Employee Misclassified as Independent Contractor; Employee Seeks Triple Damage for Owed Wage and Overtime

Employer shall be very cautious about classifying an individual as independent contractor rather than an employee. If you are an independent contractor and suspect that you should have been treated as an employee, you are protected by Massachusetts law. If your employer violates Massachusetts wage and hour law by owing you wages and overtime pay, you can be awarded treble damage.

It is illegal for an employer to misclassify an individual as an independent contractor rather than an employee in order to avoid paying payroll tax, social security, worker’s compensation, unemployment benefit premium, and other benefits. The biggest common mistake is that employers think if they call an individual independent contractor, IRS will simply acknowledge this characterization. This is not the case. This is not about the label, but about the factors that determine the label.

Our employment law presumes an individual performs services as an employee unless the employer can overcome the presumption by meeting some requirements. The general test is the employer’s right to control and direct the individual’s work. An employer of an employee controls not only what the employee does, but also how he does his work. Independent contractor enjoys more freedom and less control from the employer as to the content and the manner he performs his work. Factors to consider include degree of control, employer’s right to discharge, employer’s delegation of work, hiring practice, training, place of work, duration of relationship, nature of the trade, intent of the parties.

Massachusetts’s employment law makes it difficult to classify an individual as independent contractor. Employer’s misclassification may cause serious violations of employment law, tax law, and benefit law. The Attorney General’s Office will prosecute the employer who violates this law. The punishment is fine, civil and even criminal liabilities. Depends on employer’s intent of violation and seriousness of the offense, the fine could be $10,000 to $50,000 and up to 2 years jail time. Not only the company, but an officer, agent or employee of the company may also be personally liable for the misclassification.

Moreover, if an employee files the complaint in the court and prevails on claims of wage and/or overtime pay owed by the employer, whether due to misclassification or not, court can award the plaintiff triple damage plus attorney’s fee and cost.

What an Individual Needs to Know When Soliciting Investment in Massachusetts

The growing force of cross border equity investment, whether with respect to EB-5 immigration projects or other emerging businesses, have created alarming and ample opportunities for companies and individuals to violate Securities law.

Just recently, I am handling several investment disputes, when the company misrepresented material information that the investor relied on when making the decision. In all these cases, individuals working as the investment agents facilitating the investment and getting commission are not registered with the State government.

In Massachusetts, an individual who is getting paid by engaging in selling, effecting and soliciting securities or offers investment advice shall pass professional exams and register with Massachusetts Securities Division. Different rules apply to person who works for a Financial Industry Regulatory Authority (FINRA) registered company and those who are not FINRA registered company. Almost all financial service or broker dealers are FINRA companies. Narrow exception applies.

“Security” could be a lot of things. The most common ones are stock, equity ownership in any business and EB-5 investment. They may also be partnership interest in LLC, LP or LLP. Promissory notes, investment in real estate or derivative may also be counted. A lot of people become investment advisors by accident, most times, not even knowing their activities shall be governed by State securities agency. It is irrelevant what your title is on the business card, it is your actual activities that define whether you are investment agent or advisor. Failure to register may cause government to stop your activity and/or impose penalties. Federal Securities regulations have separate requirements.

Investment broker or advisor cannot intentionally or negligently misrepresent the investment opportunity. Meaning, they shall not lie about any material aspect of the company that investor rely on in making investment decisions. Neither can they lie about a known fact nor can they omit material information. Penalties could be administrative injunction, repay the investors capital they invested, or even criminal liabilities.

Myth of Trade Secrets

Every business likes to claim that it has some sort of proprietary information that qualifies as trade secret and warrants special protection. Employees in sales and technical positions are more likely to be prevented from misappropriating information involving customers or highly specialized business knowledge.

All proprietary information is not trade secrets. A trade secret could be in different forms. It may be a formula, device, business process, software, or information that gives the employer competitive advantage and is being used in the continuous operation of the business. A trade secret does not need to be a registered patent.

Simply sticking a label on whatever an employer claims to be trade secret will not cut it. There are steps an employer shall take to increase the likelihood that the information is to be defined as trade secret. Mass courts consider several factors: the value of such information to the employer, measures taken by employer to guard the secrecy, amount of capital and effort expended by employer to develop that information, degree of difficulty the information could be duplicated by others.

In terms of reasonable measures to protect the secrecy, an employer shall at minimum restrict outside visitors from the business areas where the trade secret is used, limit access to the secret to those with business needs, maintain the secret in a secure location; and communicate to those who have access to the secret that it is confidential.

Unauthorized access or misappropriating trade secret is not only a tort based on the theory that an employee breaches her or his duty to safeguard this information, but also a civil and criminal liability.

Covenant Not-to-Compete in Massachusetts

Massachusetts court has long limited an employer’s right to restrict a former employee from competing against the employer. Court only enforces such a restriction if employer can show “legitimate business interest” to protect itself from unfair competition by the former employee. Employer’s legitimate business interest has to be balanced against employee’s right and freedom to obtain employment in order to make a living.

An employer’s “legitimate business interest” falls into three general categories: (1) trade secrets; (2) confidential business information; and (3) goodwill. It shall be noted that free from ordinary business competition in the industry is not itself a legitimate business interest. I see the covenant more often with high level staff or senior executives rather than regular or lower level employees.

In addition to protect reasonable and legitimate business purpose, the not-to-compete term also needs to be reasonable in scope, time and geographic scope. The reasonableness is defined by case law. A lot of factors are used to assess the situation, such as, nature and financial position of the employer, employee’s job description, employee’s ability and need to make a livelihood.

Employer shall also enter into such a covenant with the employee at the outset of their relationship. It could become problematic when employer rushes to strike such a deal with the employee at the time of employee’s departure.

Protection of Proprietary Information for Early Stage Businesses

The protection of intellectual property is essential to the success of a business focused on development and marketing of a new technology. The protective approach shall be broad instead of narrow. It may include the use of Non-Disclosure Agreement (NDA) or Confidentiality Agreement, specifically tailored employment or third party service contract, Noncompetition Covenant, ,filing of a Provisional Patent or a trademark.

NDA may be a standalone agreement or a confidentiality clause may be built into a service contract. It is a fairly common practice for a technology start-up to forbid the disclosure of its proprietary technology by another party who needs access to this technology to design systems, platforms or products for the start-up. The goal is not only prohibiting the disclosure, but also clarifying who owns the intellectual property of what specific component. It is the best interest for most businesses to require the service provider to release the ownership of intellectual property right of any work provided. This shall be made clear in the contract.

The company shall require the primary sales representative or software developer to sign a Noncompetition Agreement. That individual could be either an employee or contractor. The extent of the non-competition as to the geographic regions, time and scope shall be reasonable and for legitimate business purpose. Legitimate business purpose is construed as protect trade secret, confidential information and goodwill. If the engagement is with another business, not an individual, the non-competition prohibition could be difficult to impose depends on the circumstances.

Basic Structure of a Business Corporation

Every week, I’ve encountered questions and confusions from many soon-to-be entrepreneurs, and sometimes even entrepreneurs who are running real companies, about power struggles among board of directors, officers and shareholders.

In general, board of directors exercise all the corporation powers except those reserved to the shareholders by statutes, articles of organization or bylaws. It means, business affairs of the corporation shall be managed under the direction of the board. Note the word “direction”. Board does not engage in day to day operation of the corporation, but only “directs”. The board members are elected by the shareholders. The number shall be fixed by the shareholders at the annual meeting. In Massachusetts, the number shall be at least one. If the corporation has more than one shareholder, the number of directors shall not be less than three.

The most basic structure of the officer team has a President, a Treasurer and a Clerk. President is in charge of the daily operation of the business. One would imagine a President has pretty broad authorities, but amazingly, his power is very limited and in most instances only has the authority to enter into routine transactions, unless he is also a Chief Executive Officer (CEO). Treasurer receives and disburses corporate funds. Clerk, also referred as Secretary, takes minutes of board and shareholder meetings and maintains corporate records and seal. All the officers are elected and removed by the board and fulfill their duties at the direction of the board. The scope of their authority shall be enumerated in the bylaws.

Shareholders are the owners of the corporation. They have the right to elect and remove board members, which is a right sometimes shared with the board itself. Shareholders have the right to inspect and copy corporate records. Corporate records include articles of organization, bylaws, resolutions adopted by the board, minutes of shareholder meetings, records of actions taken by shareholders without meetings, financial statements, corporate communications to shareholders, and names and addresses of directors and officers.

The biggest source of contention is who has the right to do what, and what quorum and how many votes are needed to elect or remove a board member or officer, and to determine a corporate action or transaction. Well drafted articles of organization and bylaws shall address all these issues in accordance with the statutes, thus to minimize the likelihood of future disputes.

Wage and Hour Exemption in Mass

By Mass law, employers have to pay employees overtime pay, with some exceptions. Exemptions applies only to highly skilled employees who have achieved a level of proficiency in the theoretical and practical application of a body of highly specialized knowledge, such as, computer and system analysis, programming, and software engineering. It is usually a fact specific task to define what types of jobs within this parameter has "achieved certain level of proficiency", mostly those employees who do not need close supervision and can work independently.

To avoid overtime claims in software industry and emerging businesses that may be able to take advantage of a special minimum wage and overtime exemption for workers in these areas. The employees must be salaried or hourly, with a regular rate of a minimum wage set by the law, and must have a primary duty consisting of either or any combination of:

Application of system analysis techniques and procedures.

Design, development, documentation, analysis, creation, testing, or modification of computer systems or programs; or

Design, documentation, testing, creation, or modification of computer programs related to machine operating systems.