Paid Time Off & the Startup Runway

Along with 47 other attorneys licensed to practice in the State of Washington, I've written about our local "willful withholding of wages" statute, and how it can be a trap for founders and board directors of startup companies.

Statutes1805-titlepg"Statute" means a law passed by the legislature and signed by the governor, then codified in black and white in the "Revised Code of Washington." Statutes can be contrasted with "common law," which is a phrase to describe legal doctrines iterated over decades, sometimes centuries, through scores of judicial decisions and the setting of precedents.

That's a digression there.

But in a way it isn't. Because the fact that there is chapter and verse statutory law around employee wages makes certain leverage points, vis a vis paying employees, pretty darn sharp.

We all know that part of the reason you set up a corporation or LLC for conducting a business is to insulate yourself from the liabilities associated with that business, over and above how you fund that business. Right?

Wages in Washington are an exception to that rule.

The willfully withheld wages statue in Washington tells companies this: fail to pay your employees what you owe them, and those employees will have the ability to look beyond the corporate or company form. They will be able to sue your officers and directors personally. And they can sue for twice the amount of the wages withheld. Plus attorneys fees. What's more, they will be able to serve the spouses of those officers and directors at their homes on the weekend.

And they will win. (Translation: you will have to pay them.)

All this build up by way of saying the Gerry Langeler of OVP has a great post up about the potential trap of PTO, or "paid time off."

He's connecting the dots between what seems like a benign, employee friendly policy, and the hammer of Washington statutory law, which (quite appropriately) reflects the sovereign's public policy to protect workers.

If PTO accrues, then it is going to have to be paid. Come hell, high water, earthquake, fire, or the brick wall of no next payroll and no new financing in sight, that PTO is still going to be paid.

Gerry's quick to the point that this reality can cut acreage out of a startup's remaining runway when an extra month or two of operations might make a difference.

"Right now, we have a firm with over $250K in the bank, but we may have to shut it down or fire-sale it because there is about $250K of PTO 'overhang' hanging like the Sword of Damocles over the firm. On the other hand, if we could run the company off that cash for a month or two more, perhaps something good could happen on either the customer or M&A front."

Gerry writes as someone who knows the problem well, can see it coming and will plan accordingly. But not all startups have someone with his experience on the board. It can be a real surprise for some entrepeneurs to learn that they have far less (personal exposure-less) runway than they thought they did. Sometimes months less!

Picture from Ivan Smith's website, "Nova Scotia's Electric Scrapbook."


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