It's true, there can be a certain excitement associated with hiring your first employee. The idea of having someone to help shoulder the burden-whether it's in a personal or business capacity-who is dedicated to your priorities and goals, and relies on you for guidance and direction can be appealing. It is important, however, that expectations not get in the way of the formalities that ensure the employer-employee relationship is compliant with state and federal regulations. Ultra-affluent individuals should pay particular attention to protecting themselves as they are often perceived as ideal targets for lawsuits, and will look to their advisors for guidance on this issue.

First and foremost, it's worth noting that labor issues affect virtually everyone with employees-even if it's just a part-time household worker. Furthermore, a lawyer's advice is only as good as the facts he or she is working with. So, understanding the typical problems and potentially expensive and embarrassing disputes that frequently arise in labor-related cases is a worthwhile effort.

In the past ten years, I have witnessed the most unanticipated legal issues arise for wealthy clients in the area of labor and employment. Two contributing factors to this situation are the mistaken beliefs that: A home has different workplace rules than a business-it doesn't.

Employers must have a certain number of employees before any of the labor laws apply to them-they don't.


Getting Off To A Good Start

What follows is a discussion of the most critical issues pertaining to employees in any environment, whether it's a home, a family office or a conventional business location, and some insight into how to best hire, retain and terminate staff.

1. Pre-employment screening: If a client is planning to hire someone to work in his or her home, the integrity and reliability of the referral source is critical. They should also talk to people who know the applicant, and consider using a formal background check (see item 3 below).

2. Application form: The initial stages of an employment relationship, when handled correctly, can play a significant role in the overall success of the relationship, as well as protecting a client in the event of necessary termination. A few things should be made clear to candidates beginning with the application process: all information collected on the application form should be permissible (for example, you cannot ask about arrests which didn't result in a conviction); all application information provided by a candidate is subject to due diligence, so they should certify that everything is accurate and complete; the application form is not an offer of employment; if an offer is made it will be for "at-will" employment (see item 6 below); and new employees are expected to sign confidentiality agreements (see item 7 below).

3. Background check: The costs for these types of investigations are quite reasonable, especially when compared to the risk of insecure hiring practices. Specifically worded consents are required to legally obtain information regarding an applicant's criminal and credit histories. Improperly worded applications have led to many lawsuits, such as those filed in recent years against many major supermarkets in California.

4. Job description: While a job description is not mandatory, it's a good idea. Be as specific, and realistic, as possible regarding hours, duties, location of work and other pertinent subjects. Your clients should put this information in writing, but reserve the right to change it. This is particularly important for employees with disabilities who ask for special accommodations.

5. Physical exam: Physical exams can be requested only after a provisional job offer is made and, even then, solely to evaluate job related issues (for example, a candidate's ability to lift heavy objects). The Americans With Disabilities Act and most state laws require employers to make a "reasonable accommodation" for a disabled worker. On a related note, it is not permissible to require an "English language-only" workplace unless there's a defensible business need.

6. At-will employment agreement: The terms of at-will employment should be communicated clearly both verbally and in writing, as follows: "You may terminate your employment at any time with or without cause. Likewise your employer can do the same." Without doing so, an implied-in-fact contract can be construed. The agreement should also state that it cannot be changed by anyone unless it has been agreed upon in writing by the employer.

7. Confidentiality agreement: It is important for your wealthy clients to know that information gathered by the household staff in the course of their employment typically is not "confidential" and therefore can be given or sold to another party (say, a tabloid magazine), unless it is protected by a confidentiality agreement. There are, however, provisions that may help an employer keep an employee from disclosing information gained by stealth or through other unauthorized measures.

8. Employee handbook: Generally, it's a good idea to have a handbook of labor policies and procedures if a client has, or plans to have, more than a handful of employees. The handbook should include a sexual harassment policy, setting forth the procedures to be followed in case an employee feels aggrieved; a description of time-keeping requirements (more below); and, if appropriate, a computer and e-mail policy, setting forth how the equipment and services should be used, who owns the equipment, and whether or not information on the computer is considered private. If a client is hiring household staff, it is important to emphasize that the law considers the place of employment "a small business run inside a residence" rather than "a home," and it should be treated as such by all parties. For further protection, your clients should consider establishing a separate legal entity as the "employer."

9. Performance review: Reviews are not required but are an excellent idea, both to provide the employment relationship with the formality it deserves and to give the employee a clear idea of how he or she is doing. Reviews should be done at least yearly.

The following section outlines other considerations for high-net-worth employers, such as time-keeping issues, establishing contractor eligibility and knowledge of labor laws. The examples and advice provided in this article are for illustrative purposes only and are specific to employers in the state of California, although other states may have similar requirements. Before taking action in any state, regulations should be fully researched with counsel.

Time-Keeping Considerations

Generally, the first eight hours worked per day is straight time paid at the normal hourly wage. The next four hours worked per day is overtime and paid at a rate 1.5 times the normal rate. Hours worked over 12 per day is paid at the double-time rate. The employer needs to provide hourly workers with either a time clock or a sign-in sheet.

The minimum wage is now $7.50 per hour and $11.25 for overtime work. (The minimum wage will increase to $8.00 per hour in January 2008.) This means that a nanny working five 10-hour days per week would be paid, at a minimum, over $80 per day, over $400 per five-day week, about $1,800 per month or over $21,000 per year. It's important to note that different rules apply to different roles (i.e., nannies, maids, home health-care workers, security guards, personal attendants for invalids), so an employer must be precise when determining the job duties and confirm which rules apply to which employee.

All employees (except "exempt" employees, more below) need to track their time worked. Just as important, the employee should be asked to verify, in writing, that the records for each pay period are accurate and that all meal and rest breaks to which they were entitled were taken. Workers are entitled to take meal and rest breaks (depending on the length of the shift worked) or to be paid extra for any they were forced to miss. It is estimated that more than 100 cases on this very topic were filed in California during a short period of time in 2006. Employers should retain all time records for at least five years after an employee leaves the job.

Exempt workers, such as supervisors and managers, may be paid a salary so that overtime rules don't apply. Your clients should be aware that certain criteria must be met for an employee to be classified as exempt. For instance, "managers" must spend more than 50% of their working time on duties that are managerial in nature and "supervisors" must oversee multiple employees and have the right to hire and fire. Even then, the exemption may not apply depending on the "supervisor's" level of "independent judgment and discretion."

Demystifying Employment

To my dismay, a great deal of employment law has been mythologized over the years. My hope is that the following list will lessen the confusion surrounding the employer employee relationships that can be rewarding and productive for everyone involved.

A worker is not an independent contractor simply because the employer says so and the employee agrees. Many criteria are used to make that determination, such as who sets the work schedule, who provides the equipment and supplies needed to fulfill the duties of the job, whether the employee is paid by the job or the hour, and to what degree the employee is self-directed. In most cases, a person who works only for one employer is probably an employee. For instance, professionals that provide landscaping or pool maintenance services are classic independent contractors. By contrast, a family's full-time housekeeper or governess is a classic employee.

The laws prohibiting age discrimination protect individuals that are 40 years of age or older.

In California currently 18 notices must be posted in the workplace and accessible to all workers, covering such issues as the "Polygraph Protection Act," "Protection for Employee Whistleblowers," "Time Off for Voting," (posted no less than 10 days preceding a statewide election) and "Discrimination or Harassment in Employment is Prohibited by Law." Employers who do not meet these requirements expose themselves to liabilities.

Most employment laws apply even in cases where there is only one employee. Certain laws, such as some discrimination rules, apply only when there are five or more employees. Virtually all labor laws apply when there are 50 or more employees.

Encourage your clients to consider EPLI (or employment practices liability insurance). The premium can be as little as $1,000 to $2,000 annually and may cover attorney's fees and judgments from labor-related lawsuits for unintentional acts.

Help your clients understand the scope of their rights and responsibilities when an employee leaves his or her job, voluntarily or involuntarily. Regular performance reviews that have been documented can be a big help establishing the cause for termination. A written separation agreement should be used in all instances, and an agreement with a release can provide better protection for the employer. The employee is due any wages and benefits, such as vacation days, that have already been earned and it is in the employer's best interest to pay them immediately and offer an incentive to the employee for signing the release.

If the terminated employees are 40 years or older, your client must provide time for the workers to consider the agreement, and a specified period of time during which they can change their mind. The severance amount should only be paid after the agreement is executed and the grace period is over. There have been a number of high-profile situations in recent years in which sloppy or illegal employment practices prohibited an individual from pursuing a lucrative and powerful career opportunity. Above all else, make sure your clients know that fame and fortune do not insulate an employer from adhering to the pertinent labor laws.