·  Legal News, Analysis, & Commentary


Compliance with Labor Laws: Payroll and Compensation Obligations for Startups

— February 21, 2024

Startups should also ensure that the founders review and update the payroll processes to reflect their startup’s evolution in growth, as well as the changing requirements. ~ Allyson Gagliardi, Legal Practice Director, Rockwell Family Law

Navigating the complexities of labor laws for payroll and compensation can be daunting for startup founders. To offer guidance, we’ve compiled twelve tips from CEOs, managing partners, and other experts. Their advice ranges from implementing robust payroll systems early to highlighting the essentials of payroll management.

  • Implement Robust Payroll Systems Early
  • Utilize Fractional Support 
  • Partner with Local Experts for Global Hiring
  • Seek Legal Advice for Gray Areas
  • Stay Informed with Laws
  • Regularly Consult with Legal Professionals
  • Maintain Meticulous Employee Records
  • Know Rules and Choose Reliable Payroll Systems
  • Foster a Culture of Compliance Awareness
  • Partner with a Professional Employer Organization
  • Outsource HR Expertise for Compliance
  • Highlight Essentials of Payroll Management

Implement Robust Payroll Systems Early

As a Regulatory and Compliance Attorney with MAH Advising, I work directly with a multitude of businesses, including startups, to navigate complex compliance scenarios, including labor laws regarding payroll and compensation. One of the lessons I’ve learned from these experiences is that an ounce of prevention is worth a pound of cure when it comes to compliance.

One of the key aspects we routinely advise on is setting up proper systems from the get-go. For instance, employing a robust payroll system that automatically tracks and calculates hours, taxes, and benefits can significantly reduce the risk of error and non-compliance. But it’s not just about automation. It’s crucial to understand the structure and nature of your workforce—the compliance requirements for full-time employees are different from those for part-time employees or independent contractors.

Another important consideration is continuous education. Labor laws are subject to local, state, and federal regulations, all of which can frequently change. Staying abreast of these changes and dynamically updating your processes to remain compliant is essential. Lastly, and perhaps most importantly, if you are unsure about something, don’t hesitate to get an expert opinion. Consulting with knowledgeable lawyers and advisors can save you from missteps, ensuring your startup sails smoothly on the compliance front.

Michael Hurckes, Managing Partner, MAH Advising PLLC

Utilize Fractional Support 

Compliance is key for all businesses. Startups need to look into the tools of fractional help as soon as they hire employees. There are laws that apply as soon as there is one employee. 

This fractional support will bring the knowledge and background to ensure your company is set up for success. They can recommend tools, vendors, etc., based on their experience. 

Professional Employer Organizations are another tool that will handle many of the compliance issues. However, there can be downsides with regards to costs, benefits selection, etc., so working hard to talk through these options is key.

Ben Madden, Owner, HR Action LLC

Partner with Local Experts for Global Hiring

We hire globally, and that comes with its own challenges. Our strategy focuses on limiting our hiring to a select number of countries to better manage compliance. To ensure we adhere to each country’s specific legal requirements, we partner with local accounting and legal experts. These partners act as consultants to our team, guiding both us and our employees through the necessary legal and financial processes.

Given that our team members are technically self-employed, it’s essential for us to facilitate their compliance with local laws, including invoicing practices and health insurance contributions. Although we compensate our employees to cover these expenses, we actively oversee this process to prevent any legal oversights. Ensuring our team members meet their local requirements helps us maintain a compliant and ethical business model across borders.

Erman Kuplu, CEO, Analyzify

Seek Legal Advice for Gray Areas

Payroll and compensation are two parts of a startup’s foundation that can crack and cause massive headaches if they are not done right from the beginning. We set up and work with over a hundred startups each year. 

For payroll, we recommend outsourcing it to a vendor. This passes the responsibility, which can be complicated. In short, let the pros deal with that.

Because every startup is different, we recommend getting solid legal advice because there are so many gray areas and nuances to consider in compensating your team members. Often, startups want to treat team members as independent contractors rather than employees. Another issue is whether a team member can be salaried or hourly. These are some of the more common gray areas of the law that a startup needs to be very careful to navigate safely. Getting it wrong can prove very costly later.

Matthew Davis, CEO, Davis Business Law

Stay Informed with Laws

One important consideration is to stay informed and up-to-date. Labor laws vary from state to state and country to country, and they can change over time. It’s crucial for startup founders to stay informed about the current laws in their jurisdiction. This includes minimum wage laws, overtime pay regulations, break and meal periods, record-keeping requirements, and more.

One way to stay updated is by regularly checking the website of your local labor department or equivalent agency. Many of these agencies provide resources and guidelines to help employers understand their obligations.

Sherman Standberry, CPA and Managing Partner, My CPA Coach

Regularly Consult with Legal Professionals

Honestly? Just work with a lawyer on a regular basis to update your policies. This is especially true if you work in a location that has opaque tax laws and a rapidly-shifting landscape, like Poland and Romania, for example. 

You don’t want to be trying to navigate this on your own if you don’t have to, as building the competency to deal with legal and tax processes is often far more time- versus money-inefficient than just paying a lawyer or accountant to handle the processes for you that you can maintain in the future. 

Once you’ve gotten a few cycles of operation under your belt, the entire process becomes easier, but when you’re just getting off the ground? Outside help, every time.

Dragos Badea, CEO, Yarooms

Maintain Meticulous Employee Records

To ensure compliance, I recommend maintaining meticulous records of employee hours, wages, and deductions. Implementing a robust time-keeping system to track working hours is essential for accurate overtime calculations, providing transparency and documentation for audits or disputes. Keeping these records accurate, organized, and easily accessible is essential to demonstrate compliance during potential legal inquiries.

Phil Strazzulla, Founder, SelectSoftware Reviews

Know Rules and Choose Reliable Payroll Systems

Man in suit reading business newspaper; image by Adeolu Eletu, via
Man in suit reading business newspaper; image by Adeolu Eletu, via

First things first, you must know the rules. Before you start paying anyone, brush up on federal and state laws for payroll, wages, overtime, and employee types. Don’t forget industry-specific regulations, either. Invest in a reliable payroll system that automates calculations and sends payments on time. Bonus points if it integrates with tax authorities for easy deductions.

Don’t forget to classify employees correctly as salaried (exempt) or hourly (non-exempt) to avoid wage violations. Confused? Ask a lawyer or HR professional for help. Keep detailed records of pay stubs, wage statements, timekeeping, and tax records. It’s your shield against future headaches. 

Lastly, subscribe to updates on labor laws and seek professional advice when needed. Remember, even a small slip-up can cost you big time. My bonus tip is to train your team on payroll processes, compliance, and employee rights.

Raymond Kishk, Co-Founder and Principal, Custom Filters Direct

Foster a Culture of Compliance Awareness

Conduct regular employee training sessions on labor-law compliance, emphasizing the importance of accurate time tracking, record-keeping, and benefits enrollment. Encourage employees to report any concerns or discrepancies, fostering a culture of compliance awareness within our startup. 

Additionally, establish a feedback mechanism for employees to submit compliance-related questions or concerns anonymously, ensuring open communication channels.

Jonathan Feniak, General Counsel, LLC Attorney

Partner with a Professional Employer Organization

As a startup founder, navigating the complexities of labor laws, particularly in payroll and compensation, can be daunting. A highly effective solution to this challenge is partnering with a Professional Employer Organization (PEO).

A PEO is an organization that provides comprehensive HR solutions for small and medium-sized businesses. By entering into a co-employment arrangement, a PEO manages various aspects of human resource management, including payroll, employee benefits, workers’ compensation, and compliance with state and federal regulations.

PEOs are well-versed in labor laws and regulations. They keep abreast of legal changes and ensure that your payroll and compensation practices are compliant. Outsourcing HR functions to a PEO allows startups to focus on core business activities, saving time and reducing the overhead costs of maintaining an in-house HR department.

PEOs also help mitigate risks by ensuring legal compliance and providing expert advice on HR-related matters. Through a PEO, startups can offer competitive benefits packages, often at a lower cost due to the PEO’s pooled buying power.

In my own startup journey, leveraging the services of a PEO proved invaluable. The PEO we partnered with not only streamlined our payroll processes but also played a crucial role in keeping us compliant with evolving labor laws. This was absolutely crucial when an employee was injured on the job site. The PEO was able to advise us over the phone and set up services that not only helped the employee recover faster but also reduced our liability by over 50%.

Michael Dion, Chief Finance Nerd, F9 Finance

Outsource HR Expertise for Compliance

Startups must make compliance with labor laws a top priority from day one. My number-one tip is to partner with an experienced HR consultant or payroll provider who can advise on legal obligations and handle required filings. Outsourcing this expertise reduces risks and frees founders to focus on growth.

To elaborate, I recommend startups utilize HR consultants to audit policies and procedures against state and federal regulations covering compensation, overtime, time tracking, and rest breaks. Consultants can identify any gaps and recommend cost-effective solutions tailored for an early-stage company.

I also advise partnering with a payroll provider like Gusto that stays current on labor laws across all states. They can automatically handle complex pay calculations, filings, and year-end tax documents. This ensures full compliance without needing extensive in-house payroll expertise.

Labor laws shouldn’t be ignored. Leveraging outside specialists provides essential guidance and maximizes compliance.

Alex Adekola, CEO, ReadyAdjuster

Highlight Essentials of Payroll Management

To promote labor law compliance in payroll and compensation, startup founders may highlight the essentials of payroll management. This involves the proper computation of wages, deducting the appropriate taxes from them, contributing to social security, and also controlling benefit deductions. 

By employing technology, for instance, through using effective payroll systems, this procedure can be simplified, and the generation of errors can be minimized. Secondly, keeping an accurate record is very essential for transparency and also compliance with the law. 

Startups should also ensure that the founders review and update the payroll processes to reflect their startup’s evolution in growth, as well as the changing requirements. Compliance is achieved by staying abreast of national, regional, and also local payroll laws. Such detailed sources can be directed to specialists.

Allyson Gagliardi, Legal Practice Director, Rockwell Family Law

Join the conversation!