California Corporate Officers are Employees
This post discusses why – especially now that Assembly Bill No. 5 (AB-5) has taken effect – in California corporate officers are considered employees rather than independent contractors.
California Corporate Officers Employees by Statute
The starting point is California Unemployment Insurance Code Section 621. This Section states, in relevant part:
(more…)“Employee” means all of the following:
(a) Any officer of a corporation.
Protect Your IP when You Hire a Freelancer
This post explains how to make sure that you own work product and intellectual property (IP) when you use a freelancer service. Most of the following first appeared on Quora. Please see How can I protect my source code and its Intellectual Property Right while working with a very large team of remote freelancers (Upwork and Fiverr etc)? Are freelancing platforms ensuring IP protection?
When you use a freelancing platform, you need to ensure that you have an agreement with each freelancer. And that agreement must assign to you all work product and all intellectual property rights.
(more…)ABC Test for Employee Misclassification in California
This post discusses a recent decision by which the California Supreme Court adopted the so-called ABC Test for misclassification of employees as independent contractors.
The relevant case is Dynamex Operations West, Inc. v. Superior Court, decided on April 30, 2018. (more…)
Important Independent Contractor Agreement Provisions
I am writing this post because of a Quora question that I answered. Please see What are the most important provisions in an independent contractor agreement?
Independent Contractor Agreement Business Terms
As concerns business terms, the most important provisions in an independent contractor agreement pertain to the following. (more…)
DTSA (Defend Trade Secrets Act) Requires Notice to Employees
Until recently, trade secrets were solely a matter of state law. However, on May 11, 2016, President Obama signed the DTSA, the Defend Trade Secrets Act of 2016.
Because of the DTSA, trade secret misappropriation suits with an interstate component now can be filed in federal court. For more information about civil and criminal enforcement, please see Trade Secrets Receive Federal Protection. (more…)
“Work Made for Hire” Can Convert a Contractor to an Employee
In California, a “work made for hire” (WMFH) provision in a contract can convert a contractor to an employee. This post describes the statutory basis for this little-known area of the law.
Before providing details, I will note that the (likely unwanted) ability to convert a contractor to an employee will arise only under narrowly-defined circumstances.
- The independent contractor must be an individual rather than a legal entity (a corporation or limited liability company).
- The relevant contract must expressly specify WMFH treatment for the contractor’s work product.
- The contractual relationship must be governed by California law. (I don’t know whether any other states have similar laws.)
Independent Contractor Misclassification Can Be Expensive
I have written several times about potential undesirable consequences of misclassifying an employee as an independent contractor. It’s time for an update.
In 2012, California Labor Code Section 226.8 took effect. That statute is directed toward willful (i.e., voluntary and knowing) misclassification of employees as independent contractors. Consequences can include the following. (more…)
Copyright: Why You Need Presence of Mind about Present Assignments
In Independent Contractors: How to Assign Copyrights, I provided sample language for an independent contractor’s assignment of copyrights to a client. This post explains why the present assignment aspect of that language is critical.
Here (with emphasis added) is the relevant portion of the pivotal sentence:
Contractor hereby irrevocably assigns, transfers and conveys to Client all of its right, title and interest in and to the Deliverables, including complete, unconditional and worldwide ownership of all intellectual property rights in any draft or final version of the Deliverables.
Small-company CEOs Can Be Accused of Sexual Harassment, Too
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.
If You See a Contract Like This, DON’T SIGN IT!
An acquaintance recently showed be one of the worst contracts I have ever seen – one of the worst in the sense of unfair and unbalanced, and perhaps even unconscionable.
The company in question provides contract personnel for IT projects. Here is the agreement that candidates have to sign to be proposed for a client’s project [emphasis added]: (more…)
Court Says Tech Startups Special re Works Made for Hire
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.
Independent Contractors: How to Assign Copyrights
After reading If You Don’t Set the Terms of a Copyright License, a Court Will, a (non-lawyer) friend wrote: “I work with subcontractors on a regular basis in the creative area (photographers, graphic artists, website designers, etc.).? Do you know where I can find a sample [copyright assignment provision]?”
If You Don’t Set the Terms of a Copyright License, a Court Will
Almost a year ago, I wrote about why independent contractors (as contrasted to employees) own the copyrights in works that they create. As a result, a prudent customer will ensure that the contractor assigns its copyrights to the customer (Work Made for Hire – a Term Made for Confusion). This post discusses the implied copyright license that is granted in the absence of an assignment.
If there is no assignment provision, a court will determine that there is an implied license under the copyright. The rationale is that it would be unfair to deprive the customer of all rights in a work for which the customer has paid. The issue, then, will be the terms of the implied license. (more…)
Contractors as a Tax Dodge – NYT Reports U.S. to Crack Down
Four months ago, I wrote about a Wall Street Journal report. According to that report, 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. (See 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 of contractors as a tax dodge 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.
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.
Top Ten Legal Tips for Independent Contractors (Presentation)
This evening I will present “Top Ten Legal Tips for Current and Would-be Independent Independent Contractors” at The Society for Technical Communication Silicon Valley Chapter.
If you are interested in the topics that I will be covering, please check out “Top Ten Legal Tips for Independent Contractors” by signing up for this blog’s Downloads page using the drop-down list in the sidebar.
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.
Stock is Great – but Don’t Give It Away Too Quickly!
Most startups and early-stage companies have limited cash. As a result, they often are eager to use stock as a major component of? compensation. They need to make sure, however, that personnel stick around long enough to make the contributions for which they are being compensated.
In some instances, the corporation creates a tax-qualified incentive stock option plan. Employees are granted options to purchase stock, and they do not have to pay any tax on the stock (actually, on profits from their sale of the stock) until they exercise the option (purchase the stock, presumably, at a low price) and, later, sell the stock. (Tax law is less favorable to independent contractors.)
The “Independent Contractor” Trap Becomes More Dangerous
Earlier this year, I wrote Avoiding the “Independent Contractor” Trap about the dangers that companies face if they misclassify employees as independent contractors. The Wall Street Journal recently reported (Employers and Workers Clash in Court Over ‘Contractor’ Label) that those dangers have increased.
According to the WSJ article, the Internal Revenue Service will audit 6,000 randomly-selected U.S. companies in its first attempt since 1984 to quantify the extent of employee misclassification. The IRS is not taking this step merely to help the individuals involved receive the pay and benefits to which they are entitled – state and federal governments stand to gain billions of dollars every year from withholding taxes, unemployment insurance and workers’ compensation if workers are classified properly.
Even greater than the risk of a government audit is the risk that a disgruntled “independent contractor” will file a wage claim (see Wage Claims – Nasty but [Sometimes] Necessary).
Avoiding the “Independent Contractor” Trap lists factors that can help you determine how to classify workers properly.
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.
Top Ten Legal Tips for Independent Contractors
I just made available on the Downloads page (sign up using the drop-down list in the sidebar) “Top Ten Legal Tips for Independent Contractors,” a document that describes how independent contractors can avoid exposing themselves to unnecessary legal risks.
Here are the titles of the ten tips, which are discussed in greater detail in the document:
- Choose the right type of legal entity for your business
- If you choose a corporation or LLC, comply with applicable formalities
- Buy the right types and amounts of insurance
- Identify and protect your intellectual property
- Use your form of client agreement whenever possible
- Be careful when assigning or waiving intellectual property rights
- Be careful when collaborating or subcontracting
- Be careful with nondisclosure / confidentiality agreements
- Avoid oral agreements whenever possible
- Understand what distinguishes independent contractors from employees
For more information about distinguishing independent contractors from employees (tip 10), please see Avoiding the “Independent Contractor” Trap.
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.
Presenting to the Society for Technical Communication on October 14
On October 14, 2009, I will make a presentation to the Berkeley chapter of the Society for Technical Communication. The topic: Ten Legal Tips for Current and Would-be Independent Contractors.
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.
Avoiding the Independent Contractor Trap
Small companies usually need to conserve cash, so they often turn to independent contractors rather than employees. This makes perfect sense – unless the company falls into what I call the independent contractor trap.
If there is not enough work to justify a regular employee, the company can use an independent contractor when needed. That way the company avoids making unemployment and social security contributions. Also, it does not pay benefits such as health and life insurance, retirement plan contributions and personal time off.
There can be problems, however. If the individual really is doing the work of an employee – is misclassified – the Internal Revenue Service or, in California, the Employment Development Department might reclassify the individual as an employee, erasing the presumed financial benefits.
