From time to time, clients ask me to review their employment offer letters. Here is a summary of what I believe every offer letter should convey to the prospective employee from the business and legal perspectives.
Rita Risser
I am especially pleased to welcome Rita Risser as a guest writer – not just because her post about sexual harassment is this blog’s first guest post, but because I have had the pleasure of knowing, and staying in touch with, Rita ever since we met at Boalt Hall.
As CEO of a small company, you may imagine that the recent resignation of HP’s CEO has no relevance to you and your organization. Think again.
Whenever employees or contractors are let go, they are more likely to bring claims for harassment, whistle-blowing and more. The worse the economy, the less likely they are to find other jobs and the more incentive they have to pursue alternative sources of income through lawsuits.
Their are obvious security-related reasons why businesses do not want employees to give their computer passwords the third parties. With the recent decision in Multiven v. Cisco Systems, the U.S. District Court for the Northern District of California has given us a legal reason, as well.
Peter Alfred-Adekeye (“Adekeye”), a former Cisco engineer, left Cisco to form plaintiff Multiven. After his departure, Adekeye used a Cisco employee’s password, with the employee’s permission, to download certain proprietary Cisco software.
Many people know that, when one leaves a job in California, the former employer typically cannot stop the former employee from working for a competitor. However, some people mistakenly believe that the right to compete includes the right to steal the former employer’s customers!
According to Civil Code Section 3426.1(d), a trade secret is “information…that [d]erives independent economic value…from not being generally known to the public…and [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” For many employers, a customer list is an important trade secret.
Subsection (c) of that Section specifies a variety of circumstances that constitute misappropriation of a trade secret, including those involving “[d]isclosure or use of a trade secret of another without express or implied consent”. Use of a former employer’s customer list to solicit business from those customers, thus, is likely to constitute misappropriation, irrespective of whether the solicitations ultimately are successful.
Threatened or actual misappropriation is subject to injunctive relief (Section 3426.2(a)). Section 3426.3 provides that one who misappropriates a trade secret may be liable for damages equal to the amount of the trade secret owner’s losses; the amount of any unjust enrichment gained; payment of a reasonable royalty; or twice any of the foregoing amounts in the event of willful and malicious misappropriation.
Bottom line: Once you leave a company’s employ, don’t use your former employer’s customer list or any of its other trade secrets.
Photo credit: Bartlomiej Stroinski via stock.xchng
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Some companies are formed as S corporations to avoid “double taxation”: The corporation does not pay federal income tax. Instead, income flows through to the shareholders, who pay income taxes (as in a partnership).
This potential tax benefit is available, however, only if stringent requirements are met. Most notably:
Failure to meet a requirement, even if inadvertent, results in loss of S corporation status.
Entrepreneurs should think carefully about whether S corporation status is appropriate for the long term. Here’s why.
A client company was started almost a decade ago. All this time, the founders have retained S corporation status because it has been beneficial to them.
However, during the past year, revenue and the number of employees have grown dramatically. The founders would like to reward employees with shares of stock, but the S corporation limitation of a single class of shares makes the desired equity compensation plan impossible.
As a result, we are forming a new limited liability company (largely owned by the S corporation) that will offer flexibility in awarding equity to employees while retaining the existing S corporation’s benefits for the founders. This sophisticated structure will give the company what it needs, but planning and implementing it requires substantial time, energy and money. I have to wonder whether a different decision would have been made up-front if this outcome had been foreseen.
Related posts:
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
In a recently-decided case (JustMed v. Byce), the U.S. Court of Appeals for the Ninth Circuit decided that a software developer was an employee, rather than an independent contractor, even though the parties had completed almost no employment-related paperwork.
Byce took over development of JustMed’s software from an employee who had moved out of state. Byce’s compensation – the same as his predecessor’s – was 15,000 shares of JustMed stock (valued at $0.50 per share) per month.
A year later, because Byce was running low on money, JustMed started paying Byce half in shares and half in cash – but Byce never cashed the three checks that he received. Concerned that he was not seen as an equal in the corporation, Byce changed the the software’s copyright notice to state that he, rather than JustMed, was the owner. Then, two days before JustMed was to meet with a potential merger or buy-out partner, Byce deleted all copies of the source code from JustMed’s computers to gain leverage in an unsuccessful effort to acquire more shares.
JustMed sued Byce, alleging misappropriation of a trade secret, conversion, breach of fiduciary duty, and intentional interference with a prospective economic advantage. Byce counterclaimed, seeking a judgment declaring that he is the sole author and owner of the software under the Copyright Act as an independent contractor, rather than an employee. (See Why “Work Made for Hire” is a Term made for Confusion.)
The court examined a variety of factors that go into deciding whether an individual is an employee or an independent contractor. (See Avoiding the “Independent Contractor” Trap.) The court concluded that factors suggesting that Byce was an employee included that he was hired for an extended period of time; he was paid a monthly salary rather than a project-specific fee; and that he had other duties, as indicated by the titles “Director of Research and Development” and “Director of Engineering”.
The court acknowledged that Byce’s strongest argument for independent-contractor status arises from JustMed’s failure to provide benefits and to fill out employment forms, and JustMed’s tax treatment of Byce as an independent contractor. Amazingly (to me), the court wrote that these factors must be considered in the context of the company being a technology startup:
JustMed’s treatment of Byce with regard to taxes, benefits, and employment forms is more likely attributable to the start-up nature of the business than to Byce’s alleged status as an independent contractor. The indications are that other employees…were treated similarly. Insofar as JustMed did not comply with federal and state employment or tax laws, we do not excuse its actions, but in this context the remedy for these failings lies not with denying the firm its intellectual property but with enforcing the relevant laws. [Emphasis added.]
As a small start-up company, JustMed conducted its business more informally than an established enterprise might. This fact can make it more difficult to decide whether a hired party is an employee or an independent contractor, but it should not make the company more susceptible to losing control over software integral to its product.
What we should learn from this case:
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Four months ago, I wrote about a Wall Street Journal report that the Internal Revenue Service planned to audit 6,000 randomly-selected U.S. companies to determine the extent to which companies misclassify employees as independent contractors (The “Independent Contractor” Trap Becomes More Dangerous).
Today The New York Times reported that both federal and state officials are cracking down on misclassification (U.S. Cracks Down on ‘Contractors’ as a Tax Dodge). The incentive: To reduce record budget deficits.
By misclassifying personnel, companies avoid paying Social Security, Medicare and unemployment insurance taxes. The article goes on to say that, on average, misclassified personnel do not report 30% of their income. The 2010 federal budget projects that the crackdown will net at least $7 billion over ten years.
Implication for companies of all sizes: If you have been lax in classifying workers, now would be a good time to start doing things correctly. Avoiding the “Independent Contractor” Trap may help you determine how to improve your classification procedures.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
I recently learned that one of my LinkedIn answers in Employment and Labor Law was selected as the Best Answer. The question and my answer are reproduced below.
Question: Which state law matters for employment contract questions (for the CEO of a firm), the law of the state of incorporation or the law of the state where the headquarters are located?
Answer: Please note that you actually have asked two different questions: (1) Which state’s law governs? (2) Where can / must the lawsuit be brought?
Answer to Q1: Most employment agreements will specify the applicable law. For agreements that do not, the court will need to make a “choice of law” decision. Assuming that the employee resides and works in the state where the company is headquartered, that state’s law probably will be chosen.
Answer to Q2: If the agreement has a mandatory jurisdiction and venue provision (stating where the suit *must* be filed), then that provision will apply – even if the law of a different state is to be applied. Otherwise, it is conceivable that multiple states could satisfy venue and jurisdiction requirements, though, again, the state where both parties are located would be most likely.
Getting to what may be the heart of your questions: In an employment-contract lawsuit, where the company is incorporated is not likely to matter.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
A few months ago, I posted Does your Employee Handbook address social media? This post discusses a specific social-media issue that is of great importance to every employer: Online endorsements of products or services by employees.
The Federal Trade Commission has published Guides Concerning the Use of Endorsements and Testimonials in Advertising. Actions that are inconsistent with the Guides may result in an FTC enforcement action.
As I write this post, I am in the process of helping an early-stage client develop a stock-based compensation plan for a key officer. The principal choice was between a stock option and restricted stock.
A stock option is the right to purchase a specified number of shares at a specified price at some point in the future. The option typically “vests” over a period of years – the longer the individual stays with the company, the greater the portion of the option s/he has the right to exercise. At the end of the vesting period, the individual has the right to purchase all of the shares specified in the option.
With restricted stock, shares are granted to the individual immediately but are subject to “reverse vesting”: If the individual leaves the company, a specified portion of the stock is forfeited to the company (if the individual paid nothing for the shares) or is subject to repurchase by the company at the price the individual paid. The portion that is subject to forfeiture or repurchase declines to zero over a specified number of years.
Dana Shultz is a business-savvy lawyer with in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies. Located in the San Francisco Bay Area (Northern California), Dana develops close working relationships with clients based on a positive attitude and rock-solid dependability so he can deliver High-touch Legal Services® - thus the name of this blog.
Dana received an undergraduate degree with honors in Communication Sciences from the University of Michigan and a law degree from Boalt Hall School of Law (University of California at Berkeley). He is licensed to practice law in California.
Before starting his own law practice, Dana provided in-house legal services at companies ranging in size from pre-IPO to multinational. His positions included Vice President and Legal Counsel at VISA, General Counsel at Baron Data Systems, and Senior Staff Attorney at Lexis-Nexis.
+1 510 547-0545
dana [at] danashultz [dot] com
Skype: dana.h.shultz
This blog does not constitute legal advice and does not establish an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
