October 13, 2026
Startup employment law comes down to a few basics: classify each worker correctly, register as an employer and run real payroll in every state where someone works, pay at least the minimum wage and follow the overtime rules, keep hiring, firing and day-to-day management free of discrimination and retaliation, and get a Confidential Information and Invention Assignment Agreement (CIIAA) from everyone. Federal law sets the floor, but state and city law usually sets the real rules, and many of them apply from the first employee.
Key takeaways
Set up as an employer in the state where the person will work. That means an EIN, a state withholding account, a state unemployment insurance account, workers’ compensation insurance (required from the first employee in most states, including New York and California), and registration for state disability or paid family leave programs where the state has one. Pick a payroll provider or a professional employer organization (PEO) to run payroll and filings. Put up the required federal and state notices, electronically for remote employees.
For each hire, you’ll need a signed offer letter and CIIAA, Form I-9 completed within three business days of the start date, tax withholding forms, a new-hire report to the state, and, in states like New York and California, a written wage notice at hire. See Employee Onboarding for Startups for the full checklist and Startup Employment Contract Guide for the offer letter.
There are two separate questions. The first is whether someone is an employee or an independent contractor. That depends on how much control the company has over the work and whether the person is really in business for themselves, and several states, including California, presume a worker is an employee unless the company proves otherwise. Someone working full time on your core product is almost always an employee. See Independent Contractor vs Employee.
The second is whether an employee is exempt from overtime. Exempt status depends on both the job duties and the salary. A title like “manager” isn’t enough. The federal salary threshold is $684 a week ($35,568 a year), after a 2024 increase was struck down in court and formally withdrawn in 2026, but several states set it much higher. In 2026, it’s $1,352 a week in California, $1,275 a week in New York City and $1,541.70 a week in Washington. See Exempt vs Nonexempt Employee.
Pay at least the highest applicable minimum wage: federal, state or city. The federal minimum is still $7.25 an hour, but most states where startups hire are far higher. In 2026, California’s is $16.90, New York City’s is $17.00, and San Francisco’s is $19.61 from July 1, 2026. Non-exempt employees get overtime at one and a half times their regular rate for hours over 40 in a week, and California also requires daily overtime for hours over eight in a day. Keep accurate time records for non-exempt employees.
States also set rules on how often you pay, what goes on a pay stub, meal and rest breaks, paid sick leave and final paychecks. More than a dozen states, including California, Colorado, Illinois, Massachusetts, New Jersey, New York and Washington, plus Washington, DC, require a pay range in job postings. Founders can’t skip payroll for employees by paying in equity. See Can Startup Workers Be Paid Only in Equity? and How Much Should I Pay My First Startup Employees?
Some obligations depend on headcount. The federal thresholds are below. Many states apply their versions of these laws to much smaller employers: New York’s anti-discrimination law covers employers of any size and requires annual sexual harassment prevention training for every employee, and California’s covers employers with five or more employees, with its harassment rules applying from the first.
| Employees | Federal law that starts to apply |
|---|---|
| 1 | Minimum wage and overtime, Equal Pay Act, Form I-9, payroll taxes |
| 15 | Title VII (discrimination and harassment), Americans with Disabilities Act, Pregnant Workers Fairness Act |
| 20 | Age Discrimination in Employment Act, COBRA continuation coverage |
| 50 | Family and Medical Leave Act, Affordable Care Act employer mandate (50 full-time equivalents) |
| 100 | EEO-1 reporting, WARN Act notice of mass layoffs |
A handbook makes sense at about 20 employees, earlier if you have employees in several states. See Startup Employee Handbook.
Each new state means new registrations and new rules. Register for withholding, unemployment insurance and workers’ comp in that state, and follow its rules on paid leave, pay frequency, final pay and non-competes. An employee in a state can also require the corporation to qualify to do business there. See Do I Need to Qualify My Delaware Startup in My Home State? Workers outside the US are governed by their own country’s law. Hire them through a local contractor agreement or an employer of record.
Every US hire, citizen or not, completes Form I-9. E-Verify is voluntary for most employers, but several states, mostly in the South, require it. Don’t treat applicants differently because of national origin or citizenship status, and don’t ask for specific documents beyond what Form I-9 allows. Sponsoring a visa, such as an H-1B or O-1, is specialized work for immigration counsel. You can extend an offer before a petition is filed, conditioned on work authorization.
Have every employee, including founders, sign a CIIAA that covers confidentiality and assigns their work to the company. Limit access to sensitive information, and take back devices and access when someone leaves. Don’t rely on non-competes: they’re banned in several states, including California, and limited in many others, and a narrow non-solicit plus trade secret law usually protects what matters. See The CIIA Agreement and Non-Compete Clauses.
If you record calls or monitor employees’ email or devices, give notice. Roughly a dozen states, including California, Florida, Illinois, Maryland, Massachusetts, Pennsylvania and Washington, require everyone on a call to consent to recording, and New York, Connecticut and Delaware require notice of electronic monitoring. A disclosure in the offer letter or handbook covers most of it.
Take every complaint seriously, investigate promptly, keep it as confidential as you can, and write down what you found and did. Never take action against someone because they complained, took protected leave or reported a problem. Retaliation claims are often easier to prove than the original complaint.
Employment is usually at will, but a firing still can’t be for a discriminatory or retaliatory reason, so document performance problems as they happen. Final pay deadlines vary by state, and in California final wages are due on the last day when you fire someone. Some states, including New York, require written notice of the termination date and benefits within a few days. Severance is optional. When offered, 2 to 4 weeks of base pay is typical for early-stage employees, in exchange for a signed release. See What Do I Need to Do When an Employee Is Fired? and What Do I Need to Do When an Employee Quits?
For more, see What Agreements Should Startups Have With Their Employees? If you’d like ongoing help with employment questions as you grow, see our General Counsel service or contact us.
