If you just arrived and consider working for a startup or a limited liability company this post is for you. The post is about the financial and legal risks of working for a startup in America as an employee or as a contractor.
1. No Overtime Pay
Depending on the startup policy, overtime might be discouraged, or not be allowed at all. Please note, according to Federal Fair Labor Standards Act, employers are required overtime pay is 1.5 times the regular rate of pay is required after 40 hours of work in a workweek (Credit: U.S. Department of Labor).
Example of overtime pay. You worked 43 hours this week, and your regular pay is $10/hour. Your payroll should include your regular pay of $400 dollars + $10 x 3 hours x 1.5 times =$45 for overtime, or $445 for a workweek.
2. Unfair Wages
Sometimes startup management will offer to register you as an Independent Contractor rather than as an Employee.
Please keep in mind, unlike federally and state registered companies, limited liability companies (LLCs) don`t have to follow minimum wage laws for independent contractors. (Credit: Nolo) In other words, if you are a contractor, the startup management team is allowed to pay you an hourly wage you will agree to work for.
Why does it matter? Because you lose money by being underpaid. When you work for a startup, you more likely to be compensated below your market value.
Example: how an hourly pay discrepancy will affect your monthly compensation.
- You are a housekeeping contractor in Denver, Colorado, with starting to pay $9.50/hour
- Minimum wage in Colorado= $10.20 (Credit: CDLE)
- Working week = 40 hours
Your approximate compensation:
- Your pay: at $9,50/hour x 40 hours= $380/weekly x 4 = $1,520 monthly
- Minimal wage: at $10.20/hour or $408/weekly = $1,632 monthly
- National average for the job = $14.74/hour (Credit: PayScale)
- Your Market Value: $14.74 x 40 x 4= $590/weekly or $2,358 monthly
Conclusion: As an unprotected independent contractor you will be paid below the state minimum wage limit which will cost you $112/monthly or $1,344 annually. Additionally, you will lose $838 in wages monthly or $10,056 annually.
3. No guarantees of compensation
When you are employed by a small firm, there could be a very limited recourse in case of employer`s payroll default. Of course, you could press legal charges and sue the firm to get your money back, but this may take a long time to resolve.
4. Limited opportunities for career growth
Typically, not always, startup employers are small firms organized as LLC (limited liability company). The type of firms has a flat management structure and few or limited opportunities for advancement.
5. Higher Taxes
Some startup managers will insist that you are employed as an independent contractor. The biggest downside of working as a contractor is the fact that you will need to pay your self-employment tax.
The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security tax and 2.9% for Medicare (Credit: IRS). Alternatively, if you are a worker, you would pay only half of that amount or 6.2%. Employers pay a matching amount for a combined contribution of 12.4 percent of earnings.
6. Limited Employee Benefits
Typical employee benefits may include the following: PTO- paid time off, sick days, vacation days; health insurance; life insurance, paid medical leave, flexible schedule, dental insurance, retirement accounts (including match), flexible spending account, education assistance, and long-term disability insurance.
In many cases, a startup due to financial constraints will not be able to offer the same package of benefits as larger, well-established companies.
Working for a startup has a few risks including lower pay, no guarantees of compensation, higher tax liability if you are employed as a contractor, limited opportunities for career advancement, and limited or no employee benefits. Of course, finding a larger, well-established employer may take some time and effort, but in the end, it is worth it.
I personally worked for three startups in America. Overall i had a great time. I loved the crazy, fast-paced environment, the excitement of a small company and the opportunity to do many things outside of the role i was hired for. I learned a ton and i am super grateful for the opportunity to be part of the experience. It was fun!
That said, there were some things i did not enjoy: my lunch hour was not guaranteed, and as an independent contractor i was not offered any benefits at all. I did end up paying significantly higher taxes for the wages i earned.
At one time, my employer did not pay my earned wages for almost two months and i was really scared whether i will ever get compensated, it was uncomfortable. It was also highly unusual for the U.S. to have a delay in payment. This actually happened in two out of three startups.
Career opportunities were not there since startups were struggling to make their ends meet financially and promotions were limited too. Most folks who worked at the startups had either other jobs or had spouses who could support them financially.
At the end of the day, you will make your own decisions and i am hoping now, knowing your risks you will be better positioned and informed before signing your employment agreement.
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Questions to Readers:
- What about you, have you had issues working for a Russian Employer?
- Share your experience of working for a startup in U.S.?