The High-touch Legal Services® Blog • For Startup Companies

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:

• Being clear about whether an individual is an employee or an independent contractor – and documenting the relationship appropriately – are important.
• If it is clear that the defendant acted highly inappropriately toward the plaintiff, a court is likely to go out of its way to ensure that justice is done.

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.