Startup founders are often overwhelmed by employment law requirements. Articles, forums, and online advice frequently contradict each other, and misinformation spreads quickly in early-stage communities. This guide dispels the most common startup employment law myths and provides founders with legally accurate, practical explanations.
Myth #1: “Employment laws don’t apply to startups.”
Truth: Employment laws apply as soon as you hire even a single employee.
-
State wage and hour laws apply at employee number 1.
-
Payroll taxes, I-9 verification, new-hire reporting, and withholding obligations begin immediately.
-
Federal law applies at various thresholds:
-
Title VII & ADA — 15+ employees
-
ADEA — 20+ employees
-
FMLA — 50+ employees
-
There is no general “startup exemption.” Early compliance prevents audits, penalties, and legal disputes.
Myth #2: “We can choose whether someone is an employee or an independent contractor.”
Truth: Worker classification is determined by law.
The legal presumption is that a worker is an employee unless you can prove otherwise. Agencies evaluate factors such as:
-
Who controls how and when work is performed
-
Whether the worker uses company tools or systems
-
Whether they appear integrated into the business (title, email address, meetings)
-
Whether they economically depend on your business
Misclassification is one of the most expensive mistakes founders make, leading to back taxes, unpaid overtime, penalties, and potential personal liability.
Myth #3: “Startups don’t pay overtime because everyone is salaried.”
Truth: Salary alone does not make someone exempt from overtime.
An employee is exempt only if both:
-
They meet a minimum salary threshold, and
-
Their job duties fit into a recognized exemption (executive, administrative, professional, certain engineering roles, outside sales)
Many common startup roles—such as administrative support, customer support, operations coordinators, and inside sales—are non-exempt and must receive overtime.
Myth #4: “Interns never need to be paid.”
Truth: Unpaid internships are legal only in narrow situations.
In for-profit companies, interns must receive the primary benefit of the arrangement. If the intern:
-
Produces value for the company
-
Performs essential work
-
Replaces a paid employee
…they must be paid like any other employee. Most startup internships do not meet the criteria for unpaid status.
Myth #5: “Granting non-dilutable equity is normal in startups.”
Truth: Non-dilutable equity is almost always a deal-killer.
Investors typically refuse to fund companies where an employee or advisor holds permanently protected ownership. These provisions distort the cap table and make future financing rounds nearly impossible.
Standard vesting equity structures are far safer and far more common.
Myth #6: “Minimum wage rules don’t apply if you pay equity or defer compensation.”
Truth: Employees must be paid cash wages. Equity does not satisfy minimum wage requirements.
Key points:
-
Minimum wage applies to all employees
-
Equity cannot replace cash compensation
-
Deferred compensation can violate tax and wage laws unless carefully structured
-
A narrow federal exception exists for true owners who hold 20%+ and actively manage the company—but many state laws still require payment regardless
Startups often get into trouble by trying to stretch early cash too far through “equity-for-work” arrangements.
Myth #7: “Startups must provide vacation, holidays, or health insurance.”
Truth: Most benefits are optional for early-stage companies.
-
PTO, vacation, and holidays are typically optional (though many states require paid sick leave)
-
The ACA employer mandate applies at 50+ employees
-
Benefits usually cost 20–25% of base salary
Benefits matter for recruiting, but they are not legally required for small teams unless state law specifies otherwise.
Myth #8: “At-will employment means I can fire someone for any reason.”
Truth: At-will employment allows termination without cause, but not for illegal reasons.
You cannot terminate an employee for:
-
Discriminatory reasons (race, gender, age, disability, etc.)
-
Retaliation
-
Whistleblowing
-
Exercising protected rights
Founder tip: Avoid describing compensation as a “guaranteed annual salary,” which can inadvertently undermine at-will status. Instead, list pay per pay period and note the annualized equivalent.
Myth #9: “Non-competes aren’t enforceable (especially in Colorado).”
Truth: Non-competes still exist but only in limited circumstances.
In Colorado and many other states, non-competes may be enforceable if:
-
The employee is a Highly Compensated Worker
-
The restriction protects trade secrets
-
The agreement is reasonable in scope and duration
Even when non-competes don’t apply, non-solicitation and confidentiality agreements remain crucial and enforceable.
Myth #10: “If it’s not in writing, it’s not enforceable.”
Truth: Informal agreements can absolutely be binding.
Courts may enforce promises made in:
-
Emails
-
Slack messages
-
Text messages
-
Conversations
Employment agreements should include clear at-will statements, integration clauses, and disclaimers to prevent unintended commitments.
Conclusion
Understanding these common employment law myths helps founders build compliant, healthy, and scalable companies. Early mistakes in hiring, classification, wage compliance, and employment agreements often become expensive during fundraising, due diligence, or audits. Addressing these issues upfront protects both the company and the team.
If you’d like guidance tailored to your startup’s specific situation, contact Rubicon Law. We help founders navigate employment law, HR compliance, equity issues, and early hiring decisions with clarity and confidence.