Employment Compliance

---
name: employment-compliance
description: >-
  Employment law and compliance for B2B SaaS founders — contractor vs
  employee classification, offer letters, IP assignment (PIIA), at-will
  employment, equity documentation, employee handbooks, harassment policies,
  termination procedures, and multi-state / international hiring compliance.
  Use when hiring first employees, classifying workers, building HR
  infrastructure, or expanding to new states/countries. Triggers on:
  "employment law", "contractor vs employee", "offer letter", "employee
  handbook", "PIIA", "hiring compliance", "termination".
license: MIT
compatibility: Claude Code, Codex, GitHub Copilot, Cursor, Gemini CLI, OpenCode, Goose, Hermes, Jesse, Windsurf, Zed
metadata:
  version: "1.0.0"
  author: LeadMagic
  category: founder-led
  tags: [employment, hr, contractor, compliance, offer-letter, handbook, termination]
  related_skills: [first-hires-playbook, hiring-contractors, legal-for-founders, equity-management, business-insurance]
  frameworks:
    - "IRS — Worker classification (20-factor test, ABC test)"
    - "California AB5 / Prop 22 — Gig economy classification"
    - "DLSE (California) — Employment regulations"
    - "SixFifty — Employment law automation (Wilson Sonsini)"
    - "Rippling / Gusto — HR compliance platforms"
    - "Stacey Nordwall (Culture Amp / Pyn) — Revenue-team HR ops (onboarding, manager enablement)"
---

# Employment Compliance

## Overview

Hiring is a legal minefield. Misclassify an employee as a contractor and you
owe back taxes, penalties, and benefits — plus the state of California wants
to have a word. Forget the IP assignment and a departing employee takes your
code with them. Terminate someone without documentation and you're paying
COBRA for 18 months plus a settlement. The mistake: thinking "we're too small
for HR." You need compliance from employee #1. This skill covers everything
from classification to termination.

## Authoritative Foundations

- **IRS — Worker classification (20-factor test, ABC test)** — Worker classification (20-factor test, ABC test)
- **California AB5 / Prop 22 — Gig economy classification** — Gig economy classification
- **DLSE (California) — Employment regulations** — Employment regulations
- **SixFifty — Employment law automation (Wilson Sonsini)** — Employment law automation (Wilson Sonsini)
- **Rippling / Gusto — HR compliance platforms** — HR compliance platforms
- **Stacey Nordwall (Culture Amp / Pyn) — Revenue-team HR ops (onboarding, manager enablement)** — Revenue-team HR ops (onboarding, manager enablement)

## When to Use

Trigger phrases: "contractor vs employee", "employee classification", "offer
letter template", "employee handbook", "PIIA agreement", "IP assignment for
employees", "termination procedure", "multi-state hiring", "international
employee compliance", "employment law for startups"

## Step-by-Step Process

### Phase 1: Contractor vs Employee (Get This Right)

**The most expensive mistake in startup hiring is misclassification.**

**IRS 20-Factor Test (simplified):**

| Factor | Employee | Contractor |
|---|---|---|
| Behavioral Control | You control how, when, and where they work | They control their work methods |
| Financial Control | You provide equipment, reimburse expenses, pay salary | They invest in their own equipment, can profit/lose |
| Relationship | Indefinite, key to your business, benefits provided | Project-based, multiple clients, no benefits |
| Exclusivity | Works only for you | Works for multiple clients |

**California ABC Test (stricter than IRS):**
A) Worker is free from control and direction
B) Worker performs work outside your usual business
C) Worker is customarily engaged in their own independent trade

**Rule of thumb:** If they work full-time for you, use your equipment, have
set hours, and you control what they do day-to-day = EMPLOYEE. If they work
on a specific project, set their own hours, use their own equipment, and have
other clients = contractor. When in doubt: EMPLOYEE. The penalties for
misclassification are severe.

**Consequences of misclassification:**
- Back taxes (both halves of FICA — you'd owe the employer AND employee share)
- Penalties: $50-5,000 per misclassified worker
- Benefits owed: health insurance, retirement, stock options
- Overtime wages if applicable
- California: additional PAGA penalties ($100-200 per employee per pay period)
- Class action risk

**When you can use contractors:**
- Specific project with defined deliverables and end date
- Worker has their own business (LLC, other clients, website)
- Worker sets their own schedule and methods
- Worker invoices you (not on your payroll)

**GTM-specific — SDR/BDR classification:** Full-time SDRs on your sequencer, your
CRM, manager-assigned lists, and team quotas are **employees (W-2)** in virtually
all US scenarios. "1099 SDR" models fail ABC test in California and invite federal
misclassification penalties. Commission plan documentation → `gtm-role-descriptions`
comp templates. HR onboarding system → `gtm-role-descriptions/references/hr-gtm-playbook.md`.
Escalate borderline cases to qualified counsel — this skill is not legal advice.

### Phase 2: Hiring Employees

**Before employee #1:**
1. [ ] Register for EIN (if not done at incorporation)
2. [ ] Register with state tax agency (unemployment insurance, withholding)
3. [ ] Get Workers Compensation insurance (required in most states)
4. [ ] Set up payroll (Gusto, Rippling, Justworks — don't DIY payroll)
5. [ ] Post required labor law posters (physical or digital — Gusto handles this)

**Offer letter essentials:**
1. Role, start date, reporting structure
2. Compensation: salary, bonus, commission (if applicable)
3. Equity: ISO/NSO grant, vesting schedule, exercise details
4. At-will employment statement
5. Confidentiality and IP assignment (PIIA) — attach, must sign
6. Benefits summary (health, dental, 401k, PTO)
7. Contingencies: background check, reference check, I-9 verification

**New hire paperwork (every employee):**
- [ ] Signed offer letter
- [ ] Signed PIIA (IP assignment) — CRITICAL
- [ ] I-9 (employment eligibility verification) within 3 days of start
- [ ] W-4 (tax withholding)
- [ ] Direct deposit form
- [ ] Emergency contact
- [ ] Benefits enrollment
- [ ] Employee handbook acknowledgment

### Phase 3: Employee Handbook

**Every company needs one — even at 2 employees.** It protects you legally,
sets expectations, and documents policies that courts and regulators will
ask about.

**Essential handbook sections:**

1. **Welcome and Company Overview** — Mission, values, culture
2. **Employment At-Will** — Either party can terminate at any time, with
   or without cause (must be in bold/all caps)
3. **Equal Employment Opportunity** — Anti-discrimination statement
4. **Harassment and Discrimination Policy** — Zero tolerance, reporting
   procedure, no retaliation
5. **Classification** — Exempt vs non-exempt, full-time vs part-time
6. **Work Hours and Attendance** — Core hours, remote policy, time tracking
7. **Compensation** — Pay schedule, overtime (if non-exempt), bonuses
8. **Benefits** — Health, dental, 401k, PTO, sick leave, holidays
9. **Leave Policies** — FMLA, state leave laws, parental leave, jury duty
10. **Code of Conduct** — Conflicts of interest, confidentiality, social media
11. **IT and Data Security** — Acceptable use, password policy, data handling
12. **Discipline and Termination** — Progressive discipline, grounds for
    termination, final paycheck rules
13. **Acknowledgment** — Signed by employee, kept in personnel file

**Handbook tools:**
- SixFifty (Wilson Sonsini) — AI-generated, state-specific handbooks
- Gusto — Built-in handbook builder for customers
- Rippling — HR + IT + compliance platform
- Orrick — Free startup forms library

### Phase 4: Multi-State Hiring

**Every state has different employment laws.** Hiring remote means you're
subject to the laws of each state where you have employees.

**What varies by state:**
- Minimum wage
- Overtime rules
- Paid sick leave (mandatory in CA, NY, MA, CO, and many others)
- Paid family leave (state-by-state)
- Final paycheck timing after termination (immediate in CA, next payday in TX)
- Non-compete enforceability (banned in CA, restricted in many others)
- Pay transparency requirements (salary ranges in job postings)

**Compliance checklist for each new state:**
1. Register with state tax agency
2. Register with state unemployment insurance
3. Get Workers Comp for that state
4. Update pay practices to meet state minimum wage
5. Provide required state-specific notices
6. Update handbook policies for state-specific leave laws
7. Post required state labor law posters (digital or physical)

**Use a PEO for multi-state:** Gusto, Rippling, or Justworks handle state
registrations, tax filings, and compliance for you. Worth every penny.

### Phase 5: International Hiring

**Three ways to hire internationally:**

| Method | Complexity | Cost | Best For |
|---|---|---|---|
| **EOR (Employer of Record)** | Lowest | $500-1,000/mo per employee | Few employees, many countries |
| **Own entity** | Highest | $10-50K setup + ongoing | 10+ employees in one country |
| **Contractor** | Medium | Lower ongoing cost | Time-limited projects |

**EOR providers:** Deel, Remote, Oyster, Rippling Global.

**International compliance considerations:**
- Local employment laws (notice periods, severance, vacation minimums)
- Mandatory benefits (many countries require more than US)
- Data privacy (GDPR for EU employees)
- Equity: granting stock options internationally is complex — use a platform
  like Carta's international module

### Phase 6: Termination

**How to fire someone without getting sued:**

**Before termination:**
1. Document performance issues in writing. Multiple times.
2. Follow progressive discipline (verbal → written → PIP → termination).
3. Consult with legal counsel if: over 40 (age discrimination risk), recently
   returned from leave, whistleblower, or any protected class issue.
4. Prepare: final paycheck calculation, benefits continuation info, equipment
   return list, offboarding checklist.

**During termination meeting:**
1. Two people in the room (manager + HR or witness)
2. Direct: "We've made the decision to end your employment effective [today/
   date]." No negotiation. This is not a discussion.
3. State the reason (documented, factual, not personal)
4. Review: final paycheck details, benefits (COBRA), equity (vested shares
   retained, exercise window), equipment return
5. Give termination letter with all details in writing
6. Collect company property

**After termination:**
1. Final paycheck: timing depends on state (immediate in CA, next payday in
   some states)
2. Revoke access: email, apps, code repositories, building — immediately
3. COBRA notification: within 14 days (federal requirement)
4. Communicate to team: brief, professional, no details ("X is no longer with
   the company. We wish them the best.")
5. File: keep all documentation in case of claim

## Output Format

```
EMPLOYMENT COMPLIANCE — [Company]

CURRENT HEADCOUNT: X employees, Y contractors
STATES: [list all states with employees]

CLASSIFICATION AUDIT:
- [Worker 1]: [Employee / Contractor] — proper classification? [Yes / Review]
- [Worker 2]: [Employee / Contractor] — proper classification? [Yes / Review]

KEY DOCUMENTS (status):
- [ ] Offer letter template — [created / needs update]
- [ ] PIIA (IP Assignment) — [all employees signed? all contractors signed?]
- [ ] Employee Handbook — [published / draft / needed]
- [ ] Harassment Policy — [in handbook / separate / needed]
- [ ] Termination procedure — [documented / needed]

PAYROLL & HR TOOLS:
- Payroll: [Gusto / Rippling / Justworks]
- Handbook: [SixFifty / Gusto / Custom]
- International: [Deel / Remote / N/A]

COMPLIANCE CALENDAR:
- [ ] Annual handbook review — [date]
- [ ] Multi-state compliance check — [date]
```

## Implementation Checklist

- [ ] All workers properly classified (employee vs contractor)
- [ ] PIIAs signed by ALL employees and contractors (no exceptions)
- [ ] Employee handbook published and acknowledged by all employees
- [ ] Harassment policy includes reporting procedure and non-retaliation
- [ ] Workers comp insurance in place for all states with employees
- [ ] Payroll tax registrations complete for all states with employees
- [ ] Employment posters posted (physical or digital) in all states
- [ ] I-9 forms complete for all employees
- [ ] Termination procedure documented

## Quality Check

Before delivering, verify:

- [ ] Output matches the user's stated request
- [ ] Named frameworks or sources are reflected in the recommendation
- [ ] The deliverable is specific enough for an agent to execute
- [ ] Any assumptions, risks, or dependencies are explicit
- [ ] No unsupported claims, invented facts, or private/internal references are included

## Common Pitfalls

1. **Misclassifying employees as contractors.** "They're a contractor" but
   they work 40 hours/week, use your laptop, have a company email, and
   report to a manager. If it walks like an employee and quacks like an
   employee... Fix: Use the IRS 20-factor test. When in doubt, classify
   as employee and use Gusto/Justworks.

2. **No IP assignment from contractors.** You pay a contractor $50K to build
   your product. They own the code. You don't. Fix: Every contractor signs
   a PIIA or work-for-hire agreement BEFORE starting work.

3. **Firing without documentation.** "It wasn't working out" with no paper
   trail = lawsuit risk. Fix: Document performance issues. Give feedback
   in writing. Follow progressive discipline. The paper trail is your
   defense.

4. **Ignoring state-specific laws.** "We're based in Texas, but we hired a
   remote employee in California." California has completely different
   overtime rules, sick leave requirements, and final paycheck timing.
   Fix: Your PEO (Gusto/Rippling) handles this — but you need to tell them
   about every hire in every state.

5. **No handbook for employee #1.** "We're only 3 people — we don't need
   a handbook." You need it BEFORE there's a problem. The handbook is
   evidence that you communicated expectations and policies. Fix: SixFifty
   generates a handbook in under an hour.



## ⚠️ Disclaimer

This skill provides general informational guidance based on publicly available frameworks and operator experience. It is NOT legal advice, accounting advice, tax advice, financial advice, insurance advice, or professional services advice.

Consult qualified professionals for your specific situation — attorneys for legal/equity matters, CPAs for tax and accounting, licensed brokers for insurance, and certified security assessors for compliance. This skill does not create a professional-client relationship. Use it as a starting point for research and preparation.

## Execution Artifacts

- `references/framework-notes.md` — Named frameworks and reference tables
- `templates/output-template.md` — Deliverable shell for agent output
- `scripts/check-output.py` — Lightweight deliverable validator
- `../gtm-role-descriptions/references/hr-gtm-playbook.md` — Revenue-team HR ops (Stacey Nordwall; Pattern 28)

## Related Skills

- `first-hires-playbook` — First 10 hires, compensation, interview process
- `hiring-contractors` — Contractor management, rates, IP assignment
- `legal-for-founders` — Foundational legal docs and compliance
- `equity-management` — Stock options, cap tables, 409A
- `business-insurance` — Workers comp, EPLI