job description, you should seek out the advice of an attorney or reputable human resources consultant to determine whether each position is “exempt” or “non-exempt.” This is the most important step in the hiring process. It is a common misperception that paying an employee a salary means they are exempt and therefore not owed overtime. This mistake may end up costing an employer tens of thousands of dollars (or more) in wages and penalties per employee.

Instead, each position must be analyzed to determine whether it fits within one of the few exemptions authorized by law. Specifically, this analysis requires two tests: (1) the duties test and (2) the salary basis test.

• Duties Test: Workers classified as exempt employees are those whose primary duties are executive, administrative, or professional. (Other exemptions for specific occupations, such as sales employees, also apply in limited circumstances.) A key factor in this analysis is whether the employee uses discretion and independent judgment in carrying out their duties.
• Salary Basis Test: If it is determined that an employee’s duties are exempt, the next step is to consider the salary basis test. In general, if a position is exempt, then the employee must be paid a fixed salary at least twice the state minimum wage for full-time employment (whether or not the employee will work full-time). Moreover, the employee’s salary may not be reduced by the quality or quantity of work (except for certain absences pursuant to a written leave policy, such as vacation).

If a position is not determined to be exempt, the employee must be paid an hourly rate equal to or greater than the current minimum wage. Marin County has not adopted its own minimum wage ordinance and therefore the state minimum wage controls. Currently, California’s minimum wage is $13.00 per hour for employers with 25 or more employees, and $12.00 per hour for employers with less than 25 employees. These rates will increase by $1.00 on January 1 of each year, capping at $15.00 per hour.

In a solo or small law firm practice, the most common jobs will involve support staff (receptionist, legal assistants, bookkeeping), which, absent exceptional circumstances, will almost always be non-exempt. Many people make the mistake of assuming that the administrative exemption applies to all administrative workers, including legal assistants and other support staff. However, the Industrial Welfare Commission wage orders make clear that administratively-exempt workers must either (1) perform “under only general supervision work along specialized or technical lines requiring special training, experience or knowledge” or (2) execute “special assignments and tasks…under only general supervision.” (See IWC Order 4-2001 § 1, subd. (A)(2)(d) & (e).) This is a very high burden to meet, which means that the administrative exemption is generally only applied to high-level workers such as chief financial officers and controllers, and not to those workers who support those positions such as bookkeepers and accounts-receivable clerks.

3) Adopt a time keeping system.
Before hiring, you should identify and adopt a time keeping system that works for your business. The best systems allow non-exempt employees to clock in and out with their own unique credentials, record in/out times for meal breaks, and affirm rest breaks were taken timely. Most timekeeping software will also easily export this data to your payroll service.

4) Don’t rely on your payroll service to comply with the law.
Ultimate liability will always rest with the employer, so don’t make the mistake of failing to double check employee wage statements. A payroll company should provide you with a mock-up before you ever add an employee to the payroll so that you can ensure compliance with Labor Code section 226, which requires each wage statement to provide nine specific categories of information:

a) Gross wages earned;
b) Total hours worked by the employee;
c) The number of piece-rate units earned and any applicable piece rate if the employee is paid on a piece-rate basis;
d) All deductions;
e) Net wages earned;
f) The inclusive dates of the period for which the employee is paid;
g) The name of the employee and only the last four digits of his or her social security number or an employee identification number other than a social security number;
h) The name and address of the legal entity that is the employer; and
i) All applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee and if the employer is a temporary services employer, the rate of pay and the total hours worked for each temporary services assignment.

Once you are up and running, you should make a habit of monitoring wage statements to ensure compliance with Section 226, as well as for overtime, break penalties, and sick leave and vacation accruals. While this may seem onerous, be aware that most payroll company contracts significantly limit the payroll provider’s liability for errors that violate labor laws, so the employer will almost always be on the hook alone for liability caused by the payroll company.

5) Adopt policies and procedures.
Not only should you have an employee handbook that explains all of your policies and procedures, employers are required to develop a harassment, discrimination and retaliation policy that:

a) Is in writing;
b) Lists all current protected categories covered under the Fair Employment and Housing Act;
c) Indicates that the law prohibits coworkers and third parties, as well as supervisors and managers, with whom the employee comes into contact from engaging in conduct prohibited by the Act;
d) Creates a complaint process to ensure that complaints receive: confidentiality to the extent possible; a timely response; impartial and timely investigations by qualified personnel; documentation and tracking for reasonable progress; appropriate options for remedial actions and resolutions; and timely closures;
e) Provides a complaint mechanism that doesn’t require an employee to complain directly to his or her immediate supervisor, including an alternate reporting structure, a complaint hotline, or access to an ombudsperson;
f) Instructs supervisors to report any complaints of misconduct to a designated company representative, such as a human resources manager, so the company can try to resolve the claim internally;
g) Indicates that when an employer receives allegations of misconduct, it will conduct a fair, timely, and thorough investigation that provides all parties appropriate due process and reaches reasonable conclusions based on the evidence collected;
h) States that the employer will keep the investigation confidential to the extent possible, but does not promise complete confidentiality;
i) Indicates that if at the end of the investigation misconduct is found, appropriate remedial measures shall be taken; and
j) Makes clear that employees shall not be exposed to retaliation as a result of lodging a complaint or participating in any workplace investigation.

6) Seek counsel before hiring independent contractors.
In the wake of Assembly Bill 5, signed by the governor in 2019 and codified primarily in Labor Code 2750.3 (it also amended Labor Code section 3351 and Unemployment Insurance Code sections 606.5 and 621), it is harder than ever for employers to safely engage independent contractors. And the risk of misclassification is steep: While you save on employer-side taxes, for every misclassified worker, the hiring entity may owe back wages for overtime, penalties for missed meal and rest breaks, various additional Labor Code penalties, back payroll taxes and FTB and IRS penalties, as well as the claimant’s attorney’s fees and costs.

7) Understand your personal liability.
If you’ve read this far, you may be thinking that a lawsuit won’t affect you personally because you’ve formed an entity and taken all steps necessary to avoid alter-ego liability. While those steps are important, you should also be aware of the two main avenues to personal liability for individuals. First, Labor Code section 558.1 extends liability for specific Labor Code violations (including those relating to payment of wages at termination, wage statement errors, failure to provide meal and rest periods, violations of minimum wage or overtime compensation, unpaid expenses, and attorney’s fees and costs) to persons “acting on behalf of an employer” including owners, directors, officers or managing agents. Additionally, Labor Code section 1197.1 imposes personal liability on officers, agents and employees who causes an employee to be paid less than the minimum wage.

This list is not exhaustive, but instead is intended to provide a prospective employer a proper foundation. As the saying goes, an ounce of prevention is worth a pound of cure. Making sure you are in compliance with California’s labor laws before your first hire is the best step toward protecting your practice against potentially devastating employee claims.