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How does your hypothetical view account for this statement from the OP, or are you considering a different scenario:
Quote:
I found out that she had formed her own company--without explicitly informing me, though my office manager knew about it--that produces a product similiar to that of my company. She was working for this company on her own time and without using anything that could be considered a "trade secret" from my company.
You cant have it both ways, either she was an independent contractor, and thereby entitled to pay her own taxes, and possibly entitled to a "copy" of this proprietary item, or she was an employee and not entitled to a copy of this "proprietary" item, meaning she stole "company" information and used it for her own gain and to compete against her employer.
The real confusion of the issue here comes from the employer's behaviour regarding the employee's status. If you refer to the bulleted list a few pages back, you should get a pretty good idea of what the employee/contractor's status was. After investigation and reading the California Legal Code, it looks like she would probably be considered a common law employee despite the employer's (when it's convenient for them) claim that she was a contractor. There's support for both sides, but the employee side seems stronger.
Initially, she worked 40-ish hours, at an office location, using the employer's assets like computers, software, and phones to produce products for the employer. After a while, she was told they were switching her to independant contractor status. I can only assume that the reason the employer did this was to avoid paying taxes/benefits. Her actual working arrangements did not change significantly. Her hours became a little more flexible and her pay became irregular and came through checks. No further tax information was provided.
Anyway, I've made arrangements to meet with a tax professional to help determine our responsibilities regarding the unpaid taxes. The employee/contractor status will make a big difference. As this matter has evolved, and my understanding of the situation has improved, my primary tax-related question here comes to this: When your employer tells you that you are an independant contractor, apparently in order to defraud the IRS--and stops witholdings/contributions how do you handle your taxes? I guess I'll find out when we meet with the CPA.
My primary legal question comes to this: What do you do when your employer tells you that you are an "independent contractor" in order to deny you benefits/pay taxes, then later attempts to sue you for allegedly possibly improper actions as an "employee"? Not concerned about the copying thing here, but rather the starting of a similiar independant business that I can't find info on.
Anyway, interesting posts. I'm, of course, seeking legal counsel outside of this message board, but I appreciate you all acting as a sounding board to make sure that the lawyers aren't just telling me what I want to hear, or trying to steer me down the path that will make them the most money. Thanks to all for the discussion.
Sponger42, I will agree with you that based on the fact that the company provided space to work in, required specific hours (although perhaps somewhat flexible they were still within a defined range) and provided tools and equipment to perform the work with, they have met the IRS employee test and fail being an independent contractor.
The problem with the taxing agencies is that when she was notified verbally that she was an independant contractor, regardless of wheter IRS agrees with that classification or not, she should have begun making her own quarterly payments and prepared herself for self employment taxes. Since she did not, she may face penalties unless she can win a ruling that she was a defacto employee and shift that tax burden to the ex-employer.
If I were betting, I would put money down that she could. Even if that is so, there could still be penalties imposed by the IRS for missing deadlines while this is being worked out. The IRS and likely the California agencies don't really care too much who pays as long as anyone with any legal responsibility does. They generally go after the deepest pockets as a rule.
Lawsuits are always imprecise and subject to absurd rulings, so you should always be prepared for the worst. My wife was sued over a credit card she never opened, that according to the documents we got had past the statute of limitations by a couple of years and the creditor did not have a signed application. She still lost the case without comment from the judge. We do not know why, but there is now a judgement against her.
Either you or the employer could win regardless of the evidence, but I would think the employer is at much more of losing than your wife is.
Initially, she worked 40-ish hours, at an office location, using the employer's assets like computers, software, and phones to produce products for the employer. After a while, she was told they were switching her to independant contractor status. I can only assume that the reason the employer did this was to avoid paying taxes/benefits. Her actual working arrangements did not change significantly. Her hours became a little more flexible and her pay became irregular and came through checks. No further tax information was provided.
The reason I left the above is this is primarily where we differ, I think we agree on the rest.
While you "assume" the reason for switching was to avoid taxes, I assume that possibly other motives in "switching" her status could have occured,
example:
Its very possible that they hired her, "on the clock" to build a computer program, she built the program, then she became a sales individual (i.e. normally changing her employment status from employee to independent contractor), who's job it was to sell that item. While "on the clock" anything she develops would belong to the company, and she could have figured, hey, I built it, I can improve on it, let the company fly me around the country so I can "sell" the package I built for them, and while I happen to be there, let me show them my version and try to sell it on the side.
It all hinges upon when she created that "proprietary" item, was that during the period of time she was classified as an employee? If so, she stole company information, if she built this item as an "independent contractor" it would be in her interest to claim to be an "independent contractor" because then she would be entitled to a "copy" of what was built having no signed contract.
Well we agree on one thing.. the poster shouldnt proceed with ANYTHING without talking to a lawyer because obviously, the company already has shown they are willing to go to court...
Both parties acted extremely foolish, the company for not clarifying status, getting contracts etc, the employee for, not getting a contract, and of course starting a competitor to the company that pays their salary.
pgh ... one must gather up all the "facts" of this situation through many posts of the OP on this thread and the OP's parallel thread "using company computers for personal gain".
From the very first, the OP asserted a 40 hour workweek performed solely at the employer's place of business, and referred to using the employer's computers and office facilities to create the professional work product as well as the later created personal work product. The inference was that she worked at the employers schedule on his premises, and did not independently schedule her work and have contracted work product goals. That's an employee status.
The OP states that a W-2 was issued by the employer. By implication, a W-9 must have been filled out by the employee to enable the employer to issue a W-2. That's an employee status and a verbal mutual acceptance of that relationship as evidenced by showing up for work, creating work product on site, and subsequently receiving payroll checks to confirm the employee/employer relationship. She did not need an employment contract to enter into that relationship; a simple verbal "you're hired" or "start next week" and showing up for work is sufficient to establish the working relationship.
The employee worked without a independent contract. A verbal arrangement, even if issued by the employer and accepted by default by the employee is not a defensible sign of an independent contractual arrangement. No Form 1099 was issued, which would have been a clear sign of trying to pay someone as an independent contractor (even though they may not really be one).
At no point does the OP indicate that his wife ever had a independent business presence in the marketplace prior to forming her new company in the latter time of her employment relationship. No indication of her own place of business (not even a home office!), no equipment (computers, office equipment, etc.) owned or accessed independently by the employee, no business or sales tax licenses, no telephone line number/business FAX number, no business checking account (even a sole proprietor needs to do that to establish legitimacy as a business for many reasons), no suggestion of an internet listing or business email address, no apparent sales or marketing effort to any other "client" or business, no business insurance, no health policy insurance for her business ... simply no evidence whatsoever of any legitimate sign of having an "independent contracting" business of any sort prior to working for this employer. It simply doesn't add up to any meaningful suggestion that she had or ever created an independent professional contracting business.
The default position of the tax authorities will always be that the relationship was, in fact, an employee/employer relationship. The burden of proof to satisfy the IRS that it was anything else falls upon the employer (and, to a much lesser extent, the employee). Absent clear means tested indications of a legitimate independent business and contracted relationship, she was and would remain an employee.
There are an incredible number of small (or trivial) actions by either the employer or the employee which breach the wall of independence. I've had a contracted relationship refused by the tax folks simply because the "employer" supplied me with the digital format they required for my billable time as an independent contractor. It's a lot easier to breach the wall of "independence" and fall into an employee status than one would like to think when viewed through the eyes of the tax entities who exercise their responsibility to collect taxes.
simply no evidence whatsoever of any legitimate sign of having an "independent contracting" business of any sort prior to working for this employer. It simply doesn't add up to any meaningful suggestion that she had or ever created an independent professional contracting business.
And there simply is no evidence whatsoever of her having this "side" business until she went to work for her "employer". What a coincidence she just "happened" to start a similar business, doing something very close to what she was "hired" to do, using the very same (if not very similar) prioprietary items of the company that she worked for (that she created, and was paid to create) Granted, its not illegal to start a "side" business, but when your using your employers equipment and "proprietary" items, expect to get sued.
You contend that she was an employee, fine, take that argument, but if she is an employee, the employer is guilty of classifying an employee wrong, the employee is guilty of stealing "proprietary" items from the employer. Classifying an employee incorrectly, isnt something that you, as a civilian go to "court" over.. you file a complaint with the state employment agencies.
If she truly is an "employee, the employer in this case, then has every single right in the world to ask her to stop using the STOLEN "proprietary" item that she's using, that she TOOK from her then "employer".
The fact that they classified her incorrectly, would not mean they cant still go after her for damages..
This would be similar to going to work at McDonalds, and selling the big mac sauce. He's already admitted its a proprietary item..
This would be similar to going to work at McDonalds, and selling the big mac sauce. He's already admitted its a proprietary item..
No, that's incorrect. I've been pretty clear that the item(s) in question were independently designed. This would be more like going to work for Hallmark, then selling your own greeting card with a different picture and poem on it, through your own individual business.
Hallmark then files suit stating: "well, they'e both greeting cards printed on cardboard, and you're not allowed to be in the greeting card business, anyway..."
Except Hallmark would probably put you on the payroll, withold taxes, provide you employee benefits, tell you that you were an employee, and make you sign non-compete agreements; rather than telling you that you were an independent contractor. And Hallmark checks probably don't come up NSF half the time.
having now acknowledged that she was an employee, there's a gap here as to her responsibilities to any "proprietary" information she may have gleaned while employed.
I've watched a similar ... almost absolutely identical ... employee "theft" of proprietary information and "trade secrets" at a friend's business.
When the employee was discharged for opening up a competing business using the employer's business trade secrets, business model, client list, manufacturing techniques ... a total clone of the business ... using critical and essential engineering work that he'd been paid to perform as an employee ... the whole situation went to the courts.
The bottom line was that the courts upheld the employee's actions because the employer had failed to have:
1) an employee manual defining the company standards of ethical performance and confidentiality, trade secrets defined, use of company equipment, or non-compete clauses written out in plain language; and,
2) the company, having defined in the manual what constituted trade, engineering, marketing, sales, manufacturing, process, QC testing, and operating secrets, failed to properly identify each and every page of every pertinent document or procedure as "confidential" or "for internal use only" or "trade secret -- confidential". This included information in electronic format on the company computers or marking and identifying any other electronic media or manual, and extended to placarding and reminding employees that technical discussions, research, and company business phone conversations were also privileged business information; and,
3) that these terms and conditions were part and parcel of the professional employment offer made prior to being hired by the company.
There's no laws protecting the employer from this type of employee behavior. The burden is upon the employer to notify the employee ... prior to actually hiring them ... that these standards of performance and behavior are part and parcel of their employment offer.
The employer cannot then come later to the employee after hiring them and having them work for any amount of time and then declare that the employee must sign an agreement to comply with these terms of confidentiality as a condition of continued employment. The employer can only issue the new terms of employment in the manual and ask the employees to voluntarily sign an agreement to comply and abide by the terms for other reasons.
In this case, the continued financial success of the company was highly compromised by the former employee. My friends literally bankrupted their company with legal fees and costs trying to force the former employee's new company to pay royalties or cease operations using any proprietary information stolen from them.
FWIW, the former employee's company has survived rather well in their niche marketplace and he's making a lot of money today. My friends lost it all ... a $3mil/year gross sales, 65 employee company, the land and facilities, their investment, their equipment ... everything went to the auction block. They crushed some essential proprietary equipment rather than let that fall into a competitor's hands ....
FWIW, they'd been taking about $20k/month out of the cash flow after taxes ....
Such is the way of our litigious society today ....
having now acknowledged that she was an employee, there's a gap here as to her responsibilities to any "proprietary" information she may have gleaned while employed.
I've watched a similar ... almost absolutely identical ... employee "theft" of proprietary information and "trade secrets" at a friend's business.
When the employee was discharged for opening up a competing business using the employer's business trade secrets, business model, client list, manufacturing techniques ... a total clone of the business ... using critical and essential engineering work that he'd been paid to perform as an employee ... the whole situation went to the courts.
The bottom line was that the courts upheld the employee's actions because the employer had failed to have:
1) an employee manual defining the company standards of ethical performance and confidentiality, trade secrets defined, use of company equipment, or non-compete clauses written out in plain language; and,
2) the company, having defined in the manual what constituted trade, engineering, marketing, sales, manufacturing, process, QC testing, and operating secrets, failed to properly identify each and every page of every pertinent document or procedure as "confidential" or "for internal use only" or "trade secret -- confidential". This included information in electronic format on the company computers or marking and identifying any other electronic media or manual, and extended to placarding and reminding employees that technical discussions, research, and company business phone conversations were also privileged business information; and,
3) that these terms and conditions were part and parcel of the professional employment offer made prior to being hired by the company.
There's no laws protecting the employer from this type of employee behavior. The burden is upon the employer to notify the employee ... prior to actually hiring them ... that these standards of performance and behavior are part and parcel of their employment offer.
The employer cannot then come later to the employee after hiring them and having them work for any amount of time and then declare that the employee must sign an agreement to comply with these terms of confidentiality as a condition of continued employment. The employer can only issue the new terms of employment in the manual and ask the employees to voluntarily sign an agreement to comply and abide by the terms for other reasons.
In this case, the continued financial success of the company was highly compromised by the former employee. My friends literally bankrupted their company with legal fees and costs trying to force the former employee's new company to pay royalties or cease operations using any proprietary information stolen from them.
FWIW, the former employee's company has survived rather well in their niche marketplace and he's making a lot of money today. My friends lost it all ... a $3mil/year gross sales, 65 employee company, the land and facilities, their investment, their equipment ... everything went to the auction block. They crushed some essential proprietary equipment rather than let that fall into a competitor's hands ....
FWIW, they'd been taking about $20k/month out of the cash flow after taxes ....
Such is the way of our litigious society today ....
I didnt acknowledge she was an employee, I still think she was an independent contractor, but we will have to agree to simply disagree. For every case you sight showing that its ok to take company information and use it, I can show a case to show that its not.
I think overall we're getting off topic of the fact that the poster, admits that this was "proprietary", and without knowing what we're talking about we can go around in circles all day long.
My internet company I run several proprietary programs. All of them I paid to have developed.. If an employee of mine ever walked away taking these programs with them.. I'd surely have them slamed with so much legal crap that they would have wished they never came to work for me. (yes.. I'm that way).. Its my livelyhood, my income, and while I have problems with competition, (I have over 15,000 competitors), I do have a problem with someone taking my own software, and using it against me.. I would assume that the company in question feels the same way, and regardless to how the employee was classified, and regardless of the fact that checks bounced etc.. There is no doubt that the company, paid to have this "proprietary' item developed.
I would not disagree with the employee in this case starting her own company, my disagreement is the fact that they are admitting they are using proprietary information, paid for by the company..
here is a company who was facing CRIMINAL prosecution for taking company files and information.. Dane Spotts & Joni Dourif sue former employees F.M. Bonsall and Ed Dames (http://www.psitech.net/news/legal/lawsuit.htm - broken link)
pgh ... again, if you read the OP's background on this situation through both threads, the OP asserted that there was no proprietary information created or used by his wife for her new business start-up.
I appreciate that a software company has sensitive work product that is truly proprietary, hence your owner's perspective on this situation.
However, I got the impression in reading the whole thread that the company was more hard product creation and manufacturing ... which would have much less value tied up in the "intellectual property" of the business, and mostly value in the physical product and marketing/distrbution/sales aspect of a hard good item(s) ....
We'd need the OP to clarify that to put a finer take on it ....
As an aside ... "intellectual property" and "non-compete" clause interpretation and enforcement vary greatly from state to state. Generally speaking, without clearly defined terms and conditions of employment, there's very few or no laws protecting an employer from adverse employee behavior.
I've even had employees steal hard finished goods off my shelves, or order raw goods from suppliers on my PO's and divert the products to their own use while hiding the invoices from me so I only saw the monthly statement ... and the law(s) allowed me to fire them only because it was an employment at will state.
I couldn't fire them for cause without actually having a criminal prosecution find them guilty of the theft ... and the DA's weren't interested in prosecuting anything less than large felony thefts.
My point here ... the laws of most states tend to favor employees rather than employers when it comes to adverse behavior of an employee. Absent an aggressive employer program to define and enforce acceptable in-house employee behavior, the employee is the one protected by law (or it's default) even if that would defy "common sense" or ethical or honest behavior.
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but I appreciate you all acting as a sounding board to make sure that the lawyers aren't just telling me what I want to hear, or trying to steer me down the path that will make them the most money. Thanks to all for the discussion.
