Avoiding the Independent Contractor Misclassification Pitfall

Recently, it's been reported that federal and state officials are going to be taking a hard look at companies using Independent Contractors to ensure that employers aren't passing off employees as Independent Contractors.  Hopefully you're not in the position to question whether or not the tension to save money has led you down the path to misclassification of your employees, but it looks like now would be a good time for a refresher course on Independent Contractors.

The IRS website is a great place to start. The IRS outlines 3 major, common-law areas to focus on: 

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker's job controlled by the payer? 
3. Type of Relationship: Are there written contracts or employee-type benefits? Will the relationship continue and is the work performed a key aspect of the business?

In addition to these key areas, many courts have faced this question and come up with various factors to guide a factual inquiry into an Independent Contractor controversy. These include (among MANY others): 

1. Terms of the contract.
2. Level of skill or expertise needed to perform the work.
3. Which party bears the risk of profit / loss.
4. Where the work is performed.
5. Which party supplies the tools, equipment, work environment, etc.
6. Which party retains discretion about where, when and how to perform the work. 
7. Whether the contractor is paid on a per project or commission basis.
8. Whether business or travel expenses are reimbursed. 

None of these factors in and of themselves is determinative - rather the bottom line will always be the degree of control the employer has over the way the worker accomplishes relevant tasks or duties.  The greater the control over day-to-day activities, the more likely the individual will be characterized as an employee rather than as an independent contractor. 

We've developed a short list of Dos and Don'ts to give you a little help along the way (not to be confused with legal advice ;-):

DO: 

• Develop and maintain specific goals and schedules. Document clear and specific goals and provide timeframes for projects that include interim checkups. Give necessary direction without mandating how the work must be completed.
• Execute project plans that are results focused. 
• Execute a well-written independent contractor agreement (read: see a lawyer!)
• Carefully integrate your Independent Contractors into your business. Use caution when including contractors at company events.

DON'T:

• Include the contractor in office functions (onsite & offsite).
• Provide performance feedback and discipline.
• Provide business cards.
• Provide administrative support.
• Give monetary bonuses.

This will give you a place to start and, most importantly, a reminder to re-evaluate your current Independent Contractor practices in light of heightened scrutiny. Good luck!

The Copyright Funkiness of the Google Book Settlement

Well, Google's Book Settlement website is up and running, the Fairness Hearing is scheduled for February 18, 2010, before the Court in the Southern District of New York and the reaction and speculation is really all over the board. I mean, if this settlement is only for the millions of out-of-print books that are making zero dollars for their authors and publishers, what's the big deal?

Despite the amended settlement agreement, the U.S. Dept. of Justice ("DoJ") still has concerns about what, in its view could be a far-reaching settlement. The DoJ's concerns boil down to three primary areas of interest: Copyright, Anti-trust and Class Action issues.  My primary focus is going to be the Copyright issue since I don't really follow Anti-Trust of Class Action and there are plenty of other more competent people out there to tell you about those things.  So here goes...

According to the DoJ's Statement of Interest, "[u]nder existing law, copyrighted works typically cannot be exploited in all the ways the [Amended Settlement Agreement] contemplates without the prior permission of the rightsholders." The problem that the settlement agreement brings to light something like the Y2K of publishing agreements: Many to most of the out-of-print books were written and published before the digital age and / or the contract just doesn't address who owns the digital rights to such a book. The Amended Settlement Agreement attempts to get around this thorny little issue by creating an "opt-out" mechanism whereby rightsholders could prevent their copyrighted material from appearing. 

This presents a couple of interesting things to think about. First, this would seem to give Google a license to books without permission from the rightsholder and shifting the burden to the rightsholder to say no way Jose! Not too many copyright holders are going to be in love with that idea. Second, from an academic standpoint, if no rightsholder can be found for a given book, isn't it better to throw it into the database rather than let it sit on obscure bookshelves of a handful of libraries?

Go Big or Go Home - BSkyB v. HP-EDS

If you work in the IT outsourcing industry or  follow legal headlines in any way, you've probably seen some press related to this issue - and honestly the numbers are a bit staggering: BSkyB initially claimed £700m in damages (roughly $1.098 BILLION) on a £48m contract ($75.25m). The legal fees are estimated at £70m ($110m) and the initial award - which HP-EDS is seeking to appeal - sits at £200m ($314m). 

At its heart, this is a fraudulent misrepresentation case - no new law was created to reach the decision. The sticker shock of this case grabs headlines because there was a limited liability clause in the contract that limited liability to £30m ($47m).  However, that clause could only come into play in the event of negligence (that is, negligent misrepresentation). The court found that HP-EDS' representations with respect to the time required to complete the project - made during the bidding process for the project - were made fraudulently, opening the door to unlimited liability for HP-EDS to BSkyB.

So why does this case matter? Companies embarking on similar IT or outsourcing services contracts should be concerned whether this case will affect service providers' view of risk (and, consequently, price) and whether their projects will feel the impact of more constrained service provider behavior - especially in the bidding process. This case could affect the way in which service providers can be called to account for its pre-contract sales pitches and the degree to which either party can rely on contractual limitation of liability clauses. 

Many times, the sales team comes in and makes promises about their company's capabilities thinking that they'll worry about those issues later or let the lawyers hammer it out later. This case could serve to change this process significantly by inserting a new tension: greater risk leading to greater cost. Service Providers will argue that this case increases their risk of exposure and justifies a higher contract price. Customers will counter that they don't want to bear the cost of the risk (which is going to be difficult to accurately measure in the first place, especially in the bidding stage where the project may not be fully scoped) and that such costs should be absorbed by the Service Provider anyway. 

Overall, this case is a milestone - but perhaps not in the way it has been hyped.  BSkyB was able to catch a key HP-EDS witness perjuring himself and that, but for HP-EDS' deceit, BSkyB would have selected a different service provider to perform the project. Not everyone is going to be able to gamble the kind of money that BSkyB did in this case. Combine that with the fact that BSkyB was able to prove fraud rather than mere negligence - kicking open the door to unlimited liability - you have a truly unique case on your hands. Many dissatisfied customers may try to go down this path, but far fewer will succeed. However, the fact that a precedent exists should be enough to cause many sales departments to evaluate their current bidding process with an eye to reducing their exposure to these types of claims.