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Your startup is growing, and you're ready to make your first US hire. It should be straightforward. Post the job. Find the person. Send an offer letter.
Except there's a compliance layer underneath that most founders don't see until something goes wrong. Employment law in the US is fragmented across federal and state systems, and the requirements vary significantly depending on where your employee works.
This guide covers the essentials: offer letters, at-will employment, state-by-state nuances, I-9 compliance, and the termination rules that trip up even experienced operators.
Start with the offer letter
An offer letter is not an employment contract. In most US states, employment is at-will, meaning either side can end the relationship at any time for any lawful reason. The offer letter confirms the terms: role, compensation, start date, equity, and reporting structure.
Every offer letter should include:
- At-will employment language
- Start date and compensation details
- Reference to a Proprietary Information and Inventions Assignment (PIIA) agreement
- An expiration date
If the candidate doesn't sign before the expiration date, don't ask them to sign the old version. Issue a new offer letter with a current date. It's cleaner and avoids ambiguity about whether the offer was validly accepted.
For C-level hires who negotiate more complex terms (severance, bonuses, perquisites), a full executive employment agreement is usually appropriate. Talk to your attorney before sending an offer at that level.
Noncompetes: proceed with extreme caution
Noncompete agreements are a minefield. Laws vary dramatically by state:
- California: noncompetes are virtually banned. Since 2024, employers can't enforce them regardless of where the contract was signed. Employees can sue for damages and attorneys' fees.
- Oregon and Washington: heavily restricted with specific requirements.
- Other states: varies widely.
Our recommendation: avoid noncompetes entirely. If you need to protect sensitive information, use a PIIA and an NDA instead. Consult your attorney before including any restrictive covenant in an employment agreement.
I-9 compliance is non-negotiable
Every employer must collect a completed Form I-9 from each new employee within three business days of their start date. There are substantial penalties for noncompliance.
One common mistake: founders sometimes classify a new employee as an independent contractor while they wait for a Social Security number. Don't do this. If someone has valid work authorization, start the employment relationship on day one. Most payroll providers (Gusto, Rippling, Warp) can onboard employees with a pending SSN and update records once it's issued.
State registration: if your employee works there, you need to be there
If you have an employee in a state other than where you're incorporated, you typically need to:
- Register as a foreign corporation in that state
- Obtain applicable business licenses
- Withhold and remit state income and employment taxes
- Comply with that state's employment laws
This catches many startups off guard, especially remote-first teams. Every new state where you have an employee is a new compliance obligation.
Tax withholding basics
Employers must withhold federal income tax, state income tax (where applicable), and Social Security (FICA) taxes from every paycheck. Each employee completes a W-4 form, which you maintain in their personnel file.
Set up payroll correctly from the start. Retroactive corrections are painful and expensive.
When things don't work out: PIPs and termination
If a hire isn't performing, document everything. Performance Improvement Plans (PIPs) serve two purposes: giving the employee a genuine opportunity to improve, and creating a paper trail that supports termination if improvement doesn't happen.
Before placing anyone on a PIP, review three things:
- Has the employee engaged in any protected activity recently (complaints, leave requests, whistleblowing)?
- Could the performance issues relate to a disability or medical condition?
- Are you treating this employee the same as others in similar situations?
If you reach the termination stage, California has specific rules that catch many startups off guard: all final wages, including accrued PTO, must be paid immediately at the time of involuntary termination. Not on the next pay cycle. Late payment can result in up to 30 days of waiting time penalties.
Your hiring checklist
- Use a proper offer letter template (Fellow provides one)
- Collect the signed offer letter before the start date
- Collect a signed PIIA before the start date
- Complete I-9 verification within 3 days
- Collect W-4 for payroll
- Register in every state where you have employees
- Set up workers' compensation insurance
- Build a compliant personnel file system
The bottom line
Hiring your first employee is a milestone. It means the company is growing. But employment compliance in the US is complex, state-specific, and unforgiving when you get it wrong.
At Fellow, we give our clients the templates, the checklists, and the guidance to hire confidently. Focus on finding the right people. We handle the legal.
