# Employment and classification

## Not legal advice; escalate when

This skill explains employment-law concepts and the classification framework. It does not draft binding terms, separation agreements, or equity grants. I am not your lawyer. Escalate to actual counsel when: any termination in California, New York, Washington, Massachusetts, or Illinois; any equity grant above 0.5% of the cap table; anyone earning above the FLSA salary-test threshold; anyone working outside the United States; any role being moved from W-2 to 1099 or back; any classification challenge from a state agency or the IRS.

## When to load this mode

The Operator handed off a hiring question, or the user is about to write a job description, send an offer letter, hire a contractor, or part ways with someone. Triggers: "1099 or W-2?", "can I hire them as a contractor?", "what's an offer letter need to say?", "how do I let someone go?", "what does the equity grant look like?"

## Procedure

Five concepts. Each one a real trap.

**1. Contractor vs. employee.** Misclassification is the most expensive common mistake. Two frameworks: the IRS multi-factor test (behavioral control, financial control, relationship) and the ABC test (California, Massachusetts, New Jersey — worker is presumed an employee unless A: free from control, B: doing work outside the hiring entity's usual business, *and* C: independently established in that trade). A "contractor" doing core work on your tools, your schedule, exclusively for you is an employee regardless of paperwork. Penalties stack: back wages, payroll taxes, benefits, state penalties.

**2. At-will basics.** Every US state except Montana defaults to at-will — either side ends it for any legal reason. Exceptions: discrimination, retaliation, contract (offer language promising a term). Offer letters should state at-will explicitly. "Permanent" creates exposure.

**3. Equity as compensation — the 83(b) trap.** Restricted stock vests over time. Without an 83(b) election filed within 30 days of grant, the recipient pays ordinary income tax on the spread between strike and fair market value *as each tranche vests* — years of escalating tax bills on illiquid paper. ISOs (incentive stock options) carry favorable tax treatment but only for employees, only within limits. NSOs go to contractors but are taxed as ordinary income on exercise. The 30-day 83(b) window does not extend.

**4. Multi-state employment.** Hiring in a state where you have no other employees creates obligations: state income tax withholding, unemployment insurance registration, state-specific paid-leave laws, workers' comp. California, New York, Washington, Colorado, Illinois, Massachusetts each override home-state defaults. A remote hire in a new state is a payroll and compliance project, not a Slack invite.

**5. Termination hygiene.** Document performance issues in writing, contemporaneously, before termination. Final pay rules vary by state — California requires final pay at the moment of involuntary termination; missing the deadline triggers waiting-time penalties. Severance is optional unless contracted; if offered, condition it on a signed release drafted by counsel.

## Decision rules

- **Default to W-2 for core work.** If the person does what your business does, on your tools, on your schedule, they are an employee.
- **Use 1099 for genuinely independent specialists.** Defined scope, defined deliverable, their tools, their schedule, multiple clients.
- **File the 83(b) within 30 days or do not accept restricted stock.** No exceptions.
- **Get the offer letter reviewed once.** A counsel-blessed template is reusable.
- **Termination in a high-risk state goes to counsel.** Every time.

## Anti-patterns

- **"They prefer 1099 for the tax write-offs."** Worker preference does not control classification. The IRS and state agencies decide.
- **Verbal offers, no written terms.** Disputes over what was promised land in court; the employer usually loses.
- **Equity grants without a board resolution.** Unauthorized grants are voidable and create disclosure problems at the next financing.
- **PIP designed to push someone out.** A pretextual performance improvement plan in a protected state is a roadmap for the claim against you.
- **Severance without a release.** Cash out the door; the door stays open for a claim.

## Before / after

**Before:** *A founder hires a California engineer as a 1099 contractor at $8k/month, full-time, exclusive, on company tools, for 14 months. The engineer leaves and files a wage claim. The state finds employee status. Bill: back overtime, missed-meal-break premiums, payroll taxes, state penalties — roughly $90k.*

**After:** *Same founder hires the engineer as W-2 from day one. Offer letter states at-will, names base salary, references the stock plan, requires invention assignment and confidentiality. The engineer files an 83(b) within 30 days. Cost: one $600 lawyer hour for the template, plus payroll provider at $50/month. The engagement closes without claims.*

**Disclaimer:** I am not your lawyer. This is a framework for spotting risk, not legal advice for resolving it. Classification disputes, terminations in protected states, and equity grants above the threshold need actual counsel.
