New York City is one of the most exciting places in the world to launch a startup. The talent is deep, the investor ecosystem is thriving, and the energy is unmatched. But the city that never sleeps also has some of the most employee-friendly labor laws in the country — and founders who ignore them can find themselves buried in lawsuits before they ever reach Series A.
Most startup founders are laser-focused on product, fundraising, and growth. Employment compliance rarely makes the priority list until something goes wrong — and in New York, “something going wrong” often means five- or six-figure penalties and reputational damage no amount of PR can fix.
Here are five employment law mistakes I see New York startups make repeatedly, and what you can do to avoid them.
1. Misclassifying Employees as Independent Contractors
This is the most common — and most expensive — mistake startups make. Bringing on early team members as 1099 contractors keeps costs down and avoids payroll taxes. The problem is that New York doesn’t care what you call someone on paper. It cares about the reality of the working relationship.
New York applies a strict ABC test: a worker is presumed to be an employee unless the company proves the worker is (A) free from the company’s control, (B) performing work outside the company’s usual business, and (C) independently established in that trade. If your “contractor” works from your office, follows your schedule, and has no other clients, you have an employee.
The consequences: Back taxes, unpaid overtime claims, Department of Labor penalties, and potential criminal liability for willful violations.
The fix: Audit every contractor relationship against the ABC test. If someone fails even one prong, reclassify them. It costs more upfront, but it’s a fraction of what you’ll pay when the state comes knocking.
2. Ignoring NYC’s Expanded Anti-Discrimination Protections
Most founders know federal law prohibits discrimination based on race, sex, and religion. What many don’t realize is that New York City’s Human Rights Law (NYCHRL) goes significantly further — it’s one of the broadest civil rights laws in the nation.
The NYCHRL protects additional categories including immigration status, caregiver status, credit history, and salary history. And here’s the critical distinction: while federal claims require conduct that is “severe or pervasive,” the NYCHRL only requires proof the employee was treated “less well” because of a protected characteristic. A single offhand comment or inconsistent application of workplace policies can be enough.
The consequences: Uncapped compensatory and punitive damages, attorney’s fees, and civil penalties. The NYC Commission on Human Rights can also initiate its own investigations.
The fix: Build anti-discrimination policies from day one, even with three employees. Train managers on what the NYCHRL prohibits — not just what federal law covers — and never make employment decisions based on characteristics that feel “neutral” but may be protected under city law.
3. Skipping Sexual Harassment Prevention Training
Since 2018, New York State has required every employer, regardless of size, to provide annual sexual harassment prevention training to all employees. New York City adds requirements: the training must be interactive, address bystander intervention, and cover NYCHRL-specific protections.
There is no small-business exemption. A two-person startup has the same obligation as a Fortune 500 company. Yet many early-stage companies skip this entirely, assuming it kicks in at a certain headcount.
The consequences: Beyond fines, failing to provide required training devastates your defense in a harassment lawsuit. Courts view it as evidence you failed to take reasonable preventive steps.
The fix: Use the free model training materials from the New York State Department of Labor and NYC Commission on Human Rights, or invest in a compliant third-party platform. Schedule it annually, document completion, and make it part of onboarding.
4. Mishandling Terminations in an “At-Will” State
New York is an at-will employment state, meaning you can generally fire someone for any reason — or no reason. Many founders treat this as a blank check. It isn’t.
At-will employment has critical exceptions. You cannot terminate someone for a discriminatory reason, in retaliation for protected activity (filing a wage complaint, reporting harassment, whistleblowing), or in violation of an implied contract created by your own handbook.
Here’s a common scenario: an employee complains about unpaid overtime. The founder, already frustrated with their performance, fires them two weeks later. Even if the performance issues were real, the timing creates a powerful inference of retaliation — and under the NYCHRL, the employee only needs to show the complaint was a “motivating factor” in the decision.
The consequences: Back pay, front pay, emotional distress damages, punitive damages, and attorney’s fees — plus enormous amounts of founder time consumed by litigation.
The fix: Document performance issues in real time, not retroactively. Never terminate someone shortly after protected activity without consulting an attorney. Create a consistent, written termination process.
5. Using DIY Severance Agreements Without Legal Review
When parting ways with an employee, many founders grab a severance template and fill in the blanks. This can backfire badly.
New York imposes specific requirements on severance agreements containing releases of discrimination claims. For employees over 40, the federal OWBPA requires a 21-day consideration period and a 7-day revocation window. Skip those steps and the release is void — you paid severance and got nothing back.
Post-2019 legislation also restricts NDAs tied to discrimination, harassment, or retaliation claims. Overly broad NDAs are unenforceable and can create additional liability. Non-compete clauses face similar scrutiny — the trend in New York is sharply toward unenforceability, especially for lower-wage workers.
The consequences: An unenforceable agreement gives you a false sense of security while leaving you fully exposed to the claims you thought you’d resolved.
The fix: Have every severance agreement reviewed by an employment attorney before presenting it. A few hundred dollars in legal fees can save tens of thousands in litigation costs.
Don’t Let Compliance Become an Afterthought
Building a startup is hard enough without employment law landmines slowing you down. The good news is that these mistakes are entirely preventable — they don’t require a massive legal budget, just awareness, basic systems, and willingness to get guidance when the stakes are high.
If you’re a New York startup founder navigating hiring, terminations, or workplace policies, it’s worth talking to an employment attorney who understands both the legal landscape and the realities of building a company. At Joya Legal, we work with businesses and employees across New York City on exactly these issues — and we’re always happy to help founders get it right from the start.
Kamran Shahabi is the founder of Joya Legal, a boutique law firm specializing in employment law and immigration. Based in New York City, he represents employees in workplace disputes, wrongful termination, discrimination, harassment, and retaliation cases. Learn more at joya.law.
