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Most Internet and start-up companies are largely preoccupied with two things: product and funding. Human resources policies may develop as an afterthought and often only as necessity dictates. Unfortunately, this reactive approach to human resources planning is riskier than most young companies realize. The American workplace is a highly regulated industry with numerous laws and regulations reaching companies with as few as two employees. An unknowing violation of an employment law leading to litigation can be devastating to the morale and financial health of a fledgling company. The presence of pending litigation can also drive away risk-wary sources of funding or corporate acquisition. Chief among the contributors of risk for start-up companies is the workplace environment. Internet and other technology companies often strive to create a non-traditional and relaxed work atmosphere. The absence of formal reporting structures and emphasis on casual work relationships often contributes to a breakdown of personal barriers between employees which can lead to claims for sexual and other types of harassment. For example, weekly or semi-monthly company-sponsored “happy hours,” a common practice with start-up companies, can serve as a breeding ground for sexual harassment claims if not properly monitored. Indeed, in one of two sexual harassment cases filed last year against Juno Online Services, a former female employee’s allegations included, among other things, a description of company happy hours as “a Roman orgy.” A sexual harassment lawsuit can require hundreds of hours of investigation which often necessitates a probing into the personal lives and motives of employees � the results of which may lead to discipline, if not termination, of key employees. In addition to the potential for large monetary liability, a sexual harassment lawsuit can last several years and require the ongoing attention of key members of management and human resources. Thus, the average sexual harassment lawsuit can leave a severe and lasting impact on a small company. It is also not uncommon for a new company to require employees to work 60 or 70 hours a week. While this practice is entirely legal, the law requires employers to pay “non-exempt” employees at a rate one and one-half their regular pay for hours worked in excess of 40 per week. The determination of “exempt” vs. “non-exempt” involves a careful analysis of numerous factors. Failure to make a correct determination (or any at all) can result in harsh penalties, including double the overtime owed for up to three years, and it is no defense that the employer failed to keep records of the overtime. Similar penalties can be incurred where a company incorrectly classifies certain individuals as “independent contractors,” as is common in the technology field. While it is tempting initially to save the costs of employee benefits through the use of independent contractors, if it is determined that the individuals should have been classified as employees, damages may include payment of back taxes, interest and penalties, not to mention damages from claims by the employees to recoup benefits. In these and many other personnel matters, knowledge of employer obligations and employee rights is the key to risk-averse business planning. Attaining even a minimal level of knowledge of employment laws and their applications is, however, a daunting task. In addition to separate federal, state and municipal statutes and regulations, employer duties and employee rights spring from the labyrinth of federal and state common law (judicial opinions) and from independent government agencies. Solutions to common problems that arise in the workplace are often the result of a melding together of some or all of the legal authorities cited above. While the risk of litigation can never be completely eliminated, the following five key preventative measures may largely reduce the costs of litigation which include, among others, legal fees, damage awards and court costs, not to mention the usurping of the otherwise productive time of company directors, managers and human resources employees. 1. Appoint Competent and Professional Human Resources Staff. The human resources department of a company serves two purposes. First, the department (even if it is a single employee) has the direct responsibility of ensuring compliance with applicable employment practices laws. Without assignment of this function, a young company is undoubtedly on a collision course with the law and operates at its own peril. While, optimally, even the smallest company (five-10 employees) should consider this a single full-time position, it may be necessary to assign this function to a CFO or COO. Such a practice should suffice initially, but the individual’s other responsibilities cannot overtake the human resources function. As the company grows, the department must grow. Any company with over 20 employees should have, at a minimum, one full-time employee devoted exclusively to human resources. Furthermore, whoever performs the task should have access to legal counsel. While much of what is considered traditional human resources is non-legal, the explosion of employment litigation in the last 20 years necessitates the incorporation of risk assessment into common decisions such as hiring, offers, discipline, leaves of absence and termination, among others. The second purpose which a human resources department serves is to act as the central repository of all employee relations and benefits matters. A hallmark of fair employment practices law is even-handed application of policies to all employees. Where all information is channeled through one department, the risk of differential treatment which often leads to discrimination litigation is sharply reduced. 2. Establish Written Employment Policies. The value of having employment policies set forth in a written format cannot be overstated. Written policies can act as an effective tool in implementation and maintenance of a comprehensive compliance scheme. Employees tend to trust that decisions affecting them are valid if they are part of a written employment handbook rather than a seemingly individualized decision of one manager. A handbook also serves as resource for managers who need to communicate and apply policies on a daily basis. Additionally, the individual decisions of managers and supervisors that are scrutinized in hindsight by a court or a jury are much less likely to be undermined where they are supported by the written provisions of an employment handbook or policy and procedure manual that was in effect at the time the decision was made. Finally, with respect to harassment and discrimination policies, U.S. Supreme Court decisions in Faragher v. City of Boca Raton, 524 U.S. 775 (1998), Burlington Industries, Inc. v. Ellerth, 524 U.S. 742 (1998) and Kolstad v. American Dental Association, 527 U.S. 526 (1999), now effectively require the implementation and maintenance of a policy of preventing and eradicating harassment and discrimination in the workplace. The High Court specifically placed significance on providing adequate procedures for complaining and investigating employee complaints. Adherence to the holdings of these decisions can amount to a legal defense, in some cases a complete defense, to liability in harassment and discrimination lawsuits. Given the potential for large compensatory and punitive damage awards, companies cannot ignore the Supreme Court’s clear warning. 3. Standardize Employment Forms. Statements made in routine employment forms such as applications, advertisements, offer letters, performance evaluation forms, exit interview forms and termination letters can inadvertently operate as evidence of discriminatory treatment or legally bind an employer in ways unintended by the drafters. For example, an Internet company may place an advertisement for software engineers seeking “energetic people with new and fresh ideas.” Such an ad, as far-fetched as it may seem, may be asserted as circumstantial evidence of a policy of age discrimination in a lawsuit by an older applicant who was not offered a position. An offer letter containing language such as “As long as you perform your duties according to our expectations, you will continue to have a job” may diminish an employer’s right to terminate an employee at will. To avoid such problems, all employment forms should be reviewed by counsel prior to use. Additionally, formal written contracts, such as employment, non-compete, confidentiality, trade secret, and consulting agreements, must be reviewed, if not drafted, by legal counsel. The risk of binding the company in an unintended manner or, conversely, of failing to draft an enforceable provision in a contract, is magnified greatly where the drafter is not skilled in the law of contracts. 4. Train All Management Staff. A company acts through its agents (directors, officers, managers and supervisors). Thus, factual allegations found in the vast majority of employment-related court complaints focus almost exclusively on the actions (or inaction) of individual members of management. A well-trained management staff vastly increases a company’s ability to avoid costly litigation. Training should include a review of all company policies and their applications. Management should be trained to deal directly with subordinates and to understand the situations in which an employee, or an issue, should be referred to human resources. In particular, management must be trained in recognizing and dealing with potential claims of discrimination and harassment. (In the decisions cited above, the Supreme Court explicitly recognized “training” as another form of reducing potential liability in discrimination and harassment lawsuits.) For example, some managers may fail to report a claim of harassment to human resources because the employee told the manager “in confidence.” Because the manager is an agent of the company, he or she cannot act as a confidante to an employee complaining of harassment. The law imputes the knowledge of the particular manager to the company. Therefore, as an agent, the manager has a duty to report potential liability issues to the appropriate individuals who will ensure a proper company response. Practical training in interviewing, hiring, discipline, evaluations and, especially, termination also ensures consistent application of policies and reduces claims of discrimination and other forms of liability. Furthermore, training of management should not be limited to lower-level management. Employment lawsuits often name directors and officers as individual defendants. Indeed, it is often the case that high-level officials present a higher risk of liability because they are more likely to bind the company by casual and off-handed statements. Additionally, courts and juries may attribute a higher level of accountability to a director or officer in view of such an individual’s authority. 5. Train Non-Management Employees. Much of employment law counseling incorporates simple notions of human nature. In this regard, informed workers are more likely to conduct themselves in a manner consistent with policies, and are less likely to feel that they are being denied the benefits of employment. The average employee believes that he or she is endowed with certain “rights” in the workplace. That is correct. However, very few employees possess even a basic understanding of the nature of those rights. For example, despite that fact that it may be communicated in an application, offer letter and employment handbook, most employees are not aware that they can be terminated at any time, for any reason, with or without cause. Moreover, to the extent that employees do possess certain rights (e.g., the right to be free from sexual harassment), they may not know how to lodge a complaint, especially if they are being harassed by their immediate supervisor or a high-level employee. Companies should train employees in policies and procedures at the outset of employment and periodically throughout the employment relationship. In particular, employees must be sensitized to diversity issues and trained to avoid, and recognize, conduct which may be perceived as inappropriate in the workplace and which can serve as a basis for claims of sexual and other forms of harassment and discrimination. Edward A. Brill is a partner, and Frank F. Martinez is an associate, in the labor and employment law department of Proskauer Rose LLP’s New York office.

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