The dangers of unpaid employment in a startup
Do employees in startup companies really need to be paid? Can employers provide them with stock options, shareholdings or the promise of future payment in lieu of current payment of wages? The short answer is that except in certain defined circumstances, employees must be paid wages, and they must be paid on a regular basis from the time that they begin working for a company.
The Employment Standards Act, 2000 (Ontario) (the “ESA”) defines an employee as “someone who performs work for an employer for wages”. In turn, the term “wages” is defined as “monetary remuneration”. Section IX of the ESA requires employees to be provided with “at least the prescribed minimum wage”.
The Regulations under the ESA have some exemptions in relation to Section IX, but they are limited and generally only apply to certain defined professionals (eg. doctors, lawyers, engineers, architects, teachers), commissioned salespeople, and other specified groups of employees (certain student employees such as camp counselors, and janitors/superintendents who reside in the building that they are responsible for). It is particularly important for startup companies to note that there is no wages exemption under Section IX of the ESA for information technology professionals, managers, supervisors or executives.
In addition, because the ESA expressly prohibits employers and employees from entering into an agreement to circumvent the provisions of the ESA, it is not possible for a company founder or similarly-placed employee to agree to forego wages during the startup period. The potential risk to a company which permits employees to work without receiving at least minimum wage, is that the employee can make an unpaid wages claim, which in turn can also be a liability to the directors and officers of the company. In addition, a failure to pay wages as earned can lead Canada Revenue Agency to have a claim for unpaid tax and other withholdings which should have been made.
While there are risks with entering into independent contractor agreements, particularly if the contractors are actually employees under various legal tests, sometimes the safest path for a financially strapped startup is to consider short-term contractor arrangements until the company is on its feet and generating revenue which can be used to cover payroll for employees. This can be a tricky area to navigate and should never be done without legal advice, but done properly, it is a better and safer option than failing to pay employees during the initial startup period.
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