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.
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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.
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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:
- There must not be more than 100 shareholders.
- Permissible shareholders are limited to individuals (other than non-resident aliens), estates, tax-exempt organizations, and certain qualified trusts.
- Only one class of stock is permitted.
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.
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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.
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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.
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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.
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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.)
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Prudent employers have known, for many years, the importance of Employee Handbooks in setting forth a company’s policies and operational procedures. However, the recent increase in the popularity of social media – Facebook, Twitter, blogs and the like – has taken many employers, and their Handbooks, by surprise.
Policies governing mobile phones, computers, Internet access and e-mail no longer suffice. With social media, every employee – for better or for worse, intentionally or unintentionally – can become a spokesperson for the company.
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Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.