MERGER SHE WROTE
Merger She Wrote is a podcast for business owners looking to scale, sell, or transition their companies. Each episode unpacks the strategies behind successful exits, the pitfalls to avoid, and the steps to maximize value. Featuring expert insights and real-world case studies, this podcast helps you navigate the complexities of M&A with confidence. Whether you're planning your next move or just starting to think about the future, Merger She Wrote gives you the knowledge you need to make informed decisions and build a business buyers want.
MERGER SHE WROTE
EP 7 | Selling Soon? This Is the First Place Buyers Will Look
Protect your sale by uncovering legal landmines and HR risks before it’s too late!
Thinking about selling your business? Don’t let hidden employment issues kill your deal. Employment law pro Sarah O’Keefe joins Paloma Goggins to reveal the silent deal-breakers—like misclassifying contractors, outdated offer letters, and family members on payroll with no paper trail.
You’ll learn how simple fixes—like tightening up benefit programs, rethinking non-compete clauses, and using the right employment docs—can make or break your valuation. Whether you're years from selling or already in talks, this quick-hit episode gives you the legal edge buyers love to see.
Hit play to protect your hard work, and follow the show for more smart moves every founder should know.
In the world of business. Not all deals are what they seem. Fortunes rise, empires crumble, all with the stroke of a pen. Mergers, acquisitions, hostile takeovers Welcome to Mergers. She Wrote where we examine strategies and stories behind the biggest deals in business, because in M&A, the real risks are the ones you don't take.
Speaker 2:Welcome back to Merger she Wrote, episode 7. I'm your host, paloma Goggins, the owner of Nocturnal Legal, a business law firm devoted to mergers and acquisitions. I'm here today with Sarah O'Keefe. She is a partner at Shields, petit and Zoldan. She has broad experience with everything from litigation and workplace investigations to OSHA compliance and disability accommodations. She advises clients on compliance, risk management and employee training, all with a focus on fostering fair, safe and legally sound work environments. She's recognized as a best lawyers once to watch and super lawyers rising star, and Sarah brings not only her legal acumen but a passion proactive solutions in the workplace.
Speaker 2:Thanks so much, sarah, for being on today. Oh, thank you being on today. Oh, thank you. So, as you know, merger she Wrote is really centered around trying to help people who are building and scaling their business with the idea and plan to eventually exit. And today Sarah and I are going to kind of discuss back and forth what are really common topics that we have with business owners about, generally speaking speaking, their relationship with their employees being an employer. So first, on our list of questions, our Q&A is when a business is scaling and thinking about exiting in the future, what do you think is the most common mistake you see founders make when it comes to classifying workers employee versus independent contractor yeah, that's a big one and it can definitely be like a bet.
Speaker 3:The company problem Probably the number one is sort of like misunderstanding what the legal tests really are. And then you know if you're doing that you're you're misclassifying the employee kind of from the jump. And a lot of the tests are really about control and like how much control the employer can exert over the independent contractor slash employee. And there's also a bunch of different tests. So like there's the IRS test and each state's have their own different tests. There's Department of Labor, economic Realities and California has their own test. There's a whole bunch. So it's a trap for the unwary. If you're, you know, not well versed in that, definitely consult an attorney before you go down that road, for sure.
Speaker 2:Would you say that if somebody was just trying at a baseline to determine whether they have things right or wrong before consulting with an attorney, is there one test they should look at just for their own sanity, or gut check first before having to dive deep into getting an advisor?
Speaker 3:Control is definitely the focus, right. So you, for an employee, you can dictate everything, all of the terms and conditions of employment. For an independent contractor, however, you need to make it seem like that person is free to go and compete with you, work with other businesses, etc. And so you can't have too much control or the discretion to exercise too much control over that person. You do not want to set schedules, you don't want to provide materials, you want them to bring like their own tools and everything you don't want to share. Branding, all of that stuff is indicia of employment, so avoid all of that. But if it's somebody who's like integral to your business, like the business can't function without them, you're probably an employee space opposed to independent contractor so you had kind of hit on something that I would like to get your thoughts on.
Speaker 2:In addition to like just the general classification and I think control is a great way to put it when you're talking about not necessarily limiting someone from competing. Can you, in fact, for a 1099, can you put some parameters in there? Because I think there's always some level of concern, especially those businesses that are creating deliverables or work product, where, if you don't have something in there that prevents them or limits them from competing in some capacity or taking their you know, you know hard, hard fought after clients away from them after they've worked with them internally in your business, can you do that on a baseline level and to what degree? And and answer how you feel comfortable? Because I know, you know, sarah and I are both lawyers and I feel like we both know the idea of like answering questions on a podcast that exists in perpetuity is not necessarily disclaimer. This is not legal advice. Thank you, this is for informational purposes only. Thank you, continue, perfect, thank you for that.
Speaker 3:Yeah. So there's a lot that you can do and when you're doing it, just kind of be careful, right? So you definitely want agreements like confidentiality, non-disclosure, how the IP is going to be treated, that whatever work the independent contractor is doing for you, when they're working for you, is your product, not the independent contractors. All of that you can do. Just be careful when you're doing it, basically, and don't. A lot of people were like oh, can I put in a non-compete? No, no, please, don't do that, because you're really saying like that person's your employee by by just doing that. So, yeah, have confidentiality, non-disclosure, assignments of rights and IP and all of that good stuff in there. That's totally fine.
Speaker 2:So when we talk about non-compete and maybe this is digging a little too deep on this specific topic but like when you say not putting in a non-compete, can you still potentially limit their ability to steal just your client specifically, like instead of a more general concept of non-compete which is like going out and doing the exact same thing that you're doing out in the marketplace, yeah, yeah.
Speaker 3:So typically and this varies by jurisdiction, of course, but generally courts are more lenient. When you have things like non-solicitation agreements, so like you can't target our customers clients, prospective clients, employees, vendors, suppliers that gets a little dicey, but mostly those are all fine and they make sense. Right, because you just want to have reasonable restrictions to keep your business competitive and that's okay. For the courts On the non-compete side is a little bit more tricky. Right, because those you need to have reasonable scope define what the job is really, clearly the duration of time and a geographic space. You don't necessarily have to have that with a non-solicit, but it could be good to help make your agreement potentially more enforceable if, god forbid, it got challenged. Right.
Speaker 2:That's fair and for listeners. You know geographic region and I'm, you know, coming from a place of general business knowledge. Geographic region, I think, can be a really key piece of the enforceability. And correct me if I'm wrong, but like I think, generally speaking, the broader the scope, the potentially less enforceable, correct.
Speaker 3:Definitely yeah. And I mean, if you think about it, like, if you're going to do a provision where you're like, okay, nobody within five miles, you can't solicit any of these people, you can't compete. It's a five mile like radius, right, and when you're talking about like that, that's probably reasonable. But if you go with something like all of Phoenix, not not reasonable, not going to be reasonable, because you're basically saying that that person can't, you know, work in their chosen field, in that space you have to move.
Speaker 2:Yes, very true, and I will put this as a caveat because the podcast is geared towards people buying and selling businesses. This conversation is about employee and 1099 type restrictions, is about employee and 1099 type restrictions. The non-compete language in like a purchase agreement for an exit, is far different. Don't think that this applies the same. You can make that much more enforceable with more general, broad strokes than if you had to try and do this with the 1099. For sure.
Speaker 3:Yeah, definitely your key man agreements are going to be very different.
Speaker 2:Like somebody who is the business, that's okay On a personal level, when you saw recently in the past year, all of those you know news updates about how potentially the non-compete generally was was at risk of being just completely wiped out, did you think that that was going to survive and get passed? Like what was your personal opinion, just coming from an employment lawyer perspective?
Speaker 3:Yeah, the FTC's potential, you know, non-compete ban got everybody all really excited and worried about like, what's that going to look like? Because obviously that would be a huge measure, right, you would not have non-competes. The FTC was trying to say that that's their area to regulate. From kind of knowing what the, what the background is and how these things go, it wasn't too worried that it was actually going to, you know, pass without legal challenge. And there are still many pending legal challenges. So, um, we'll see what happens. But a lot of people take the position that that's like not within the FTC's jurisdiction to regulate really, and there's some sense to that right, like who knows what the business is. There's a whole lot of things in their proposed rule that like didn't really account for everything. So it's probably for the best that nothing else has happened. But definitely there is this perception and I probably share that that like you shouldn't be able to restrict your competition out of business. Like it's not about competition, it's about unfair competition.
Speaker 2:Well said, I think, to your point. There was a lot of humdrum of like yes, I can go out and immediately compete with the business. You know, free reign as like a standard right now, in lieu of any of that being passed. Every state, like you had said at the outset of what you were describing, has its own restrictions, and there's even some I've come to learn just in doing deal work that are industry specific, like medical field has some specific carve out sometimes, and so I like to say that as a caveat to anyone listening it really depends on jurisdiction where you're located, potentially where your employee is located, right? Because I think, too, one of the big questions that always gets asked of me and I'm not really entirely sure how to answer it other than go talk to an employment lawyer is whether you, being an employer here in the state of Arizona and then your employee is, you know, based in a different state, what laws apply, and is that on a case by case basis, or is it typically where the employee is based?
Speaker 3:It's typically where the employee is based, right, just be cognizant. You definitely want to know where all your workers are for compliance purposes, right. And then you want to comply with your own home state laws, but for the most part, if you have an employee that's in California, they are going to try to avail themselves of all of the wonderful California rights that exist, which are like a different world from here.
Speaker 2:Oh, it's so true. For anyone listening who has employees, or especially independent contractors, based in California, please know that there are all sorts of specific rules and limitations that make having a 1099, especially in California, a very dangerous proposal. Yeah, don't do it.
Speaker 3:Don't do it. Don't do it Better yet, get out of.
Speaker 2:California, All right. So, related to classification of employees, you know. Can you walk us through the legal and financial risks that a business might have for misclassifying an employee, especially thinking about how a lot of these issues only come to light during due diligence? If a business has been growing and scaling for 30 plus years, the owners are ready to retire. They're now just gathering all the information. Perhaps they haven't worked with advisors as they should have along the way and there's some noncompliance. What are some issues that could come up, especially from a liability standpoint? Right, Because nobody's going to close and buy a business with outstanding liabilities, right, they're absolutely going to want to know who gets what.
Speaker 3:So there's a ton of risks. Basically, like you have your normal employment law issues, which could be like wage and hour under the Fair Labor Standards Act, so that could be things like you're not meeting the minimum wage, you're not paying overtime, you're not dealing with like meal breaks and rest periods, and then you have like laws that are going to apply that otherwise wouldn't like potential. You know anti-discrimination laws, so your misclassified workers may be entitled to some additional protections under like the ADEA or the ADA, and then you could have the normal sort of run of run of the mill wrongful termination or like retaliation claims and leave entitlements. That's a big one. So, post COVID, you know there's all these laws that we have to comply with with paid sick leave and all that good stuff.
Speaker 3:Then, apart from employment law risks, you're really talking about like tax violations, which is the big, the big, scary um, which can be like your income tax, withholding, social security, medicare, um, fica, all those, all those taxes that you have to worry about.
Speaker 3:So if you've misclassified an employee, you're going to owe those back taxes, plus um penalties and interests and all those terrible things that could potentially put you out of business and a lot of things. We also see some benefits issues right, like if there are some discrepancies in the plan, people will argue that that's potentially discriminatory. So you want to have, like, all of your ERISA docs in a row and also, like the state level enforcement can be pretty vigorous depending on where you are. So you want to be worried about, like, the audits and all those kinds of things. Obviously it's going to risk your deal potentially right, like somebody is not going to want to take on this company with potential unlimited liability. You need to know what those liabilities are and you guys need to break them down in the deal process so that everybody is clear about who gets what.
Speaker 2:That was exceptionally comprehensive. I appreciate that answer and I think too, the potential for having outstanding liabilities when it comes to employee classification is something that's probably overlooked in comparison to something like outstanding taxes or liabilities on the business from like an annual filing perspective or collateralization of assets and having taxes pull those assets back. Obviously, if you're buying an asset, you know sale as opposed through stock sale or an equity maybe there's you could get the buyer on board with the fact that you're like leaving behind a lot of the liability from the old company's employment practices and like that's you know predominantly their problem, and everybody that comes over from an asset purchase will get a new employment document of some form with the new company buying all the assets. So in some cases I would argue that if you did discover that you had all these potential misclassifications and extending liabilities, that you were doing an equity an audit. You know okay, fast forward. Someone sells an asset you know all their assets to the business, to a new buyer. They have essentially walked away from the liabilities related to that. You know old LLC that had all the misclassifications An audit occurs.
Speaker 2:Is it like taxes, where the audit can look backwards for a number of years, how and so like what? What would like if you were a business owner? You sold all your assets and, like all of a sudden discover that you're getting audited by the state? What does that look like, just on a baseline level, for someone?
Speaker 3:um, besides, immediately like paranoia and fear, because you're like, oh god, um, yeah, so it, it absolutely can look backwards, right. And typically because you're like, oh God, um, yeah, so it, it absolutely can look backwards, right. And typically the timing is like two to three years, generally, generally two, three, if someone can argue that like it's willful, um, for things like misclassification or like not not following Fair Labor Standards Act et cetera. Um, so those, those are a little bit scarier, but but it's all really like fact intensive, right. So if you don't have that documentation and like you didn't have a good housekeeping in order, it's going to be really quite terrifying, right, and one audit may trigger another audit and that also may trigger litigation from your former employees, right, and so there's a lot to unpack there.
Speaker 1:That's frankly just terrifying.
Speaker 3:So, like before that happens, you know you can self audit, you can like consult with a professional you know, labor and employment council or M&A person who can really like put your ducks in a row so that you don't have that problem. But after the fact, oh man, that's scary. You just hope that the deal has accounted for, you know who's going to own what potential liabilities. And then there's also some risk with, like, even if you do sell it and it's just assets, some you know wayward employees might argue like oh well, you know these are the issues that were ongoing before and so new company are not necessarily off the hook and that's super fact, intensive too. But like there's a little bit more risk with that. So just avoid it entirely and like have all of that, have the T's crossed and the I's dotted, before you go down that road.
Speaker 2:That is excellent advice and, honestly, I think people underestimate how you know a penny. What is? What's the phrase? Like a dollar? Yeah, it was dollar, save now.
Speaker 3:Penny wise pound foolish.
Speaker 2:Yes, something, something like that, where it's like you know, know, doing it in advance of a closing is honestly it's, it's a pain and maybe it shows that you really didn't have good housekeeping to the potential buyer and, like you said, maybe the buyer does walk away but it gives you the opportunity to clean house and make sure that you don't have liabilities that pop up later and potentially that you know, new buyer gets clawed into. This disagreement and I think one thing that can be also beneficial doing it early and even early as in the beginning part of a transaction where you realize holy smokes in the process of due diligence. Someone has brought to me or brought to my attention because I didn't know it before that I have misclassification and potentially all these liabilities is. At least if you know what the liability is going into closing, you can take a portion of that purchase price and apply it to those liabilities, because when else are you going to have that much liquid money come into your business?
Speaker 2:I would hate for someone to close not realizing that the misclassification has occurred for all these years. That money gets swept into, you know, investments that are not liquid or they spend it rapidly I've seen that too or they take it and they reinvest it in another business and now all of a sudden, all that liquid cash is gone. And how do you pay the liability liabilities back sufficiently? Yeah, so excellent points. Um, how it's kind of on the same topic, how early in the process of building and scaling your business should someone start creating standardized employment policies and procedures, and and what should those look like?
Speaker 3:Yeah Well, I'm kind of risk adverse, paranoid, you know, conservative, so I would say there's no, that, no time.
Speaker 3:Like the present, and like immediately, like before you start making your business and like creating your baby, you should have it well-papered, um, definitely, if you know, if you want to start it and see if things are working, before you spend the money on like lawyer fees okay fine, but for sure before you hit like 10 employees, because once you hit like 10 to 15, all these kinds of other laws are going to come into play and you will want to have like a paper documenting your compliance and that you thought about it.
Speaker 3:Also, like, probably when you're going to start offering like different employee benefits, like 401k or things like that. That can be another like risk point, but definitely the sooner the better. And the things like employment contracts, offer letters, um, you want a handbook, ideally, and your handbook is just going to spell out, like you know, these are the things that we expect as a company for you to do, as an employee or independent contractor potentially. Um, and like code of conduct, you're gonna have your basic eeo principles and we comply with the law, no retaliation, all those kinds of things you want in there because it can potentially lead you to like get an affirmative defense later, or at least it's going to be fodder for a defense, if you know. God forbid litigation happens.
Speaker 2:I was just going to ask that and so I'm glad you answered it, because I feel like a lot of people think it's just P's and Q's and in fact, if you have policies really well drafted and someone decides that they're going to sue for some, like wrongful termination for example, and you have something in your handbook that shows that you actually told them that that was not something they should be doing or you know, was not allowed by code of conduct, to your point, it provides that layer of defense or level of protection in the event someone was to sue. Tell me briefly I know we're a little off topic here but from a lay person's perspective, you know what's the difference, because I hear, you know, from my business clients, when they have issues with employees, like wage claims, versus true litigation like when does it fall into more of that, like state-based investigation where they make a wage claim or what I call a wage claim?
Speaker 2:and I feel like lay people call it wage claims, you know, with the state, as opposed to full-blown litigation, which I you hear about that too in wrongful termination. But like does it? Is there some things that fall into one bucket or the other? Or is there, I guess from a business owner's perspective, what could you at?
Speaker 3:least try and protect yourself from one versus the other. Yeah, wage claims are really scary, and mostly because the if, if you are an employer who hasn't paid wages, then you are subjecting yourself potentially to like the other, the, the employees attorneys fees and costs your own attorneys fees and costs, and then up to like treble damages. So just you know that that's a little nuts. So we do not want that generally for, um, like, if you're an employee, you know, and you have like a smaller wage claim, typically the industrial commission of arizona is gonna like handle that or can handle it for you and that person maybe doesn't need to get an employer, a plaintiff's you know attorney involved in that scenario.
Speaker 3:Um, if you're talking about like fair labor standards act violations, that's almost always litigation because from the plaintiff's attorney perspective, like you might, you file it because there's all these penalties and fees that start accruing pretty much immediately. So those are bigger, much bigger risk points. But if typically under like 15,000 or something and they're they're changing some of this right now. So, um, there's a pending law. Don't ask me all the details please.
Speaker 3:Um but generally, like 15,000 and under, you can go straight to the industrial commission and just file like a one pager complaint on there, um, and that the industrial commission will like reach out to the employer and like basically try to get you to settle it.
Speaker 2:Okay, no, that's helpful, yeah, even for me, and I'm sure it's helpful for the listeners, but I was wondering for my own benefit as well, like what the major difference was between the two. So, thank you, before we run out of time today, I feel like we'll definitely have to have another episode because the topics are so in depth that I want to make sure we cover some of the stuff you know on more of a detailed level, so that somebody who is actively building their business with the intention of at some point exiting whether that's for private equity or at retirement one of the same. These topics are so critical and I cannot tell you how important they become during the diligence process, when a buyer comes in and is turning over every stone and all of a sudden, all of your skeletons in every closet are visible. So, talking about we talked a lot about classification and misclassification and the potential liabilities there.
Speaker 2:You talked briefly about handbooks and documents that you should have. Tell me you know, just in a short way, what is the difference, because I feel like a lot of people proactively and very incorrectly go to the Internet and pull things off to essentially hire employees, not knowing that there's a huge difference between an employment contract and an employment offer, and I find that so many businesses that come to me later on in their evolution have everyone on employment contracts and they're not the type of employees that should have full-blown contracts. So just for everyone listening at home, what's the big key difference between the two?
Speaker 3:Yeah, so, an offer letter, right, is generally not going to be seen as like a binding contract, but like absent your compensation terms, really, Whereas your employment agreement is going to be like your 10 page document spelling out here are all of the rights, obligations and duties that you have, and you generally only need that with like a like a C-suite person, right, right, you don't need that with like your regular run-of-the-mill hourly employee typically, and there's some risk in trying to like put employment contracts into everybody because it doesn't fit.
Speaker 3:But also, why would you change the at-will status? That's a huge benefit for employers in Arizona, right, like as it stands right now. If you are a true at-will employee, which most are, then an employer or the employee can separate ties and as long as it's for a reason that is not illegal, then you're good to do that. But once you start mixing in employment contracts, that can imply a specific duration. Somebody can now bring a breach of contract, claim that there's an Arizona statute that entitles you to fees or attorney's fees and costs, and so it can just like blow up something that should have been so much simpler and that the state really, you know, says that we should be able to do as at-will employers.
Speaker 2:Totally, and I was going to say to piggyback off of that just for clarity purposes for the business owner that's listening. You know the difference between at will and someone who has contractually some form of employment. The difference, really, what you're saying, is an at will employee, unless it's for an unlawful reason, you can terminate them truly pretty much at any time. Whereas someone who's under an employment contract that says like you can terminate them truly pretty much at any time. Whereas someone who's under an employment contract that says like you can only terminate me for these reasons, for cause, yeah, and for cause, I feel like too, and with us both, you know working in contracts all the time how for cause is defined can really make or break the contract.
Speaker 2:Oh, yes, so just another reason why it's a poor decision to pull things off the internet, because you just don't know what you're putting in your contracts necessarily, or perhaps you're giving your employees lots of rights and you didn't intend to. So, yeah, well, I feel like we got a really great conversation and we did not cover like half the questions I wanted to ask, so we'll definitely have to have you back. But I think, as a final, final question that I always ask everyone you know. Is there a book or a podcast or anything that you know you would recommend to a listener who's trying to you know just better themselves? It could be employment law related or unrelated.
Speaker 3:Yeah, so I did some thinking about this, actually, and found a couple books that I would probably suggest. There's the Founder's Pocket Guide, term Sheets and Preferred Shares that one seems like a good bet by Joe Whalen and Nathan McDonald, and there's also High Growth Handbook by Elad Gill and then Built to Sell by John Warwillow. Those all seem like really great intros for anybody who's considering this, and you can probably consider that at any point when you have your business. Thank you for those recommendations, thanks.
Speaker 2:So you had talked about how employee policies can be really important to have when you're essentially starting to offer your employees benefits, 401k things like that. I think a super common and unfortunate thing that I see out in the world with especially main street businesses, is that they offer benefits to employees on a disparate basis. Some employees have benefits that others don't enjoy. Can you talk about whether that's okay?
Speaker 3:Yes, so for any time. In theory, right, you can have like different benefits, but there needs to be a tie to like a proper legal reason, like exempt or not exempt, or full-time or part-time. Otherwise you're opening yourself up to some potential legal liability and somebody is saying, oh well, I'm this full-time employee but you give this other employee who's similarly situated to me all these other benefits and opportunities. That's not fair. What's wrong with me?
Speaker 3:And from like an ERISA perspective, you really only want to do that with like the top hat agreements with your super key players and you don't want to do that with like the top hat agreements with your super key players and you don't want to do that with anybody else. Because, again, it's just your plan can be unwound, you can get all of these crazy penalties and it is not worth it. So in an ideal world, right, like have your plan documents, have all that spelled out Maybe it's in your employment handbook or maybe it's in like special memos later on who and why these people are getting disparate benefits, so that it's clear, like transparency can eliminate those potential disputes. Right, if people understand why and it makes sense and it's legally proper, you can get away with it. But if there's a lot of kind of cloak and dagger stuff and you're not being real clear about who's getting what, that can just invite problems.
Speaker 2:So, from a best practices perspective, if you have a bunch of people who aren't C-suite executives and they're just at-will employees and there's really nothing to classify them in a different way, those should all have the same benefits oh, for sure, okay, yes, and and I think the one, I think that I see really common out there that you know is a red flag immediately when talking with businesses who have been, you know, operational for a very long time and have these disparate benefits is, you'll see, like the daughter, who's also an at-will employee that you know has no other special classification other than their daughter that they're getting reimbursed for all of their healthcare costs and all sorts of like crazy, you know?
Speaker 2:or you know one person's getting an all expense trip paid once a year, as like their. You know? You know one person's getting an all-expense trip paid once a year, as like their. You know bonus instead of like a cash bonus. Everybody else is getting cash bonuses.
Speaker 2:Yeah, don't do that, don't do that sarah says don't do that please. Um, I think relatedly on this topic, you see a lot of people who have family members, especially kids, that they have on payroll because one they're trying to shelter, you know, income from a tax perspective but also in a roundabout way, kind of benefit their kids through the business. You know what are some best practices for those people to make sure that they're doing it compliantly.
Speaker 3:Yeah, hiring family is is like a whole. It's a whole nother podcast, um. But I would say like this, a one point where, like documentation really matters, even though you would think it wouldn't. But like from people, people are absolutely going to look, you know, on the outside and sort of scrutinize well, that's the owner's daughter and look at all of the benefits that she's getting. So you really want to have like a good paper trail for that person. So you want here's the job description, here's the KPIs, you want like all of that stuff in writing and you want to treat the family member like they are an employee. Otherwise you can open your business up to piercing the corporate veil, all kinds of problems that could literally just destroy everything, which you do not want. So, paper without file. Treat the daughter like you. Would anybody else Make sure that she is also like adhering to the policies and procedures of the organization? Like nobody should get a free pass.
Speaker 2:Should treat all your employees equally and I feel like this goes without saying. But if you're hiring let's say you're hiring one of your younger kids who you know wouldn't be a like traditional employee maybe they're more of like an intern style role those kids should still be truly providing some sort of level of work in order to get that pay. They don't just get on payroll and get to play outside in the byproduct.
Speaker 3:Right, otherwise they're not employees.
Speaker 2:Right, that's fair. I just wanted to have Sarah say that out loud for any business owners who are listening and don't have their kids actually providing some level of work in the business and getting this benefit.
Speaker 3:Yeah, super risky.
Speaker 2:So I think you know we talked about the disparity of benefits. We talked about, you know, hiring the kids and not necessarily having them work and how they should, and treating all employees the same. Have you seen, you know any sort of in the wild versions that you could share on a general level, that you're like, hey, for you know the smaller business, maybe closely held, family owned and operated. You know what are some things you could do right now to avoid some of these like common pitfalls?
Speaker 3:Yeah, definitely get your documentation in a row, like all of that good housekeeping stuff.
Speaker 3:So job descriptions, you want to do like performance reviews, you want to document whether there are, you know, grievances, all those kinds of issues, as well as, like your investigation of them, having those documents, while sometimes like if nothing happens, it's just a piece of paper but it potentially be your entire defense if litigation occurs later.
Speaker 3:So really you should definitely follow those formalities right, like it seems odd that we're going to do something like that with our family members, but it really is so important. Otherwise you're risking your business. So consult, consult legal, consult your business consultant. Make sure that you have all of those documents and preferably, like you've got the employee file where you've got all of your standard acknowledgements, where the family members acknowledged all of your policies and procedures and agreed that he or she is going to abide by them, and you have, like your confidential medical file where any of that stuff that you're doing is kept and under a lock and key and other people don't have access to it, and then a third disciplinary file, like, if necessary, where you're going to put your performance, you know, performance improvement plans, all those kinds of things in there.
Speaker 2:I thought of one other question tied back to the thing we just talked about, when it comes to a business that's growing rapidly and going to start hiring employees for the first time. So I feel like that can be a really common tech startup or software company issue, where you start with two people who are the founders and neither one of them are on an employment position. They're just taking distributions out of the company, or a solo founder and they're just taking distributions Once you start hiring employees. Let's say you had some sort of system. Maybe you went on a W-2 with your own company, you filed an S-corp election as an LLC, you're now taking pay, your 401k setup changes.
Speaker 2:If you're matching right because it was just you before. If you're matching your own contributions to the 401k and you're matching them like a hundred percent or whatever that requirement is and like then you bring someone on, you have to be able to give them the same situation that you have. Because unless I guess, tell me, is there a way for you to set that up where, if you're going to have the company match to some degree whatever the lawful requirement is for matching if you bring in that employee and you're going to have them on the same 401k plan, you would arguably have to have them match the same right, unless you had them listed the owner as like a C-suite executive and that makes them different than the at-will employee right.
Speaker 2:I was just trying to put together the pieces of what we talked about earlier about what best practices would be there yeah, and it's super complicated.
Speaker 3:like you, you definitely want, you probably want to go to an anarisa specific person to vet that, um, and not just rely on, like, whatever your broker says either, um, because that's not not the best Well said.
Speaker 2:Thanks for being on. I enjoyed our conversation. You'll definitely have to be back Awesome. Thank you for listening. Please like, comment or subscribe. This is Merger.
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