Myth #1: “Everyone should be an independent contractor.”
Truth: Most early hires must legally be employees.
Founders often default to contractor status because it feels flexible and inexpensive. But worker classification is one area where regulators and courts consistently favor employment over contractor relationships.
A contractor must truly operate independently — controlling their own hours, tools, methods, and business. If you set priorities, deliverables, schedules, or performance expectations, the law will almost always treat the person as an employee.
Why this matters:
Misclassification can trigger tax liability, wage claims, overtime penalties, and costly cleanup during due diligence.
Founder takeaway:
If someone is core to your business or working like a team member, they’re almost certainly an employee.
Myth #2: “If someone is salaried, they aren’t owed overtime.”
Truth: Salary alone does not make someone exempt.
Two tests determine whether an employee is exempt from overtime:
Salary threshold — the employee must earn above the federal (and in some states, higher) minimum salary level; and
Duties test — the employee’s actual responsibilities must fit a recognized exemption such as executive, administrative, or professional.
Non-exempt employees must track their time and be paid overtime.
Founder takeaway:
Don’t rely on job titles or “startup culture” to justify exempt status — courts look at real job duties, not labels.
Myth #3: “Offer letters and employment agreements are basically optional.”
Truth: Clear documentation protects both the company and the founder.
Offer letters and basic employment agreements set expectations, outline equity, define confidentiality obligations, and prevent later misunderstandings. Missing documentation creates friction during financing or acquisition.
Founder takeaway:
Every employee should have, at minimum, a compliant offer letter, signed IP assignment, confidentiality obligations, and documentation for any equity grants.
Myth #4: “At-will employment means I can terminate anyone at any time.”
Truth: At-will employment is real — but not unlimited.
You can terminate employees without cause, but not for illegal reasons, including retaliation, discrimination, whistleblowing, or protected leave activity. Missteps in documentation or timing can also turn a clean separation into a legal dispute.
Founder takeaway:
At-will protects flexibility, but consistent process protects the company.
Myth #5: “Equity alone will motivate and retain employees.”
Truth: Equity is powerful — but only when structured clearly.
Founders often grant equity casually early on, then run into problems when vesting schedules, acceleration, or repurchase rights weren’t properly documented. Equity is compensation, and mishandling it creates tax issues, morale issues, and diligence problems.
Founder takeaway:
Have a clear equity plan, use standard vesting schedules, document everything, and ensure employees understand their grants.
Myth #6: “A contractor or advisor can do work without an IP agreement.”
Truth: Without a written assignment, the company may not own the work.
Anything created by a contractor, advisor, or consultant belongs to them unless expressly assigned. This becomes a major issue when raising capital or selling the company — investors expect the company to own all IP.
Founder takeaway:
Every person touching product, branding, or proprietary information should sign a well-drafted invention assignment and confidentiality agreement.
Myth #7: “Healthcare and benefits only matter once we’re big.”
Truth: Benefits decisions matter sooner than founders expect.
The ACA’s employer mandate generally applies once you average 50 or more full-time and full-time equivalent employees, but benefit strategy starts much earlier. Offering voluntary benefits or stipends can support recruiting; ignoring compliance can lead to penalties.
Founder takeaway:
Even if you’re small, understand when benefit obligations start and structure early choices intentionally.
Myth #8: “Remote employees mean fewer compliance headaches.”
Truth: Remote teams multiply compliance obligations.
Each state has its own employment, tax, overtime, leave, and termination rules. Hiring in multiple states means you are subject to all of them. Some states require immediate registration before hiring a single employee.
Founder takeaway:
Remote hiring is incredibly powerful — just ensure you’re tracking state-specific obligations from the start.
Myth #9: “Non-competes aren’t enforceable anymore.”
Truth: Non-competes still exist, but in very narrow situations.
Despite public debate and high-profile regulatory proposals, the U.S. does not have a nationwide ban on non-competes. Instead:
They’re heavily restricted in many states
The FTC’s attempted nationwide ban is not in effect
Enforceability varies by jurisdiction and income level
In Colorado:
A non-compete may be enforceable only if:
The worker qualifies as a Highly Compensated Worker under state law
The company is protecting legitimate trade secrets
The scope is reasonable
Colorado has also refined its M&A exceptions, meaning deal-driven non-competes require careful drafting.
Founder takeaway:
Even where non-competes are limited, confidentiality, non-solicitation, and trade-secret protections remain essential and enforceable.
Myth #10: “We can fix HR issues later — right now we just need to build.”
Truth: Early decisions compound and become expensive to unwind.
Employment issues are uniquely cumulative:
One misclassified worker becomes ten
Missing offer letters become red flags in diligence
Sloppy IP assignments slow down financing
Poor documentation forces costly settlement later
Founders rarely regret getting employment basics right early — but almost always regret waiting.
Founder takeaway:
You don’t need a full HR department. You just need clean, consistent foundations.
Final Thoughts
Employment law isn’t designed with startups in mind — which is exactly why founders benefit from clear, practical guidance. Clean hiring practices, consistent documentation, proper classification, and thoughtful IP protection not only keep the company compliant, they make fundraising, hiring, and scaling dramatically smoother.
If you have questions about employment practices, contractor relationships, or state-specific compliance, Rubicon is here to help you move forward confidently.