When to Pay Interns

Certain things have become the recognizable signs of spring. Budding leaves. Flowers. Chirping birds. And summer intern resumes. Especially during a slow or recovering economy, HR professionals are likely to receive many resumes from eager students or recent graduates hoping to work as interns in order to gain valuable experience and networking opportunities. Often, intern candidates offer to work for nothing in exchange for the chance to learn about a job or industry.

Of course the idea, however enticing, of free labor should raise red flags. In fact, the United States Department of Labor (“DOL”) has made it clear that, unless specific criteria are met, student “interns” working at for-profit companies are actually student “employees,” subject to the minimum wage and overtime requirements of the Fair Labor Standards Act (“FLSA”). The DOL has identified the following six criteria for determining whether an individual meets the test for an unpaid intern:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Only if an internship program meets all of these requirements can participants be considered unpaid interns. And as you can imagine, meeting all of these requirements can be challenging. For example, the internship program must be structured around classroom or academic experience rather than around the employer’s business operations. For this reason, compliant programs are often developed and overseen by colleges or universities, which then give academic credit for participation. Moreover, the more the interns perform productive work for the employer (as opposed to job shadowing or similar activities), the more likely they will be deemed employees, entitled to minimum wage and overtime under the FLSA. You can find the DOL’s fact sheet on internship programs here.

At the end of the day, private employers seeking to benefit directly from eager students or graduates willing to work for the experience will find it difficult to meet DOL requirements. On the other hand, a company willing to provide work experience in order to be a good corporate citizen or to build relationships with schools or students, can structure an unpaid student intern program to meet those goals and comply with the law.

Protect Your IP

Are you taking right steps to protect your Intellectual Property?

Given the ever-growing risk of IP infringement, there are several steps all businesses should take to reduce their risk. Below are just a few examples:

Ensure you have the proper protections in place. Protecting your IP does take time and money, but it is almost always well worth the effort. Federally registered patents, trademarks, and copyrights provide important protection and the ability to prosecute potential infringers in court. With respect to trade secrets, nondisclosure agreements are an important tool used to make sure employees as well as consultants, vendors, and business partners know what should be kept confidential and the consequences of breaching that duty.

Train employees to safeguard IP. Companies should have policies and procedures in place to prevent employees from intentionally or inadvertently disclosing trade secrets and other proprietary information. In addition, training your staff about what intellectual property is and how best to protect that IP against inappropriate disclosure is an important method of protecting a company’s most valuable IP against being disclosed to competitors.

Monitor for signs of infringement. Companies also need to actively monitor their IP for signs of infringement. While there are services and software that can assist in this process, small businesses can often search for trademarked or copyrighted materials on their own using online tools that detect the use of specified keywords, such as your brand name or tag line. Of course, should you detect signs of IP infringement, theft or misappropriation, it is also imperative to take action immediately in consultation with an experienced attorney.

New Employment CA Laws

The California legislature has done plenty this year.

Here are the highlights.

“Anti-Wage Theft” Law (AB 469). The Wage Theft Prevention Act of 2011 requires employers to provide non-exempt employees, at the time of hiring, a notice specifying the employee’s rate or rates of pay and the basis on which the employee’s wages are to be calculated (such as hourly, daily, piece, salary, commission, etc.). The notice must also include applicable overtime rates, allowances (if any) claimed as part of the minimum wage, the employer’s designated regular payday, the name of the employer (including any “doing business as” names), the employer’s physical and mailing addresses, and contact information for the employer’s workers’ compensation carrier. The Act also requires the employer to notify employees in writing of any changes made to any of this information within seven days of the implementation of such changes, unless the changes are reflected on a timely wage statement or other writing required by law. The Act adds an element of criminal liability by providing that any employer who willfully fails to pay wage-related Labor Commissioner orders or court judgments is guilty of a misdemeanor.

Independent Contractors (SB 459). This new law cracks down on employers who misclassify their employees as independent contractors by imposing a fine of between $5,000 and $25,000 for “willfully” misclassifying a worker as an independent contractor. “Willful misclassification” means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor. The law also imposes joint and several liability for a non-attorney consultant to advise an employer to willfully misclassify someone as an independent contractor.

Background Checks (AB 22). This law prohibits most employers from obtaining or relying on consumer credit reports regarding employees or job applicants, except in certain specified limited circumstances. The law does not apply to financial institutions or entities required by law to perform credit checks. Under the new law, employers may still obtain and rely upon credit reports for managerial employees covered by the executive exemption.

Pregnancy Disability Leave (AB 592 and SB 299). This law expressly prohibits “interference” with the exercise of any right provided under the California Family Rights Act, or due to disability by pregnancy, childbirth or related medical conditions. In a provision that may prove to be preempted by ERISA, the law also requires employers to maintain and pay for health coverage under a group health plan for any eligible female employee who takes up to four months of leave due to pregnancy, childbirth or a related medical condition in a twelve month period.

Gender Identity and Expression (AB 887). Existing law prohibits discrimination and harassment based on gender. This law expands the definition of “gender” to include both gender identity (how the person sees him or herself) and gender expression (how other people view the person). Under the new law, an employee must be permitted to dress consistent with the employee’s gender identity and expression.

Genetic Information Discrimination (SB 559). Discrimination in hiring or employment based on genetic information is now unlawful under the Fair Employment and Housing Act. Genetic information is defined to include the individual employee’s genetic tests, the genetic tests of the employee’s family members, and the manifestation of a disease or disorder in the employee’s family members.

Commission Agreements (AB 1396). This law requires all contracts for employment involving commissions as a method of payment to be in writing and to set forth a method by which the commissions are required to be computed and paid. The employee must be given a signed copy, and the employer must obtain a signed receipt from each employee. This law does not take effect until January 1, 2013, so employers have a year to prepare for compliance.

Agricultural Labor Relations (SB 126). This law authorizes the California Agricultural Labor Relations Board to certify union elections when employer misconduct affects the outcomes.

California Transparency in Supply Chains Act (SB 657), beginning January 1, 2012, large retailers and manufacturers that do business in California must disclose information on their websites about what they do to eradicate slavery and human trafficking from their supply chains. The new law applies to companies with worldwide gross receipts of over $100 million.

The law provides that if a covered company has a website, it must disclose certain information via a “conspicuous and easily understood link” on the homepage. The company must disclose to what extent, if any, it does each of the following:

  1. Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery, specifying if the verification was not conducted by a third party.
  2. Conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains.
  3. Requires direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking.
  4. Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.
  5. Provides company employees and management, who have direct responsibility for supply chain management, training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chain of products.

Notably, the law does not require companies to do anything to combat slavery and human trafficking. The law simply requires disclosure of the above information.

People Matter

The Most Successful workplaces of the Future…

•    Do away with archaic command-and-control models. Winning workplaces are horizontal, not hierarchical.Everyone who works there feels they’re part of something, and moreover, that it’s the next big thing. They want to be on the cutting-edge of all the people, places and things that technology is going to propel next.

•    Instead of knives-out competition, these workplaces put a premium on collaboration and teamwork, and on building a successful community with shared values.

•    Oh, and I’m not saying workplaces should become democracies – that would never work – simply thatpeople are empowered and encouraged to express themselves.

•    Winning contemporary workplaces stress innovation. They believe that employees need to be given an opportunity to make a difference – to give input into key decisions and to communicate their findings and learnings to one another.

Corporate Culture matters more than you think

•    The best teams are hired with collaboration in mind. People who remain in the culture are those who are dedicated to the ideal that that the whole is more than the sum of the parts.

•    In the most winning corporate cultures, everyone has something to contribute. Leadership is fluid and bend-able. Integrity and character matter a lot. Everyone knows about the culture. Everyone feels the culture. Everyone subscribes to the culture. Everyone recognizes both its passion and its nuance.

•    In winning corporate cultures, roles, identities and responsibilities mutate weekly, daily, sometimes even hourly. There’s a focus on social, global and environmental responsibility. No, these initiatives aren’t just good ideas, they really matter.

Today’s Most Successful Organizations…

•    …look less like an advancing army and more like a symphony orchestra. They are divided up into sections rather than functions. Each section has a leader and every player is a member of a team that works in synchrony. The orchestra conductor may direct what the orchestra does, but he knows he’s not completely in charge. His sole mission: To impel the other orchestra members to play to the very best of their ability, while integrating those efforts into a concerted group effort.

•    In life as in business, most people are not generals, they’re lieutenants. Nor do they necessarily want to be generals – they want to be impact players. Frankly, most of us are happy to have the opportunity to accomplish what we’re good at, and what we enjoy, so long as we receive adequate recognition and reward.

•    The most successful contemporary cultures convey the message that it’s okay to be yourself, and to do your best. You don’t always have to move up; you can also move across. More important is that you are happy, fulfilled, contributing to the community and feeling productive and rewarded.

The Leaders of Today have to be self-aware –  and top-down mandates no longer work

•    There will always be the need for decisive leadership, particularly in crisis times (and there’s a touch of the autocrat and control freak inside every successful entrepreneur). But today’s world is all about collaboration –and launching and maintaining that “long conversation” that Stevenson talked about.

•    The leaders of tomorrow need to practice ego management. They should be aware of their own biases, and focus as much on the present as on the future. They need to manage the egos of employees by rewarding collaborative behavior and teamwork.

•    Leaders should strive to become what Michael Maccoby dubbed “Productive Narcissists,” tempering high self-esteem and confidence with empathy and compassion. Mindfulness, of self and others, by boards,executives and employees, may very well be the single most important trait of a successful company. Companies have to define the culture; the culture can’t define them. So pre-define it!

•    Finally, companies need to understand that every individual in the organization is a contributor; and the closer everyone in the organization comes to achieving his or her singular potential, the more successful the business will be. Successful cultures encourage their employees to keep refreshing their toolkits, keep flexible, keep their stakes in the stream.

 
Rethink Recruiting
•    Diversity is key – and by diversity I mean of thought, style, approach and background. You’re building a team, not filling a position. Cherry-picking candidates from name-brand universities will do nothing to further an organization and may even work against it.

•    Don’t buy resume or credentials. Buy competence, track record, character and culture fit.

•    Avoid hiring only superstars. It’s about company teams, not just the individual. Sure, it’s totally tempting to create an All-Star team, but in case you hadn’t noticed, those people don’t pass the ball, they just shoot it.

•    Hire competencies but remember: hire with your heart. Make sure new workers fit into the preexisting culture, while also importing their expertise. Become their sponsor – onboarding is essential. Spend time listening. Give them what they need to succeed.

•    Sometimes you need to hire aliens – folks outside of the culture who bring new ideas and best practices from other places. These people become culture-influencer and agents of change.

•    New hires are more than just the college or university they attended. In short, don’t hire credentials, hire people.

•    Character matters. Most people don’t succeed in teams not because they are unqualified or incompetent, but simply because they are not a good cultural fit.

•    Act now. One of the big mistakes entrepreneurs make is they don’t act quickly enough. Put aside perfectionism, don’t wait for the perfect person – he or she may not exist. Hire track record and potential.

•    If, looking back, you realize someone is not a good cultural fit, or is not getting it done, don’t wait to make the change. Sometimes it is just as simple as readjusting their position or redefining their role. If they really don’t get it done, then it’s time to make the tough call.

Be on the lookout for signs of a lack of emotional commitment from employees:

•    People complain about the hours they’re putting in;
•    Turnover is high, particularly among young top achievers;
•    Recruitment is difficult; there’s little innovation or creative thinking; and
•    There’s more politicking that there is actual dialogue.

Take note of those employees who have an emotional commitment to the organization:

•    People give extra effort voluntarily;
•    They become your best ambassadors
•    Employees make personal and professional sacrifices to stay rather than leave;
•    People feel free to think outside the box; and
•    Meetings often result in lively debates and team action.

The employees of tomorrow plays to their strengths

•    Rather than aspiring to omnipotence, and acting as though they’re the masters of all they survey, Betas focus on what I call “motivated skills,” e.g., the things they know they do exceptionally well. And instead of exploiting their peers’ weaknesses in order to attain and hold onto power, they encourage their fellow team-members to play to their own strengths so that the entire team and organization can succeed.

 

Self-Awareness is all (but don’t think for a moment it means you’re soft)

•    What is self-awareness but bringing an intellectual and emotional understanding of your strengths and their weaknesses, your goals and their motivations to a given situation?

•    Ensure that you hire self-aware people. Give them the proper tools, techniques and feedback, as well as the proper levers of success and sponsorship. Onboard people with the belief that they’ll be successful. Then make sure it happens.

•    That said, organizations cannot be whole-heartedly responsible for their employees’ development; employees have to play their roles, too. Beta leaders are skilled at assembling employees, encouraging them to think new thoughts in different ways and challenging them to do new things.
If there’s a single takeaway from years of consulting, recruiting and observing both old and new organizations it’s this: People really truly matter. They are your strategy. They need to be encouraged and coached to pursue what they do best; to keep doing what they enjoy, and to participate in the success of your company.

To survive and thrive today and into the future, business leaders need to grow and develop their own self-awareness. Self-awareness means that you are willing and able to collaborate with employees, directors, customers and yes, even your competitors. It means that you understand that every individual in your organization is a contributor with varying degrees of potential – and that the closer everyone comes to attaining a high level of self-awareness, the closer the organization comes to achieving its potential. It means that your self-awareness feeds into your employees’ own self-awareness, which in turn ignites the overall success of the venture.

Income Statement

A profit and loss statement is a report of the changes in the income and expense accounts over a set period of time. The most common periods of time are months, quarters, and years, although you can produce a P&L report for any period.

Here is a profit and loss statement for the past four years for Google. I got it from their annual report (10k). I know it is too small on this page to read, but if you click on the image, it will load much larger in a new tab.

Google p&l

The top line of profit and loss statements is revenue (that’s why you’ll often hear revenue referred to as “the top line”). Revenue is the total amount of money you’ve earned coming into your business over a set period of time. It is NOT the total amount of cash coming into your business. Cash can come into your business for a variety of reasons, like financings, advance payments for services to be rendered in the future, payments of invoices sent months ago.

There is a very important, but highly technical, concept called revenue recognition. Revenue recognition determines how much revenue you will put on your accounting statements in a specific time period. For a startup company, revenue recognition is not normally difficult. If you sell something, your revenue is the price at which you sold the item and it is recognized in the period in which the item was sold. If you sell advertising, revenue is the price at which you sold the advertising and it is recognized in the period in which the advertising actually ran on your media property. If you provide a subscription service, your revenue in any period will be the amount of the subscription that was provided in that period.

This leads to another important concept called “accrual accounting.” When many people start keeping books, they simply record cash received for services rendered as revenue. And they record the bills they pay as expenses. This is called “cash accounting” and is the way most of us keep our personal books and records. But a business is not supposed to keep books this way. It is supposed to use the concept of accrual accounting.

Let’s say you hire a contract developer to build your iPhone app. And your deal with him is you’ll pay him $30,000 to deliver it to you. And let’s say it takes him three months to build it. At the end of the three months you pay him the $30,000. In cash accounting, in month three you would record an expense of $30,000. But in accrual accounting, each month you’d record an expense of $10,000 and because you aren’t actually paying the developer the cash yet, you charge the $10,000 each month to a balance sheet account called Accrued Expenses. Then when you pay the bill, you don’t touch the P&L, its simply a balance sheet entry that reduces Cash and reduces Accrued Expenses by $30,000.

The point of accrual accounting is to perfectly match the revenues and expenses to the time period in which they actually happen, not when the payments are made or received.

With that in mind, let’s look at the second part of the P&L, the expense section. In the Google P&L above, expenses are broken out into several categories; cost of revenues, R&D, sales and marketing, and general and administration. You’ll note that in 2005, there was also a contribution to the Google Foundation, but that only happened once, in 2005.

The presentation Google uses is quite common. One difference you will often see is the cost of revenues applied directly against the revenues and a calculation of a net amount of revenues minus cost of revenues, which is called gross margin. I prefer that gross margin be broken out as it is a really important number. Some businesses have very high costs of revenue and very low gross margins. And example would be a retailer, particularly a low price retailer. The gross margins of a discount retailer could be as low as 25%.

Google’s gross margin in 2009 was roughly $14.9bn (revenue of $23.7bn minus cost of revenues of $8.8bn). The way gross margin is most often shown is as a percent of revenues so in 2009 Google’s gross margin was 63% (14.9bn divided by 23.7). I prefer to invest in high gross margin businesses because they have a lot of money left after making a sale to pay for the other costs of the business, thereby providing resources to grow the business without needing more financing. It is also much easier to get a high gross margin business profitable.

The other reason to break out “cost of revenues” is that it will most likely increase with revenues whereas the other expenses may not. The non cost of revenues expenses are sometimes referred to as “overhead”. They are the costs of operating the business even if you have no revenue. They are also sometimes referred to as the “fixed costs” of the business. But in a startup, they are hardly fixed. These expenses, in Google’s categorization scheme, are R&D, sales and marketing, and general/admin. In layman’s terms, they are the costs of making the product, the costs of selling the product, and the cost of running the business.

The most interesting line in the P&L to me is the next one, “Income From Operations” also known as “Operating Income.” Income From Operations is equal to revenue minus expenses. If “Income From Operations” is a positive number, then your base business is profitable. If it is a negative number, you are losing money. This is a critical number because if you are making money, you can grow your business without needing help from anyone else. Your business is sustainable. If you are not making money, you will need to finance your business in some way to keep it going. Your business is unsustainable on its own.

The line items after “Income From Operations” are the additional expenses that aren’t directly related to your core business. They include interest income (from your cash balances), interest expense (from any debt the business has), and taxes owed (federal, state, local, and possibly international). These expenses are important because they are real costs of the business. But I don’t pay as much attention to them because interest income and expense can be changed by making changes to the balance sheet and taxes are generally only paid when a business is profitable. When you deduct the interest and taxes from Income From Operations, you get to the final number on the P&L, called Net Income.

I started this post off by saying that the P&L is “one of the most important things in business.” I am serious about that. Every business needs to look at its P&L regularly and I am a big fan of sharing the P&L with the entire company. It is a simple snapshot of the health of a business.

I like to look at a “trended P&L” most of all. The Google P&L that I showed above is a “trended P&L” in that it shows the trends in revenues, expenses, and profits over five years. For startup companies, I prefer to look at a trended P&L of monthly statements, usually over a twelve month period. That presentation shows how revenues are increasing (hopefully) and how expenses are increasing (hopefully less than revenues). The trended monthly P&L is a great way to look at a business and see what is going on financially.

I’ll end this post with a nod to everyone who commented last week that numbers don’t tell you everything about a business. That is very true. A P&L can only tell you so much about a business. It won’t tell you if the product is good and getting better. It won’t tell you how the morale of the company is. It won’t tell you if the management team is executing well. And it won’t tell you if the company has the right long term strategy. Actually it will tell you all of that but after it is too late to do anything about it. So as important as the P&L is, it is only one data point you can use in analyzing a business. It’s a good place to start. But you have to get beyond the numbers if you really want to know what is going on.

Service or Product Line

Service or Product Line

What are you selling? In this section, describe your service or product, emphasizing the benefits to potential and current customers. For example, don’t tell your readers which 89 foods you carry in your “Gourmet to Go” shop. Tell them why busy, two-career couples will prefer shopping in a service-oriented store that records clients’ food preferences and caters even the smallest parties on short notice.

Focus on the areas where you have a distinct advantage. Identify the problem in your target market for which your service or product provides a solution.

Give the reader hard evidence that people are, or will be, willing to pay for your solution. List your company’s services and products and attach any marketing/promotional materials. Provide details regarding suppliers, availability of products/services, and service or product costs. Also include information addressing new services or products which will soon be added to the company’s line.

Overall, this section should include:

detailed description of your product or service (from your customers’ perspective). Here, you would need to include information about the specific benefits of your product or service. You would also want to talk about your product or service’s ability to meet consumer needs, any advantages your product has over that of the competition, and the present development stage your product is in (i.e., idea, prototype, etc.).

Information related to your product’s life cycle. Be sure to include information about where your product or service is in its life cycle, as well as any factors that may influence its cycle in the future.

Any copyright, patent, and trade secret information that may be relevant. Here, you need to include information related to existing, pending, or anticipated copyright and patent filings along with any key characteristics of your products/services that you cannot obtain a copyright or patent for. This is where you should also incorporate key aspects of your products/services that may be classified as trade secrets. Last, but not least, be sure to add any information pertaining to existing legal agreements, such as nondisclosure or non-compete agreements.

Research and development activities you are involved in or are planning to be involved in. R&D activities would include any in-process or future activities related to the development of new products/services. This section would also include information about what you expect the results of future R&D activities to be. Be sure to analyze the R&D efforts of not only your own business, but also that of others in your industry.

Sales Strategy

Once you have defined your marketing strategy, you can then define your sales strategy.  How do you plan to actually sell your product?

Your Overall Sales Strategy should include:

A sales force strategy. If you are going to have a sales force, do you plan to use internal or independent representatives? How many salespeople will you recruit for your sales force? What type of recruitment strategies will you use? How will you train your sales force? What about compensation for your sales force?

Critical sales activities.  When you define your sales strategy, it is important that you break it down into activities. For instance, you need to identify your prospects. Once you have made a list of your prospects, you need to prioritize it. Next, identify the number of sales calls you will make over a certain period of time. From there, you need to determine the average number of sales calls you will need to make per sale, the average dollar size per sale, and the average dollar size per vendor.