Articles Posted in Employment

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An employment contract can be a useful tool to protect your business while providing clarity and structure for your employees. An effective agreement should clearly spell out the terms of both employment and termination. In this post we’ll take a look at the basics of creating an employment contract.

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Understanding Employment Contracts

A well-designed contract outlines an employee’s roles and responsibilities. What tasks is the employee expected to perform? What does the job pay? What benefits will the employee receive? Clearly stating this information upfront will protect your business from future lawsuits, provided you abide by the contract.

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rules.jpgOne of the first things any newly formed corporation should do is draft bylaws. Bylaws are a corporation’s operational blueprint. They identify what the business does, how it is run and who is in charge. Here then are five steps to drafting a set of bylaws.

5 Steps to Creating Corporate Bylaws

1. Detail relevant information concerning shareholders. This includes who holds stake in your corporation, what rights they hold and when and where meetings are to be held.

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Converting a limited liability company to a corporation is a relatively easy process. Before I take you through the steps, let’s take a quick look at the differences between the two types of business structures.

3 Differences Between Limited Liability Companies and Corporations

1. LLCs are formed by one or more people (members). These members file Articles of Organization and craft an Operating Agreement. Corporations file similar paperwork. However, unlike LLCs, corporations have shareholders and governing bodies like a Board of Directors.

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You’re ready to hire. Should you go with an employee or independent contractor? Your decision will have implications for your business. In this blog post we’ll address the differences between employees and independent contractors, the benefits of both and how to tell the difference between the two.

What is an Employee?

A simple definition of an employee is someone you hire and directly manage. Employees are generally provided training by the business and work for only one employer. A benefit of hiring an employee is that you get to set a schedule and train the person in the way you want things done. Employers generally have more control over the end result in this situation.

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Business is an ongoing back-and-forth between interested parties. Contract negotiations, whether they be with employees or a competing business, can be contentious. There’s a lot at stake and big feelings are involved. A successful contract negotiation is one where all parties feel they got something out of the deal. This isn’t wishful thinking. By following these four simple tips you can create an environment where everyone is heard and respected.

1. Multiple Meetings

The first tip is pretty straightforward. Break down the negotiation into multiple sessions. The longer you sit at a table arguing over the same points the less likely you’ll come to an agreement. Give the person time to digest the information. Clear eyes and a fresh head make for better judgment.

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Having practiced corporate law in Silicon Valley for 15 years, I must say that there is nothing more frustrating for my clients, who are mostly closely held businesses in the San Jose area, than spending months or years training an employee only to have her leave and go on to compete with the company that trained her. In particular, I represent several staffing and consulting companies and have had to listen to their complaints of how unfair this is from the employer’s perspective. Often, I have to tell these hard working, small business owners that there is almost nothing they can do (except pursue a claim against the employee for misappropriation of trade secrets). In 2008, the California Supreme Court decided Edwards v. Arthur Andersen LLP, making it clear that employee post-employment non-compete agreements are unenforceable in California except in certain very limited circumstances, including in connection with the sale of a good business involving goodwill.

Now, a new California Court of Appeals case, Fillpoint, LLC v. Maas (August 24, 2012) further enforces California’s attitude towards fostering open competition and disfavoring restrictions on employees. In the Fillpoint case, a major shareholder and key employee signed both a three year non-compete agreement related to the sale of his stock, and a one year post-employment non-compete in his new employment agreement. The Court paid particular attention to whether the stock purchase agreement and the employment agreement should be read together as one document. The employment agreement alone would violate California’s view of post-employment non-compete agreements as against public policy. However, in connection with the sale of the business, it could be enforceable. In this case, the shareholder/employee worked for the acquired company until the three year non-compete ran out, but then terminated his employment and went to work for the competition. The company claimed that the one year non-compete covenant in the employee’s employment agreement should restrict him from such competing employment. The employment agreement non-compete provision specifically prohibited him from making sales contacts or actual sales to any customer or potential customer of the company, working for or owning any business that competes with the company, and employing or soliciting for employment any of the company’s employees or consultants.

The court found that the two agreements should be considered integrated because the covenants were executed in connection with the sale or disposition of stock in the acquired company. In particular, they noted the integration clause in the documents, which stated that if there were any conflicts between the two documents, the stock purchase agreement would control. The court went on to consider whether the non-compete and non-solicitation covenants should be void and unenforceable, and found that they were because they were overly broad. In particular, the court noted the over-broad restriction against selling to potential customers of the company.

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Whether it is a group lunch to welcome a new employee to our law firm, a birthday dinner for family, or Moms’ Night Out with friends, I often find myself enjoying Silicon Valley restaurants from San Jose to Palo Alto with a group of six or more. It is not uncommon to have the restaurant automatically add the gratuity, which is usually 18%, to our bill. This has always bothered me – not because I have a problem with paying the 18% (I often tip more than that), but because it is sometimes not obvious on the bill, and they still provide the blank line for you to add a tip, as if they are trying to trick people into double-tipping. Well, if you do not like the automatic 18% gratuity added to your bill, you will be happy to hear about a recent IRS ruling (Revenue Ruling 2012-18, June 25, 2012). This ruling clarifies the definition of tips verses service charges, each of which is treated differently for tax purposes. The result will likely be the end of automatic gratuities.

The IRS ruling states:

“The employer’s characterization of a payment as a “tip” is not determinative. For example, an employer may characterize a payment as a tip, when in fact the payment is a service charge. The criteria of Rev. Rul. 59-252, 1959-2 C.B. 215, should be applied to determine whether a payment made in the course of employment is a tip or non-tip wages under section 3121 of the Code. The revenue ruling provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: (1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment. All of the surrounding facts and circumstances must be considered. For example, Rev. Rul. 59-252 holds that the payment of a fixed charge imposed by a banquet hall that is distributed to the employees who render services (e.g., waiter, busser, and bartender) is a service charge and not a tip. Thus, to the extent any portion of a service charge paid by a customer is distributed to an employee it is wages for FICA tax purposes.”

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As a business litigation attorney in San Jose, I am always concerned when clients are confronted with murky or unclear regulations. For many years, employers have been awaiting clarity on California’s confusing meal and rest break laws. There has been uncertainty as to whether employers must force their non-exempt employees to take their meal breaks, or whether the employer meets its obligations by simply providing employees the opportunity to take their breaks. The California Supreme Court very recently provided much needed clarification on this important employment law issue in the case of Brinker Restaurant Corporation v. Superior Court of San Diego County.

The Court also addressed the proper method to calculate the timing of both meal and rest breaks, putting an end to the guessing game of how many breaks must be provided, and when the breaks must be given.

Employers Do Not Need To Police Employees During Meal Breaks

The Court decided that employers, while under a legal duty to provide meal breaks at appropriate intervals, are not obligated to ensure that employees do no work while on their breaks. The employer’s obligation is simply to relieve its employees of their work duties, relinquish control over the employee’s activities, and permit the employee a reasonable opportunity to take an uninterrupted 30-minute break. Of course, the employer must not impede or discourage the employee from taking the provided break.

Also of great importance was that the Court stated quite clearly that employers are not required to police meal breaks to ensure that no work is performed during the break. In fact, employees are free to work during their meal break, if they decide to do so.

Timing of Meal Breaks

The Court also provided clear guidance on the timing of meal breaks. The first meal break must be provided no later than the end of an employee’s fifth hour of work. A second meal period must be provided no later than an employee’s 10th hour of work. Meal periods can be scheduled prior to the end of the fifth hour of work, including in the first hour of work, and can occur before the first rest break.

Timing of Rest Breaks

The case also clarified when employees are entitled to rest breaks. Employees must be given one 10-minute rest break for shifts from three and one-half to six hours in length, two 10-minute rest breaks for shifts of more than six and up to 10 hours in length, and three 10-minute rest breaks for shifts more than 10 hours and up to 14 hours in length. Employees who work less than three and one-half hours are not entitled to a rest break. The Court also stated that there is no requirement for an employer to give a rest break before a meal break.

Overall, the business community and employer-side employment attorneys view the Brinker case as a common sense legal opinion that offers clear guidelines for handling employee meal and rest breaks. Furthermore, the case may have the effect of curtailing potential class-action lawsuits against California businesses that, prior to the Court’s ruling, could have been accused of meal and rest break violations.

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As a business litigation lawyer in Silicon Valley, I have seen quite a few employee-related issues come up for businesses in San Jose and Santa Clara. For the purpose of this blog, I have combined issues of several clients into one hypothetical owner of a small Internet company. The owner discovered that one of her employees had started a competing online business and was attempting to staff the new business with her current employees. The owner was justifiably concerned as to whether her employee’s acts were illegal, and whether she, as employer, had any recourse. This blog summarizes some of the litigation issues businesses face when employees take actions that violate California’s unfair competition laws. Click here to read my previous blog on unfair competition by competitors.

The owner’s biggest problem was the fact that her employees were being solicited to work elsewhere. Like many small business owners, this owner had worked hard to create a business staffed by well-trained employees who provided customers with excellent goods and services. The deliberate effort by the company’s existing employee to pick up her other employees caused the owner undue stress and frustration.

The soliciting employee in this case was clearly in the wrong. Under California law, while working for a company, an employee cannot solicit fellow employees to leave that company and work for a competitor. To do so is a breach of a confidential relationship, a breach of an implied obligation, and possibly even a breach of fiduciary duty, depending on the soliciting employee’s position. Where the employee is a fiduciary, liability for unfair competition may also extend to the hiring competitor if it knows of the employee’s actions and benefits from them.

While the owner provided a top-notch online service with an established and growing customer base, she was also concerned about her employee’s competing web site. California law permits an employee to make some preparations to establish a competing business while employed. However, the employer may have good cause to terminate the employee if the acts by that employee to establish the business are such that the employee cannot give his or her undivided loyalty to the employer. Once an employee ceases work, the employee may go into direct competition with his now-former employer.

It is also important to note that employers may also sue former employees who misappropriate their ex-employer’s proprietary information or trade secrets. For example, businesses expend a great amount of time, effort, and money in developing customer lists. Such lists are often the most valuable asset a company a may have, and can qualify as both proprietary information and a protected trade secret. Under California law, an employee may not take an employer’s protected customer address list and then begin directly soliciting the customers.

However, to qualify as protected information, the customer list should contain specific information not generally known to the public or competitors. This information might include names of contact personnel, history of previous dealings with the customer, price quotes provided to the customer, and other particular information. A company should also maintain its customer list in a confidential manner. The more rigorous a business attempts to maintain the secrecy of its customer list, e.g. informing employees of the confidential nature of the information, protecting the information with passwords, including notices that the information is proprietary, and other steps, the more likely the court will be to find that the customer list qualifies as proprietary information or a trade secret. A non-solicitation clause in an employment contract, restricting the employee from soliciting the employer’s customers for a certain period of time after leaving, may bolster an employer’s argument that the employee cannot lawfully use the customer list.

Trade secrets, of course, are not limited to customer lists, and include a wide variety of formats, such as business plans, bid specifications, software code, and other documents and information. Such documents and information should be proactively protected by businesses, in case an instance occurs where litigation arises due to an employee’s misappropriation of trade secrets, or other acts of unfair competition.

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As a corporate and business lawyer in San Jose, I have been busy speaking with Silicon Valley business owners about a recent California law affecting companies that have misclassified employees as independent contractors. When the 2008 economic crisis hit, large high tech companies and small start-ups in San Jose, Santa Clara and Sunnyvale, among other cities, adapted by hiring workers as independent contractors to avoid paying payroll taxes and offering benefits to the new hires. Unfortunately, some companies may have inadvertently misclassified employees as independent contractors.

There has been a lot of publicity around the new IRS program allowing businesses to voluntarily correct the misclassification and pay only a low penalty. However, there has not been quite as much news about the recent California law (Senate Bill 459 signed into law by Governor Brown in October, 2011) which makes the willful misclassification of employees and independent contractors illegal and subject to severe penalties. Under the California law, the Labor Commissioner can impose penalties not just on the employer, but also on the employer’s accountant or other paid advisor (other than employees or attorneys). These penalties range from $5,000 to $15,000 for each misclassified person, or $10,000 to $25,000 per violation if there is a “pattern and practice” of violations. There are still more penalties for employers that charge their misclassified employees a deduction against wages for any purpose (including space rent, goods, materials, services, equipment maintenance, etc.), which is considered as another attempt to wrongfully treat them as independent contractors.

What does “Willful Misclassification” Mean?

The definition of willful misclassification in the law is: “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” (California Labor Code Section 226.8 (i)(4).)

Contractors Beware

The labor agency is required to notify the Contractors State License Board if a contractor is determined to have willfully misclassified workers, and the new law requires the Contractors State License Board to initiate discipline against the contractor.

Everyone Beware

The new law also provides for public embarrassment by requiring employers who have willfully misclassified employees and independent contractors to prominently display a notice on their website (or if they do not have a website, then in an area accessible to all employees and the general public) saying that they have committed a serious violation of the law by willfully misclassifying employees, that they have changed their business practices so as not to do it again, that any employee who thinks they may be misclassified may contact the Labor and Workforce Development Agency (with contact information), and that the notice is being posted by state order.

It is not just the employer that needs to worry about misclassification. If you provide paid advice to an employer, knowingly advising the company to treat a worker as an independent contractor to avoid employee status, you can be held jointly and severally liable for the misclassification. This rule does not apply to business lawyers like myself, because attorneys providing legal advice are exempt from this liability, as are people who work for the company and provide advice to the employer.

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