As an attorney for small to medium-sized businesses and startups, I have had a first-hand view of the devastating impact and problems that arise, when businesses try to handle their own legal needs, without help from an attorney. In this article, I will explore some of the specific problems that many business owners face, when taking a “do-it-yourself” (“DIY”) approach to their legal needs. To give you a concrete picture of why it makes good sense to hire attorneys for your business or company’s legal matters, I will discuss some of the specific potential costs — in terms of money, time and aggravation for your business — that can result from do-it-yourself legal work by business owners.
We live in a time where independence, self-reliance, and “handling matters on our own” are highly valued. “I’m an experienced businessman — I can take care of my company’s needs”; “I won’t both other people by asking for help”; “Why waste money on a ‘professional’? I’m smart, I can figure this out!” These are the beliefs that drive many of us — sometimes consciously, sometimes unconsciously — in our personal and professional lives.
Of course, some level of handiness and self-reliance is healthy. To be clear, I’m not advocating for outsourcing every item on your to-do list. Nor do I put down the invaluable benefits that the Internet and Google provide in day-to-day living (without Google Maps and Waze, I would probably still be driving around New Jersey right now, looking for Route 24). However, when business owners try to handle their legal needs by googling legal documents, copying templates from other businesses, or downloading a “fill in the blank” version of a contract, an operating agreement, or some other legal instrument, the results can be quite painful for you and your business. Without the guidance and direction offered by an attorney or outside professional, many business owners misapply the documents or contracts that they download. Others face dire legal consequences, because they omit key terms relevant to their specific business. Yet an equal number of businesses will create future liability [or fail to limit it], and will endure other costly legal problems — problems far costlier than what your business would have paid, to hire an attorney in the first place.
To those still not convinced of the perils of applying a “Do-It-Yourself” approach to your startup or company’s legal needs, let’s look at five common legal matters for business owners, that could seriously harm your business, if handled without proper legal counsel. This will be a two-part article; the first part covering non-compete agreements and unpaid internships, the second part addressing employee classification, commission agreements, and SAFE Agreements — a common investor agreement used by many startups.
A. Non-Compete Agreements (Restrictive Covenants Not To Compete): To review, a typical non-compete agreement is a contractually binding agreement between an employer and an employee (or between partners in a business, or members of an LLC), whereby the employee (or bound party) promises not to work for a competitor in the same industry (i.e., a “rival” company), or to otherwise compete with the employer, for an established period of time during and after the employment relationship (usually during employment, and for 1 year or 18 months after the employer-employee relationship ends). Let’s take a common scenario for business owners, who fail to get proper legal guidance, and instead draft and attempt to implement their own non-compete agreements for their workers:
Scenario 1: Misapplication of a “DIY” Non-Compete Agreement:
Potential Fees And Costs Incurred, If Your Downloaded Non-Compete Is Used Incorrectly, And Leads To An Adverse NYS Dept. of Labor Finding: $50,000 — $60,000.
Potential Hours Spent By Business Owner, in Preparing For Audit, Going to the NYS Department of Labor, gathering documents and filing an administrative appeal: 50 + hours.
Business Owner Michael wants to hire workers for his company, and prevent them from working for his rival competitors. He googles a template for a Non-Compete Agreement and downloads it. Or perhaps he takes an old non-compete agreement from a prior employer, changes the names, and presto! He has a non-compete agreement for his workers. “No point in re-inventing the wheel,” Michael thinks, “I’ll save money, by not hiring an attorney to draft a non-compete agreement.” Can you see yourself doing what Business Owner Michael has done? If so, you may end up in a scenario which I have seen happen to clients like Michael, who have come to me when some of the following problems have arisen:
Michael gives his non-compete agreement to all his workers to sign, including his employees, his partners, and his freelance consultants. Later on, Charles, one of Mike’s independent contractor / freelance consultant marketers, gets fired. Disgruntled by the firing, Consultant Charles goes to file for unemployment insurance with the New York State Department of Labor, contending that he was really a misclassified employee, not an independent contractor. As part of Charles’ argument that he lacked the level of control and autonomy in his working relationship with Business Owner Michael to be an independent contractor, the “nail in the coffin” is hammered, when Charles (the supposed consultant) shows the NYS Department of Labor a non-compete agreement that Michael asked Charles to sign — an agreement that is supposed to be reserved for employees, not for independent contractors. The NYS Department of Labor considers this factor heavily, (along with other factors that an attorney could have advised Michael on, such as Charles’ lack of ability to set his own schedule, Michael’s request that Charles ask permission to take vacation time, and payment of Charles’ expenses), and determines that Charles lacked the level of autonomy, direction and supervision over his work to be an independent contractor. Thereafter, the NYS Department of Labor, in large part referring to the non-compete agreement, rules that Charles was an employee, misclassified as an independent contractor. Penalties assessed to Business Owner Michael and his company (including retroactive payments by Michael, for contributions to federal, state and city taxes for Charles, over-time wages that were not paid, fines for an unfiled W-2, and costs of defending against an upcoming audit and investigation into Michael’s other workers) results in Michael now needing to hire an attorney, to defend against an upcoming audit by the Department of Labor. Said audit triggers an inquiry by the Internal Revenue Service as well.
The above scenario is quite common. (It could have ended up with alternative negative consequences, such as the non-compete agreement being nullified, as discussed in scenario #2). Indeed, this scenario shows how an online template or a borrowed non-compete agreement may have the correct content, but is often incorrectly applied, as the online form did not come with an attorney, who could have carefully reviewed the specifics of Michael’s workers, and who would have advised Michael not to give a non-compete agreement to his independent contractors to sign. Moreover, an attorney could have made sure that additional factors, such as control over Charles the consultant’s schedule, his freedom to work with his own clients, and providing of his own payment for expenses, were expressly stated to be within Charles’ arena, as per a separate Independent Contractor Agreement. Such factors may have led to an entirely different finding by the NYS Dept. of Labor, without the financial drain of $50,000 — $60,000 on Michael’s business. Downloading or borrowing someone else’s legal document for your business is akin to giving your daughter the cough medicine that a doctor prescribed for you two months prior. The ingredients in the cough medicine may be correct, but if your daughter has a bacterial lung infection, and you have viral bronchitis, then the medicine is being misapplied, not properly monitored, and could be quite harmful to your daughter’s health. Forget Do-It-Yourself — it’s time to call a doctor.
Scenario 2: DIY “Tweaking” A Non-Compete Agreement Ties Your Business In Knots:
Potential Fees and Costs from Litigation (Which Business Owner Does Not Prevail In): $5,000 — $8,000.
Potential Aggravation / Time Lost By Michael, Due To His Incorrect Revising of Non-Compete: Quite High. Additional Costs Incurred By Business: Court Holds That Non-Compete Agreement Is Invalid, And Your Former Employee, With Knowledge Of Your Marketing Strategy, Is Allowed To Work For Your Competitor.
Another potential problem that Business Owner Michael may encounter, from using an online template, or by copying a non-compete agreement from someplace else, can occur when Michael “tweaks” the agreement’s substantive content, in such a way as to render the agreement legally invalid. This could create problems – especially if an ex-employee challenges such an agreement in court. For example, Business Owner Michael, the employer, may have set too wide a scope of industry that his employees could not compete in, such as “marketing.” Or perhaps Michael has inserted a time period (barring work for the competition) after employment ends, which is too long a period for the non-compete agreement (for example, precluding his employee from working elsewhere for three years after their employment ends). Such a 3-year time frame may have been acceptable in the non-compete agreement given to Michael in 2001, from a former employer that Michael worked for in Pennsylvania. However, in New York State in 2016, such a time-restriction in a non-compete agreement, if challenged in court by a former employee, will be struck down as null and void. Moreover, Business Owner Michael’s downloaded (or copied) non-compete agreement failed to include a proper “severability” clause (essentially stating that if one or more of the provisions in the non-compete agreement are deemed void by law, then the remaining provisions will continue in full force and effect). Thus, Michael was unable to point to any contractual basis to uphold the remaining terms of the non-compete agreement, while challenging only the time frame of the agreement’s non-compete clause. A former employee (who sued Michael and his business, seeking to invalidate the above referenced 3-year non-compete agreement) is now free to work for a company that is Michael’s rival / competition. The individual needs of your business are important, and copied documents or online cookie-cutter templates simply won’t give your business the protection that an attorney’s expertise can provide.
B. Unpaid Internships, and Unpaid Internship Agreements: The federal and state governments have set forth numerous criteria that businesses must follow when hiring unpaid interns, in order not to violate federal and state laws requiring payment of minimum wage and overtime wages for employees. [For more information, see The FLSA (The Fair Labor Standards Act; 29 U.S.C. § 206, et. seq.), and The New York State Minimum Wage Act and The Minimum Wage Order for Miscellaneous Industries and Occupations (12 NYCRR 142; Labor Law, Article 2, § 21 (11) and Article 19, § 652)]. The problem with a Do-It-Yourself Unpaid Internship Agreement (or trying to structure an unpaid internship for your interns, without help from an attorney) is that there are plenty of online templates for unpaid internship agreements, which either: (a) fail to include all of the proper criteria that a business must follow, for an unpaid internship to be legally valid, or (b) state the correct legal guidelines stated in the Unpaid Internship Agreement, yet lack any guidance or direction, for how to properly implement the criteria for a legally valid, unpaid internship.
Here are some main ways in which a business using a downloaded unpaid internship agreement could find themselves in hot water:
Scenario 1: An Incorrect Unpaid Internship / Failure To Follow The Law:
Potential Costs Incurred From A New York State Department of Labor Investigation, Or An I.R.S. Investigation, And A Determination That Your Unpaid Intern Was Actually Functioning As An Employee For The Past Six Months — With Back Wages, Interest, Penalties and Fines assessed: $35,000 — $50,000:
I have changed the names and the profession, but here is the story of a potential client whom I spoke with in 2016. I have received a similar call numerous times, over the years that I’ve been practicing law: Lawrence, a business owner, hired Jeremy, a college student, to work as an unpaid intern in Lawrence’s architecture firm. The timing was perfect: Shirley, an employee, had quit her job at the firm two months ago, and Business Owner Lawrence was aiming to replace her. However, Lawrence offered Jeremy an unpaid internship — and then decided that he would hire someone to replace Employee Shirley, after Intern Jeremy’s unpaid internship was over.
Lawrence told me that he read the NYS Department of Labor’s criteria for unpaid internships, found an online template that listed the state’s legal criteria, and then put Jeremy to work as an unpaid intern. “Was this position educational in nature?” I asked Lawrence, while thinking about the various criteria for an unpaid internship to be a legally valid exception to federal and state labor laws. “Sure,” [Business Owner] Lawrence replied, “I was teaching Jeremy how my architecture company works: I taught him how we get our clients for architecture assignments, how to draw designs according to our firm’s unique and novel method, and how to use our firm’s unique, newer / more efficient software for our blue prints. That’s ‘educational in nature’, right?” I disagreed with Lawrence (as did the New York State Department of Labor), because the New York State labor laws and regulations define “educational in nature” as having the primary goal of the intern’s training to be that of learning new skills and advanced knowledge, which are useful in a particular field, vocation, or industry. [See The New York State Minimum Wage Act, NYS Labor Law, Article 19, §§ 651 and 652].Thus, it is not sufficient to be solely teaching your unpaid intern about the inner workings of your company, firm or business. Rather, the internship’s primary goal should be to benefit your intern, not your company. In addition, the training that a business provides to an unpaid intern should be broad, of value in multiple employment settings, and building upon a classroom or academic experience. Unfortunately, Business Owner Lawrence misconstrued New York State’s definition of an internship that is “educational in nature.”
Had Lawrence come to me before hiring Intern Jeremy, I could have helped him to structure an unpaid internship, which taught Intern Jeremy these broader tools, and which used metrics to measure what Jeremy was learning in his unpaid internship, about the broader field of architecture, beyond Lawrence’s business. Moreover, while Business Owner Lawrence had an Unpaid Internship Agreement that stated most of the correct legal elements, Lawrence did not properly implement the law’s requirements for his unpaid intern. First, Lawrence gave Intern Jeremy the tasks and duties of a former employee (Shirley), who had quit the month before Jeremy started his internship. I would have advised Lawrence not to make such a mistake, if he had come to me first. Unfortunately for Lawrence, the boiler plate Unpaid Internship Agreement that he downloaded from an online legal website failed to advise Lawrence on this topic.
Lawrence made several other key mistakes: he told his ambitious Intern Jeremy that if he continued to work hard in his unpaid internship, then Lawrence would love to hire Jeremy full-time in six months, after Jeremy graduates from college. This seemingly innocuous statement, sent by Business Owner Lawrence in an email to Unpaid Intern Jeremy, runs contrary to New York State legal criteria, wherein the business should make it clear to the unpaid intern that he or she is not necessarily entitled to a job at the conclusion of their internship, and is free to take jobs elsewhere. By offering Intern Jeremy an impending paid position, or the promise of one, upon successful completion of the internship, Lawrence effectively created an unpaid “training period,” without compensation for Intern Jeremy’s services. Such an arrangement violated the FLSA and the New York State Minimum Wage Laws; See The FLSA (The Fair Labor Standards Act; 29 U.S.C. § 206, et seq.), and The New York State Minimum Wage Act and The Minimum Wage Order for Miscellaneous Industries and Occupations (12 NYCRR 142; Labor Law, Article 2, § 21 (11), Article 19, § 652). With the above mistakes, Business Owner Lawrence faced a high-stress, financially draining problem, when an angry former employee informed the New York State Department of Labor that Business Owner Lawrence had unlawfully hired Jeremy as an unpaid intern. The New York State Department of Labor investigated, and found that Business Owner Lawrence had misclassified employee Jeremy as an Unpaid Intern. Business Owner Lawrence and his firm owed tens of thousands of dollars in back wages, over-time pay, tax contributions and penalties, for the time that Intern Jeremy worked for Lawrence’s firm, without pay. Lawrence could have saved himself much money, time and stress, had he simply retained legal help, to draft a sound unpaid internship agreement, and to implement a proper, legally compliant unpaid internship program.
Scenario 2: Unpaid Internship Agreement Lacks Key Provisions:
Potential Costs Incurred From a NYS Department of Labor Investigation, Or An I.R.S. Investigation, And A Determination That Your Three Unpaid Interns Were Actually Functioning As Employees For The Past Six Months — With Back Wages, Interest, Penalties and Fines assessed: $90,000 (approximately).
Many online templates for unpaid internship agreements have been handed to me by prospective clients. Kerry, a prospective client and salon owner in Brooklyn, showed me an unpaid internship agreement that she had downloaded from an online site, which lacked any reference to several key New York State criteria, for creating a legitimate unpaid internship. Specifically, the agreement lacked: (a) a separate screening and interviewing process, for unpaid interns vs. potential employees, (b) separate ads for the position of employee and unpaid intern (not running in the same employment ad), and (c) notification provisions to the unpaid intern, that they will not receive any wages or benefits, and are not considered employees for minimum wage purposes (See 12 NYCRR 142; Labor Law, Article 2, § 21 (11) and Article 19, § 652). Kerry (I changed her name for this article) used his incomplete / incorrect unpaid internship agreement, when hiring three of her unpaid interns. Then, during a New York State Department of Labor routine audit within the salon industry, it was found that Business Owner Kerry (who failed to implement the missing elements for an unpaid internship, as stated above) had unlawfully hired three employees, misclassified all three people as an “unpaid intern,” and failed to pay wages for all three workers, in violation of federal and New York State minimum wage and hour laws.
In scenario #2, many business owners would not know that their Unpaid Internship Agreement was missing anything. Indeed, it is difficult to know when something is missing, if you don’t know that it belongs in the first place! It’s like trying to fix the brakes on your mother’s car, if you have no training in auto mechanics. You might not know that a small part is missing when you check under the hood, if you don’t know what part is supposed to be there. That’s not a gamble I would want to take with my mom driving her car, would you? If not, why take such a gamble with your business’s well-being? (Note to mom, if you read this article: I am not equating the value of a business with the value of motherhood. Rather, I’m using an analogy, to illuminate how a do-it-yourself (DIY) approach to matters that we are not trained for can have dire consequences).
In part two of this D-DIY Article, we will explore what can go wrong for a business owner, startup or company, when they tackle employee classification, commission agreements, or SAFE Agreements on their own, without the help and guidance of experienced legal counsel. When business owners are aware of the true potential costs and painful consequences of not using attorneys for their legal needs, it helps to inform their decisions. My hope with this article is to make small business owners, startups founders, and employers aware that, when it comes to your company, business or startup’s legal matters, you do not have to roll the dice, and risk massive financial damage, hours wasted, and aggravation for yourself or your company. Just as small payments for insurance can go a long way towards averting financial disaster down the road, so too can a small, up-front investment in legal counsel often spare you from painful, time-consuming, adverse legal consequences in the future.
Eric Sarver, Esq. is an attorney with over seventeen years of experience practicing law — fifteen of which as the sole proprietor / principal at The Sarver Law Firm, PLLC. Mr. Sarver’s practice areas include: employment law, business law and contracts, for small businesses, startups, tech companies, restaurants / cafes / bars, and non-profits. He is admitted to practice law in the State of New York, and in the federal courts, in the Eastern and Southern Districts of New York. For questions in New York State involving a specific contract, an employment law-related matter, or other legal issues that your business is dealing with, feel free to contact Eric M. Sarver, Esq. at: Tel: 917–930–8684; E-mail: ems@ericsarver.com; Web: www.sarver-law.com
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