Employment Law Basics by Jurisdiction

Purpose

This recipe produces three deliverables for startups hiring their first workers: (1) a Worker Classification Decision Matrix that determines whether each role should be structured as employee or contractor based on jurisdiction-specific legal tests, (2) an Employment Compliance Checklist covering mandatory registrations, insurance, withholding, and notices, and (3) an Equity Compensation Setup Plan specifying the optimal equity vehicle, valuation requirements, and tax implications per jurisdiction. [src1]

Prerequisites

• Business entity formed — incorporated or LLC filed in at least one jurisdiction
• Hiring plan — roles, locations, full-time vs part-time, compensation ranges defined
• Cap table (if offering equity) — current ownership structure, option pool size, latest valuation
• EIN obtained (US) — apply at IRS EIN Online
• State employer registrations (US) — register for state tax withholding and unemployment insurance in each state where workers are located
• Budget for legal counsel — employment attorney review recommended for first hire in each new jurisdiction ($500-$2,000 per jurisdiction)

Constraints

• Worker classification is determined by how work is actually performed, not by what the contract says. Labeling someone a contractor does not make them one legally. [src1]
• US misclassification penalties: $50 per unfiled W-2, 1.5% of wages, 40% of unpaid FICA taxes, plus employer's full FICA share. California adds $5,000-$25,000 per misclassified worker. [src2]
• UK IR35 determination responsibility depends on company size. From April 2026, ~14,000 companies reclassified as "small" shift IR35 responsibility back to contractors. [src3]
• EU Platform Work Directive (effective Dec 2, 2026 implementation deadline) creates rebuttable presumption that platform workers are employees. [src4]
• 409A valuations are valid for 12 months or until a material event. Non-compliant option pricing triggers 20% penalty tax plus interest on the employee. [src5]
• This card is informational guidance, not legal advice. Consult jurisdiction-specific employment counsel before making binding decisions.

Tool Selection Decision

Which path?
├── Hiring in US only, <10 employees
│   └── PATH A: US DIY -- Gusto/Justworks + Carta + local attorney
├── Hiring in US only, 10+ employees
│   └── PATH B: US Scaled -- Rippling + Carta + employment law firm
├── Hiring internationally, <10 people
│   └── PATH C: Global Lean -- Deel/Remote (EOR) + Carta/Equidam
└── Hiring internationally, 10+ people
    └── PATH D: Global Scaled -- Deel/Rippling + Carta + multi-jurisdiction law firm

Execution Flow

Step 1: Worker Classification Analysis

Duration: 2-4 hours per jurisdiction · Tool: Classification decision framework

For each role in the hiring plan, apply the jurisdiction-specific classification test to determine whether the worker must be an employee or can legally be a contractor.

US CLASSIFICATION DECISION TREE:

1. Does the company control HOW the work is done (not just WHAT)?
   YES → Likely employee
   NO  → Continue

2. Does the company provide tools, workspace, or set hours?
   YES → Likely employee
   NO  → Continue

3. Is the work a core part of the company's business?
   (California ABC Test, Prong B)
   YES → Employee in ABC-test states (CA, NJ, MA, IL + 30 others)
   NO  → Continue

4. Does the worker have their own business, serve other clients,
   and control their own profit/loss?
   YES → Likely contractor
   NO  → Likely employee

UK IR35 CLASSIFICATION:
1. Control: Does the client dictate how/when/where work is done?
2. Substitution: Can the worker send a replacement?
3. Mutuality of obligation: Is there ongoing obligation to offer/accept work?
All 3 point to employment → Inside IR35 (employee for tax purposes)

Verify: For each role, document the classification rationale citing the specific legal test applied · If failed: If classification is ambiguous, default to employee status (safer) or engage employment counsel

Step 2: Employment Registration and Compliance Setup

Duration: 1-3 days · Tool: Government portals + payroll provider

Register with all required government agencies before the first worker starts.

US EMPLOYER REGISTRATION CHECKLIST:
Federal:
[ ] EIN obtained (IRS Form SS-4 or online)
[ ] E-Verify enrollment (mandatory in some states)

Per state where workers are located:
[ ] State tax withholding account registered
[ ] State unemployment insurance (SUI) account
[ ] Workers compensation insurance purchased
[ ] New hire reporting registered
[ ] State-specific posters obtained

UK EMPLOYER REGISTRATION CHECKLIST:
[ ] PAYE scheme registered with HMRC (before first payday)
[ ] Workplace pension provider selected (auto-enrolment required)
[ ] Employers liability insurance obtained (legally mandatory)
[ ] Employment contract issued (written statement required from day 1)
[ ] Right-to-work check completed

Verify: All registrations confirmed with account numbers. Payroll provider connected to each tax account · If failed: If state registration is delayed, do not allow worker to start. Use EOR as interim solution if urgent

Step 3: Employment Contracts and Offer Letters

Duration: 2-4 hours per jurisdiction template · Tool: Legal templates + attorney review

Draft jurisdiction-compliant employment agreements with required elements for each location.

US EMPLOYMENT AGREEMENT -- REQUIRED ELEMENTS:
- At-will employment statement (except Montana)
- Job title, duties, reporting structure
- Compensation: salary/hourly rate, pay frequency, overtime eligibility
- Benefits summary (health insurance if 50+ FTE under ACA)
- Confidentiality and IP assignment clause
- Non-compete (if legal -- banned in CA, MN, OK, ND)

UK EMPLOYMENT CONTRACT -- REQUIRED FROM DAY 1:
- Names, start date, job title, place of work
- Pay rate and intervals, hours of work
- Holiday entitlement (min 28 days incl. bank holidays)
- Pension details (auto-enrolment min 8% total)
- Notice periods, probation, grievance procedures

Verify: Attorney has reviewed template for each jurisdiction. IP assignment clause covers all work product · If failed: Use vetted templates from Clerky (US), SeedLegals (UK), or your EOR provider

Step 4: Equity Compensation Structure

Duration: 4-8 hours · Tool: Carta, Equidam, or SeedLegals + tax advisor

Select and implement the right equity vehicle for each jurisdiction. [src5] [src6]

EQUITY VEHICLE BY JURISDICTION:

US (Delaware C-Corp):
  Preferred: ISOs -- no tax at grant/exercise if held 1yr+ after exercise
  Requires: 409A valuation ($2,500-$9,000), board-approved plan
  Limit: $100K/year exercisable value per employee

UK:
  Preferred: EMI Options -- CGT rate (10-20%) vs income tax (up to 45%)
  From Apr 2026: eligible if <500 employees AND <GBP 120M gross assets
  Per-employee limit: GBP 250K; company limit: GBP 6M (from Apr 2026)

Germany:
  Preferred: VSOP -- tax only on cash payout at exit event
  Avoids "dry income" problem of real ESOPs

France:
  Preferred: BSPCE -- flat 12.8% on gains if held 1yr+

Verify: 409A or HMRC valuation completed before any option grants. Board resolution signed · If failed: Do not issue options without valuation. Promise letters acceptable as interim

Step 5: Minimum Employment Requirements Setup

Duration: 2-4 hours · Tool: Payroll provider + benefits broker

Configure mandatory minimums for each jurisdiction where employees work.

US MINIMUM REQUIREMENTS (2026):
  Federal minimum wage: $7.25/hr
  California: $16.90/hr | New York (NYC): $16.50/hr
  Exempt salary threshold: $58,656/yr (federal), $70,304/yr (CA)
  Overtime: 1.5x for >40 hrs/week (FLSA)

UK MINIMUM REQUIREMENTS (Apr 2025):
  National Living Wage (21+): GBP 12.21/hr
  Holiday: 28 days/year | Pension: 8% total (3% employer min)
  Maternity: 52 weeks leave, 39 weeks statutory pay

Verify: Payroll system correctly calculates minimum wage, overtime, and withholding for each worker's location · If failed: If payroll provider does not support a specific jurisdiction, switch to EOR

Step 6: Ongoing Compliance Calendar

Duration: 1-2 hours setup · Tool: Calendar + payroll provider alerts

Set up recurring compliance deadlines to avoid penalties.

MONTHLY: Payroll tax deposits, PAYE remittance (UK: by 22nd)
QUARTERLY: Form 941 (US), state payroll tax filings
ANNUALLY: W-2s/1099s (Jan 31), 409A renewal, EMI return (Jul 6)
TRIGGERED: New state registration, funding round (new 409A), termination

Verify: All calendar items have responsible owner and automated reminders · If failed: If a filing deadline is missed, file immediately. IRS late 941 penalties: 2-15% of unpaid tax

Output Schema

{
  "output_type": "employment_law_compliance_package",
  "format": "JSON",
  "columns": [
    {"name": "role_title", "type": "string", "description": "Job title or role name"},
    {"name": "jurisdiction", "type": "string", "description": "Country and state/region"},
    {"name": "classification", "type": "string", "description": "employee or contractor"},
    {"name": "classification_test", "type": "string", "description": "Legal test applied"},
    {"name": "classification_risk", "type": "string", "description": "low/medium/high"},
    {"name": "minimum_wage_applicable", "type": "number", "description": "Applicable rate"},
    {"name": "mandatory_benefits", "type": "string", "description": "Required benefits"},
    {"name": "equity_vehicle", "type": "string", "description": "ISO, EMI, VSOP, BSPCE"},
    {"name": "registrations_needed", "type": "string", "description": "Gov registrations"},
    {"name": "estimated_employer_cost_pct", "type": "number", "description": "% above gross"}
  ],
  "expected_row_count": "1 per role per jurisdiction",
  "sort_order": "jurisdiction ascending",
  "deduplication_key": "role_title + jurisdiction"
}

Quality Benchmarks

If below minimum: Do not proceed with hiring. Incomplete classification or missing registrations create immediate legal liability. Engage employment attorney or EOR before first hire.

Error Handling

Cost Breakdown

Anti-Patterns

Wrong: Using contractor agreements to avoid employment taxes

Startups frequently classify early team members as contractors to save 20-30% on employer costs. If the worker functions as an employee, California penalties range from $5,000-$25,000 per worker, plus back taxes and interest. [src2]

Correct: Classify based on work reality, not cost optimization

Apply the jurisdiction-specific test honestly. If the role requires employee status, budget for the full cost. Use contractors only for genuinely independent, project-scoped work.

Wrong: Granting stock options without a current 409A valuation

Some startups issue options at a "best guess" price. This exposes every option holder to a 20% penalty tax plus interest under IRC Section 409A. [src5]

Correct: Always obtain 409A before any option grant

Budget $2,500-$5,000 for the valuation. Order 4-6 weeks before planned grants. Renew after any material event or 12-month expiry.

Wrong: Copy-pasting US employment contracts for UK or EU employees

US at-will employment does not exist in most other jurisdictions. UK and EU employees have statutory notice periods, mandatory benefits, and termination protections.

Correct: Use jurisdiction-specific templates or EOR-provided contracts

Each country requires its own contract template. EOR providers include compliant contracts. For direct employment, have a local attorney review the template.

When This Matters

Use this recipe when a startup is hiring its first workers in any jurisdiction and needs to ensure classification is correct, registrations are complete, and equity compensation is legally structured. The output feeds into employment contracts, payroll setup, and equity plan administration. This is a foundational compliance step that must be completed before any worker begins.