Hire Ground: Employee Or Contractor?
Once you're confident that you've adequately protected your proprietary information and intellectual property, you'll need to assemble a team of people to build your business. You'll have many decisions to make: how many people to hire, when to hire them, what functions they will perform, what adequate compensation would be, what you can afford, and where you'll find these professionals.
What you're probably not thinking about but your attorney is whether you should hire these people as employees or as independent contractors. There are pros and cons to both.
Employee Defined
Generally speaking, an employee is a person you hire and over whom you have the power or right to determine how the work will be performed for the desired end product. Typically, this employment is "at will," which means that it is not for any fixed period of time. Depending on the circumstances, you might draft an employment agreement or simply use an offer letter that specifies the relevant terms. Often, you'll create and provide employees with a handbook or operations manual that will describe the policies and manner of conducting business for your company.
Numerous statutes, such as the Fair Labor Standards Act, govern the employer-employee relationship. You are required, among other things, to pay employees at a rate equal to or above the mandated minimum wage in effect, make withholdings from their paychecks for taxes and unemployment insurance, maintain workers' compensation insurance, and provide benefits for full-time employees, such as health insurance.
You might also want to provide your employees with benefits such as stock options and pension or retirement plan. All these items must be accounted for in your budget, in terms of cash outlay and of the legal, accounting, and administrative expenses required.
A Different Animal
In contrast, an independent contractor contracts to do a piece of work according to his or her own methods. The contractor is subject to your control only in terms of the end product. You have no right to determine the means by which the work gets done.
As with an employee, your relationship with a contractor is contractual, but this contract differs dramatically from an employment agreement. You must give the contractor reimbursement for the work, but there is no minimum wage required. Rather, the amount and type of reimbursement is decided between you and the contractor. If your company's stock option plan allows for stock to be granted to nonemployees, you could offer stock options.
You don't need to make withholdings for independent contractors and you're not expected to provide benefits. Contractors often cover their insurance and expenses.
Unlike an employee, an independent contractor can be either an individual or a company.
Because independent contractors typically work with many companies at once, you should make their hiring conditional on signing a proprietary information and inventions agreement. This contract protects your company's confidential information and intellectual property. You should include an indemnity provision that defines the independent contractor's relationship with the company.
Weighing the Options
At first blush, it might seem an independent contractor is preferable because you can save money, and it requires less responsibility on your part no withholding, no workers' compensation insurance. But there are other factors to consider.
First, ask yourself if you can truly give up control of the means of accomplishing a project. If not, beware. If you begin directing how the project is done, the person will be considered an employee by the courts and you will have violated numerous statutes by not treating the individual as an employee.
Second, decide whether the end product of the contracted work is something you'd want as proprietary information of your company. If so, you'll probably want the work considered "work made for hire" that will be your intellectual property because it was created in the course of employment using your company's equipment and other means.
Third, consider the difference in loyalty likely from an employee who takes a long-term stake in your company versus an independent contractor who freelances with multiple companies and is always looking for the next project.
There are many other factors to consider, but these will give you a running start.
Covering the Bases
Whether you hire an employee or an independent contractor, there are a few things you'll need to do either way. You should draft and have signed an appropriate agreement that governs the employment or contractor relationship. You should also have the employee or contractor sign a proprietary information and inventions agreement as a condition of hiring, before starting work. This agreement is the best means to protect your proprietary information.
You must also specify compensation. You can pay for the services or you can issue stock options.
You should also consider having the employee or contractor sign an arbitration agreement that provides that all disputes, other than the misuse of proprietary information, shall be resolved by binding arbitration, including the waiver of a right to a jury trial. This will dramatically reduce the cost and time required to resolve disputes.
Take some time to think these issues through. Don't hesitate to talk to your lawyer, accountant, tax advisor, banker or fellow entrepreneur for further recommendations.
You need a good team to build your business. But you should protect your business from these people if your relationship with them goes south. At the same time, you need to be very careful to not run afoul of applicable statutes, for which you can incur heavy penalties.
Tammy Johnson Penner, labor and employment expert at the San Diego office of office of Luce, Forward, Hamilton, & Scripps LLP, contributed to this column.
About the Author:
Andrew M. Apfelberg, Esq., is an attorney in the Business Practice Group in
the Los Angeles office of Rutter Hobbs & Davidoff Incorporated...
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