Avoiding Legal Problems with Employees In California
Employee or Independent Contractor?
The primary problem with misclassifying
an employee as an independent contractor is that the employer may wind
up paying all the back
employment taxes–including the employee’s share–plus interest and
Different government agencies use
different tests. Perhaps the one most used is the "common law" test,
where "the most important factor is the right of the principal to
control the manner and means of accomplishing a desired result".
Basically, the more control the employer
has, the more likely the worker is liable to be classified an employee.
The 20-factor test used by the IRS is
much the same.
Recently, though, the IRS has shuffled
most of these 20 factors (although de-emphasizing some of them) into
various portions of a new three-area test that examines behavioral
control, financial control and type of relationship between the
Labor Code Section 3351.5(c) and
Unemployment Code Section 686 state that "employee" includes anyone
with a written agreement stating the work will be considered "work for
of thumb: an independent contractor must earn at least one-third
of his/her income from sources other than your company OR be
incorporated (or have an LLC). Be sure to have a written agreement with
each independent contractor stating that he/she is an independent
contractor and is responsible for his/her own taxes etc.
How to Maintain "At-will"
Employment begins by being "at
will", meaning that either side may terminate without cause.
Make certain your employment agreements
and any employee handbooks specify employment is "at will". If
they do not, fired employees may file lawsuits on the basis that they
were not fired for proper cause.
If there is any probationary period,
the employee should be notified in writing (or the handbook should
state) that successful completion does not alter the at-will employment
If there are written termination
guidelines, be sure these state that they do not alter the at-will
Non-Compete and Confidentiality
Avoid non-competition clauses with
employees (and with your customers) stating that your employees cannot
compete with you or work for your competitors or customers after they
leave your company. In California these restrictions on employees are
generally invalid and can lead to lawsuits by employees.
One case has held that barring a former
employee from doing business with a specifically
named customer, as opposed to a significant part of the industry,
does not violate the law. Obviously, there can be disputes over what
constitutes a significant part of an industry.
agreements, on the other hand, are generally upheld and may cover
customer preferences and sometimes customer lists.
While it is clear that an employer can
require job applicants to sign a confidentiality agreement as a
condition of becoming an employee, having existing employees sign
presents problems. The courts have held that continuation of employment
does not provide adequate consideration for the agreement. Instead, the
employer has to provide something
additional–cash, stock, a bottle of wine etc.–to make the
permissible to state in an employment agreement that the employee will
Divert the employer’s customers during
the period of employment.
Organize a competing business during the
period of employment.
Solicit the company’s employees to
work elsewhere–whether during
or after the period of employment.
In general California courts have held
that contract provisions may validly prohibit former employees from soliciting
(raising the issue of doing business with) the former employer’s
customers–but not prohibit announcements.
In other words, the former employee is entitled to send an announcement
(including to some of the employer’s customers) stating that the
former employee is with another business and giving contact information,
even if trade-secret information is involved.
If the customer then contacts the former
employee to do business, the former employee may proceed.
are in California, your agreements with employees regarding inventions must
comply with California Labor Code Section 2870. This means that
inventions developed entirely on an employee’s
own time without using the company’s equipment, supplies, facilities,
or trade secret information may NOT be assigned to your company
unless they relate to your
business. Making invention-assignment clauses too broad will
nullify the agreement. On the other hand, failure to use an
invention-assignment agreement with employees may mean an employee owns
The purposes of an employee handbook
are to eliminate confusion (and therefore arguments) as to what the
employer’s policies are and to provide for consistency. If similarly
situated employees are not treated the same, lawsuits can result.
Any size business may have an employee
handbook; as a business approaches 20 employees it becomes hard to do
In addition to at-will employment,
harassment, computer-use, and arbitration--which are covered elsewhere
in this handout--consider including the following topics:
of workstations. To avoid privacy issues, if the employer wishes
to be able to inspect workstations, the handbook should specifically
state that the employer has this right.
The handbook should state that it may be amended by the company
at any time.
of Receipt. Have each employee sign an acknowledgment of receipt
of any employee handbook and any major amendments to it. (Essentially,
California case law holds that, in the absence of an acknowledgment
signed by the employee, the handbook does not protect the employer.)
If employee reviews are covered, be sure to leave great flexibility re
timing and salary increases.
Accrued vacation cannot be taken away from employees. However, a limit
can be set so that no additional vacation accrues above a certain level.
Compensation. Be sure to include the following language:
"California workers' compensation laws govern work-related injuries
and illnesses. Employer intends to fully comply with these laws, and
nothing in this document is to be construed otherwise."
Employers with 5 or more employees must:
Give each female employee a leave of
absence of up to four months whenever she becomes disabled by pregnancy,
childbirth, or related medical conditions.
Provide the same benefits for pregnant
workers that it provides for other workers who are unable to work.
and Medical Leave. If you have more than 50 employees be
sure to check the latest requirements in the:
Federal Family Medical Leave Act ("FMLA").
California Family Rights Act ("CFRA").
At the least, state that all federal and California laws
regarding family leave and pregnancy leave will be followed.
Consider adding a section stating that all requests for references must
be forwarded to Human Resources, and that responding directly is cause
for discipline. Also consider stating that the company will verify only
dates of employment and last title and salary amount.
Consider adding provisions re workplace violence:
State that access to the company's
property is limited to those with a legitimate business interest (to
prohibit visits by significant others, etc.).
State that any employee who engages in
any violence in the workplace, or threatens violence in the workplace,
will be terminated immediately.
State that with any question regarding interpretation the employer will
have the final authority to interpret.
Make sure there is a no-waiver provision in favor of the employer.
Follow disciplinary procedures
consistently with each employee.
Before terminating any employee, give
repeated oral and written warnings over time if at all possible. Be sure
to write up your conversations and place them and the written warnings
in the employee's personnel file.
Have a written policy prohibiting
sexual harassment as well as discrimination concerning race, gender, age
and, in California, sexual orientation.
There are two basic types of sexual
"quid pro quo": a promise, express or
implied, that dates or sexual favors are tied to providing additional
benefits or avoidance of negative consequences; and
"hostile workplace": inappropriate
comments, photos, touching etc.
Employers need to expressly give the
employees several different people in the company to contact if they
believe there has been a violation. If there is a claim of harassment,
to avoid liability the employer MUST investigate and, where appropriate,
appropriately discipline the offender (including termination).
Employers may be liable if their
employees use the employer’s equipment to download pornography that is
shown to others or download other files in violation of copyright law.
Employers have a right to review
employee e-mail IF the employees have no reasonable expectation of
Have an express computer-use policy
(either in any employee handbook or in a separate document given to each
employee) which states that:
Employees may only use their computer
systems for purposes related to their work.
Employees may not use the e-mail or
on-line access to obtain or transmit objectionable materials or messages
of any kind.
Employees may not use the e-mail or
on-line access to obtain or transmit any material protected by copyright
law, trademark law etc. without the permission of the owner.
E-mails and materials sent or received
with the company's equipment may be subject to review by the company.
Consider having employees sign a
separate agreement to arbitrate (rather than litigate) all disputes
If you do this, either have them sign
it at the time when they first start work or give them additional
consideration (small amounts of stock or money) as consideration for
signing. If existing employees are not given additional compensation to
sign, the agreement may not be enforceable.
This area is very much in flux, but at
the moment the following are required:
The employee must sign an arbitration agreement.
The arbitration provision must state
that it includes both claims based on statutes and claims based on
The agreement must provide for a
neutral arbitrator, adequate discovery, and a written decision that
permits limited judicial review.
The arbitration clause must provide all
the types of relief available in court, including punitive damages.
employer must pay all mandatory arbitration costs, including the
employee’s share. (Note that this may encourage employees to pursue
claims that they otherwise wouldn’t.)
The clause must be mutual, binding both the employer as well as the
You must post
all required federal and state employment notices. If you are in
California, the California Chamber of Commerce has all the employment
posters that must be posted, plus required Unemployment Insurance and
State Disability Insurance pamphlets and required Sexual Harassment
pamphlets. To order, go to
then click on Required Notices and then
on Required Notices Kit. Prices are currently $55 to $79 dollars per