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Employment due diligence helps startups identify legal risks, fix compliance issues, and build investor confidence. It involves reviewing workforce records, policies, and practices to ensure compliance with labor laws and avoid costly mistakes. Here's a quick overview of what matters most:
- Top Risks: Worker misclassification, incomplete documentation, and labor law non-compliance.
- Key Documents: Employment contracts, compensation records, immigration paperwork, and HR policies.
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Main Focus Areas:
- Correct worker classification (employee vs. contractor).
- Reviewing contract terms for pay, IP rights, and termination clauses.
- Ensuring immigration compliance for international employees.
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Steps to Prepare:
- Organize documents digitally with clear naming and access rules.
- Conduct audits to spot and fix compliance gaps.
- Set up systems for ongoing compliance, like tracking visa renewals and updating contracts.
Getting Ready for Due Diligence
Preparing thoroughly for due diligence simplifies document review and ensures compliance is on track.
Required Documents Checklist
Gathering key employment documents is a must for due diligence. Here's what you need:
| Document Category | Examples | Why It Matters |
|---|---|---|
| Core Employment | Offer letters, employment agreements, NDAs | Outlines fundamental employment terms |
| Compensation | Salary records, bonus plans, equity agreements | Confirms payment compliance |
| Immigration | Work visas, permits, I-9 forms | Verifies legal work authorization |
| Contractor Relations | Independent contractor agreements, SOWs | Clarifies contractor relationships |
| HR Policies | Employee handbook, workplace policies | Demonstrates compliance framework |
Document Storage and Access
Disorganized files can derail progress. Keep everything accessible with these tips:
- Digital Storage: Use secure, cloud-based platforms.
- Naming Conventions: Stick to consistent file names for easy retrieval.
- Version Control: Track changes to keep documents up to date.
- Access Permissions: Set clear rules for viewing, editing, and sharing.
"Working with Fellow gives us clarity and confidence in managing our legal budget, enhances proactive communication with our lawyers, and helps us stay ahead of potential issues. Highly recommended!" - David Spunar, FaceUp
Due Diligence Task List
After organizing your documents, follow a structured review process to stay on track:
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Initial Assessment
Examine employment practices to spot compliance issues in areas like worker classification, pay structures, and immigration. -
Documentation Audit
Check all employment records for accuracy and completeness, with special attention to contractor agreements and visas. -
Compliance Review
Ensure your practices align with labor laws, workplace regulations, and industry standards to resolve potential issues before investors get involved.
"Fellow is transforming legal services with a subscription-based approach - no billable hours, just complete dedication. They seamlessly integrate with our team, providing support whenever we need it. This is what legal services should look like!" - Bara Kubinova, Lively Cycle
Strong legal processes from the start save time, money, and maintain investor trust.
Main Due Diligence Areas
Worker Status and Labor Laws
Getting worker classification right is crucial to avoid legal and financial trouble. Misclassifying employees as contractors can lead to hefty fines and lawsuits.
Here are some key differences between employees and contractors:
| Classification Factor | Employees | Contractors |
|---|---|---|
| Work Control | Company dictates schedule, location, and methods | Worker decides how and when to work |
| Financial Control | Paid a regular salary and uses company-provided tools | Uses own equipment and sets their own rates |
| Relationship Type | Ongoing role tied to company operations | Temporary or project-based roles |
| Benefits | Eligible for health insurance, paid leave, and other perks (e.g., 401(k)) | Responsible for their own benefits and expenses |
Also, review employment agreements carefully to ensure the terms are clear and protective.
Contract Terms Review
Once worker classification is sorted, dive into contract details to identify and manage risks:
- Compensation: Check salary, bonus structures, and equity agreements.
- Intellectual Property (IP): Ensure IP rights and invention agreements are properly assigned.
- Non-Compete Clauses: Verify these are enforceable under the relevant state laws.
- Termination Terms: Look at notice periods, severance packages, and other exit conditions.
Work Permits and Visas
If your team includes international talent, immigration compliance is a must. Focus on these areas:
- Visa Status: Keep accurate records of expiration dates and renewals.
- Work Authorization: Confirm all foreign employees have proper documentation.
- Monitoring Tools: Use systems to track visa deadlines and ensure compliance.
"Being a CEE team operating in the US, having someone like Fellow that understands both EU and US worlds is a crucial benefit." - Nick Velkovski, HeyReach
For global operations, collaborate with legal experts who understand both domestic and international employment laws.
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Running the Due Diligence Review
Let’s break down the team roles and tasks to ensure a smooth and efficient due diligence review process.
Team Roles and Tasks
| Role | Responsibilities | Key Focus Areas |
|---|---|---|
| Legal Lead | Oversee document review and ensure compliance | Contract terms, regulatory needs |
| HR Manager | Handle employee records and related documents | Personnel files, benefits paperwork |
| Finance Team | Examine compensation structures | Payroll, equity agreements |
| Department Heads | Confirm employee status and performance | Role descriptions, work arrangements |
| Tech Support | Manage document access and ensure security | Digital storage, access controls |
Assigning clear roles ensures the review process stays organized and efficient.
Document Analysis Steps
Here’s how to systematically review and organize your documents:
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Initial Document Organization
Sort all employment-related documents into digital folders by category: contracts, immigration papers, compensation records, and compliance documents. Use a secure document management system to protect confidentiality. -
Systematic Review Process
Develop a standardized checklist for each document type. Pay attention to critical items like termination clauses, intellectual property (IP) assignments, and non-compete agreements. Record findings in a centralized dashboard to keep everything on track. -
Compliance Verification
Cross-check documents against current labor laws and regulations. Be especially mindful of state-specific requirements and international compliance rules if your team operates across borders.
Once the documents are reviewed, focus on identifying and addressing any issues.
Finding and Fixing Problems
Key issues to look for include:
Documentation Gaps
- Missing employment agreements
- Incomplete I-9 forms
- Outdated visa paperwork
- Unsigned IP assignment agreements
Compliance Red Flags
- Incorrect worker classifications
- Non-compliant non-compete clauses
- Missing state-specific provisions
- Outdated compensation terms
"Fellow is more like a consigliere than just a law firm. I couldn't recommend a better legal partner for a startup. Their ability to foresee problems and find proactive solutions is unmatched."
- Jan Ondrasek, ClaimPartner
After identifying issues, prioritize them based on their potential legal risks and business impact. Create a clear remediation plan with deadlines and assign tasks to the right team members. For complex compliance issues, consider consulting specialized legal counsel.
For startups with international teams, keeping accurate and complete documentation is even more crucial. Maintain transparency throughout the review process by keeping stakeholders informed of findings and progress. Document every step taken to resolve issues - this not only builds trust with investors but also ensures compliance moving forward.
Making Improvements After Review
Fixing Current Issues
Start by tackling the most urgent compliance problems. Update your documentation and resolve classification mistakes right away:
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Documentation Updates
- Add state-specific provisions to agreements.
- Complete any missing I-9 forms within 3 business days.
- Ensure all team members sign IP assignment agreements.
- Revise non-compete clauses to align with enforceability standards.
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Classification Corrections
- Address worker misclassifications promptly.
- Update compensation structures as needed.
- Modify benefits eligibility where necessary.
- Record classification changes with proper legal agreements.
Setting Up Compliance Systems
Once immediate concerns are resolved, focus on building systems to prevent future issues. These systems will help you stay organized and compliant:
| System Component | Purpose | Steps |
|---|---|---|
| Document Management | Store and track documents | Use secure cloud storage with controlled access. |
| Compliance Calendar | Monitor deadlines and renewals | Schedule regular audits and updates. |
| Onboarding Workflow | Standardize new hire processes | Create digital checklists with automated reminders. |
| Audit Protocol | Conduct regular checks | Set up quarterly internal reviews. |
Preparing for Next Review
A proactive approach to compliance keeps you ready for investor reviews and avoids last-minute stress. Regularly audit and refine your processes to stay ahead:
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Regular Maintenance
- Conduct quarterly reviews of employment documentation.
- Update employee handbooks and policies as laws evolve.
- Keep digital copies of all signed agreements.
- Monitor visa expiration dates and handle renewals on time.
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Process Improvements
- Use automated systems to track documents efficiently.
- Develop standardized templates for employment paperwork.
- Set up clear communication channels and version control.
- Systematically document any policy changes.
"Fellow feels like an extension of our team - always available, always ready to help. Their 24/7 support and subscription model remove the stress of billable hours, making legal work seamless for startups. Highly recommend!" - Jiri Diblik, VOS.health
For startups with international teams, subscription-based legal services can provide ongoing compliance support, ensuring you're covered across multiple jurisdictions.
Summary and Next Steps
Key Points Review
When it comes to employment due diligence, there are three main areas that demand your attention. These can either keep your startup compliant or lead to serious issues:
| Focus Area | Must-Haves | Common Pitfalls |
|---|---|---|
| Worker Classification | Correctly identify employees vs contractors | Misclassifying workers to cut costs |
| Documentation | Ensure all agreements and I-9 forms are complete | Missing or outdated paperwork |
| Compliance Systems | Conduct regular audits and keep systems updated | Waiting until problems arise to take action |
These areas provide a foundation for actions that startup founders can implement right away.
Steps for Founders
To build on these core areas, founders should establish systems that make compliance easier to manage:
- Document Management: Organize and regularly review all employment-related documents in one centralized system.
- Compliance Calendar: Use automated reminders for key deadlines like visa renewals, contract updates, and quarterly reviews.
- Legal Support: Partner with experienced legal counsel to address issues before they become problems.
Introducing Fellow
Staying compliant can be challenging, but Fellow offers the expertise startups need to navigate U.S. employment regulations. With an impressive 95% client retention rate, their subscription-based service provides:
- Affordable, specialized support for U.S. expansion and immigration
- Technology-driven tools to help you stay ahead of compliance requirements
- Smooth integration into your existing operations
Working with experts like Fellow helps establish a solid compliance framework, which is essential for your startup's growth.
