🏴‍☠️ The $847K mistake I see in every employee handbook

Hey, it’s Kinza.

So I need to tell you about something that happened to one of my clients that honestly still makes me angry.

The earnout payment was supposed to be $2.1 million. He ended up with $1.253 million. The difference? $847,000 in "unexpected" employment liabilities that showed up 18 months after closing.

And here's the thing - all of these issues should have been caught during due diligence. Instead, they came out of his earnout payment.

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Why Employment Issues Are Silent Deal Killers

Look, most business owners think their biggest risk is financial irregularities or customer concentration. But employment problems are often what actually kill deals because they're hard to quantify upfront and usually become the seller's problem under reps and warranties.

The stuff that got my client? Vacation accruals, unpaid overtime, misclassified contractors, retirement plan contributions, workers' comp disputes. All preventable with the right systems.

The Four Things That Will Cost You

Issue #1: Contractor Misclassification You call them contractors, but the IRS might call them employees. If you control when, where, and how they work, provide tools and equipment, and they're integral to your operations … they're probably employees. The back taxes and penalties can be massive.

Issue #2: Vacation and PTO Liabilities Some states require you to pay out accrued vacation at termination. California treats it as earned wages. If you've got 50 employees with 80 hours each at $25/hour, that's $100,000 in potential liability sitting on your books.

Issue #3: Overtime Violations Paying someone a salary doesn't automatically make them exempt. The Department of Labor has specific tests for exemptions. If your "managers" don't actually manage people or make decisions, you might owe back overtime.

Issue #4: Benefits and Retirement Compliance ERISA compliance isn't optional. Late 401k contributions, missing notices, improper plan administration. All of this can trigger significant penalties.

The 90 Day Employment Cleanup

Here's how we help clients systematically clean this up:

Days 1-30: Documentation Review

• Employee handbook current and compliant

• Job descriptions match actual responsibilities

• I-9 forms complete and current

• Contractor agreements properly structured

Days 31-60: Classification Analysis

• Review all contractor relationships

• Audit exempt vs. non-exempt classifications

• Calculate potential overtime liabilities

• Document your decision rationale

Days 61-90: Benefits and Compliance Check

• 401k contribution timing analysis

• Workers' comp coverage verification

• COBRA compliance review

• Required posting audit

The Insurance Piece

Employment Practices Liability Insurance can provide coverage for claims, but it's not a substitute for compliance. Good policies cost $2,000-$8,000 annually and can cover defense costs and settlements.

Real Talk About Costs

Fixing employment issues proactively costs money. Ignoring them costs more.

• Employment law attorney consultation: $3,000-$8,000

• Comprehensive compliance audit: $5,000-$15,000

• EPLI insurance: $2,000-$8,000 annually

Compare that to my client's $847,000 earnout reduction.

Your action items this week:

1. Schedule an employment law review with qualified counsel

2. Audit your contractor vs. employee classifications

3. Calculate potential vacation payout liabilities

4. Review your EPLI coverage (or get quotes if you don't have it)

Remember, employment liabilities are often discovered post-closing when you have the least leverage to negotiate solutions.

Before You Go:

Reply if you want to discuss your specific situation.

See you next week.

-Kinza