Intellectual Property, Trade Secret Risks and Your Independent Contractors

December 19, 2011

Your contingent workforce is an important and valuable asset to your business. You depend on consultants to successfully initiate, execute and complete projects and assignments that are unique to your company.

Once this talent comes on board and to successfully assist them to effectively manage the assignment, you hand over a company laptop loaded with your company’s proprietary information… customer databases, trade secrets, confidential information meant for internal eyes only. Then the consultant walks out the door, creating a very real and challenging problem if proper steps haven’t been taken to ensure your company’s intellectual property (IP) and trade secrets are protected.

So how can you best safeguard your business while still providing the critical information necessary for your contingent workforce to do their job? According to leading employment counsel at Littler Mendelson and Mark Young, V.P. of Operations and Service Delivery for Synergy Services, it is essential to have contractual language and processes in place prior to hiring contingent talent to keep proprietary information secured.

According to Littler Mendelson, there are several necessary protective layers to consider when dealing with trade secrets that are similar to the way W-2 employees are screened and hired on a permanent basis:

  • Be proactive and take proper measures before even hiring your consultants. Conduct an internal audit to verify what is confidential information versus what can be made public. Confirm who can have access to this information. This is certainly necessary for projects that require a quick hiring process.
  • Be clear and concise in defining your IP and trade secrets. Accurately identify your proprietary information and trade secrets and highlight each particular component’s scope and importance to your organization.
  • Implement an effective login and data security program. Requiring that your consultant's equipment (laptops, software, etc.) have password protection and screen disclaimer information is simply a must. Your data tracking program should be able to track all activity on every laptop used by consultants. If questionable activity appears, be able to immediately isolate that particular equipment/software in use.
  • If you are working with a service provider, regard your relationship as a partnership. Ensure that they understand your policies and procedures, and require your provider to have similar agreements with consultants to keep processes streamlined. Consider drafting your agreements together.
  • Establish a Non-Disclosure Agreement as a standard requirement. Make sure you have the correct contract language in place, including an NDA no matter what type of contingent worker or statement of work (SOW) is being considered.
  • Confirm ownership of deliverables. If the consultant is independent in nature, make sure the consultant has agreed before the start of the engagement to assign the ownership of all work product over to you. In addition, experienced consultants will likely have their own intellectual property that they will bring to the assignment, so consider legal counsel to confirm what concessions can be made from both sides.
  • Consider direct NDAs with consultants. As an extra layer of protection, it makes sense to have an NDA directly with certain consultants who are allowed access to trade secrets in addition to existing NDAs between consultants and your provider.
  • Decide up front how to handle consultants who work for your competitors. This is a tricky situation because while you rely on the expertise and talent of your consultants, you want to protect your IP and trade secrets. Consider adding restrictions to your contracts that keep equipment on property.
  • Conduct exit interviews. Just as you do with W-2 employees, it is important to conduct an exit interview at the end of every assignment. Verify that the consultant returns all equipment and proprietary information with the consultant’s signature. This is an excellent opportunity to remind the consultant of their responsibilities regarding your IP and trade secrets. Confirm that your provider(s) also conduct exit interviews.

Keeping your IP and trade secrets secure should be a critical part of your business management practices, and while 46 states in the U.S. have adopted the Uniform Fair Trade Secret Act, it’s important that you have specific measures in place for your business’ protection. Preventative measures far outweigh potential legal ramifications

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That Dreaded "A" Word – Make It Work For Your Business Now

November 30, 2011

Raise your hand if you’re ready for that external involuntary audit.

Think it will never happen to you? Think again. Although companies facing multimillion-dollar penalties and interest for IC misclassification audits aren’t the lead story on the daily business ticker, the issue of misclassification is still very big news.

A recent study found that nearly one quarter of buyers have never conducted a voluntary internal audit to determine whether they are in compliance with their IC populations. These companies are estimated to have approximately 50 percent of their ICs properly classified, in comparison to 90 percent for those companies who have been audited either internally or externally.

The study also showed that buyers who were recently audited (within the past year) reported lower rogue (uncontrolled) spend, between 15 and 18 percent, than those who had not conducted an audit, whose spend was north of 20 percent.

So what does all this mean? It's simple really. The best way for businesses to protect themselves from IC compliance misclassification is to take the necessary proactive steps to conduct an internal audit to greatly reduce their risk. Most companies believe they don’t have the time, resources or spend to implement such a program, but the long-term security and benefit far outweigh doing nothing now.

So you aren't a subject matter expert in the area of IC compliance. Your company may not have contractor hiring standards and best practices in place. There are experts who can help you determine your best course of action to establish a robust compliance program and provide an ironclad process to save you the angst that inevitably comes with an involuntary audit.

Don’t let rogue spend dictate your level of risk. What can you afford for peace of mind?

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Compliance Enforced at the State Level as California’s New Employment Laws Take Effect in 2012 - Wrongdoers Beware

October 31, 2011

In early October, California Governor Jerry Brown signed into law several bills which will further require employers to properly classify their contingent workforce populations. These laws become effective January 1, 2012 and set precedence for other states to incorporate similar legislation.

Assembly Bill 459 – Willful Misclassification of Workers as Independent Contractors (ICs)

This new law prohibits employers from (1) engaging in willful misclassification of an individual as an IC; and (2) charging fees or taking deductions from such individual's compensation for expenses such as space rental, services, repairs, goods or materials, where deductions would have been unlawful had the individual been properly classified as an employee. In general, any such deduction from an employee’s wages would be unlawful. The law also requires employers who are found to have engaged in such misclassification "to display prominently" for a period of one year on their Internet websites a notice to employees and the general public announcing that the employer "has committed a serious violation of law by engaging in willful misclassification of employees."

Additionally, AB 459 specifies a complaint procedure and an assessment of liquidated damages against anyone who misclassifies an IC, including authorization of the Labor and Workplace Development Agency (LWDA) to assess civil penalties accordingly. The new law also requires that the LWDA notify the California Contractors’ State License Board of any violation, which must then take proper action against the licensee.

Lastly, anyone who intentionally advises the misclassification of an individual as an IC rather than an employee will be jointly and independently liable with the employer.

Assembly Bill 469 – Increased Penalties for Wage Violations

AB 469 ensures workers are properly notified of their specific wage rate and basis of wages at the time of hiring by their employer. Similar notice must also be given to each worker within seven days for any changes to their wage structure. This law will impose more stringent penalties on employers with regard to wage violations beyond the state's current civil and criminal penalties, with an additional requirement that employers pay restitution of wages to the worker. Under AB 469, employers could face misdemeanor charges if they are found to have willfully violated wages statutes, orders or final court judgments and could incur additional penalties. Finally, AB 469 will extend the statute of limitation for collecting such penalties and fees from the present one-year period to three years.

California's new laws reinforce the damaging consequences employers face if they do not have an effective IC compliance program in place. Employee misclassification is no longer solely an issue at the federal level, as other states will ultimately incorporate their own laws to protect workers going forward.

TAGS: Contingent Workforce, Compliance, Misclassification, Independent Contractor, IC, Wages, Penalties

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The IRS Voluntary Compliance Settlement Program – Proceed with Caution

October 24, 2011

In September, the IRS announced its Voluntary Compliance Settlement Program (VCSP), which allows employers/taxpayers to settle past worker misclassification issues by paying a small percentage of applicable employment tax in exchange for proper independent contractor (IC) reclassification going forward. In exchange, the employer:

  • Must pay 10% of the employment tax liability due on compensation paid to workers for the most recent tax year.
  • Will not be liable for any interest and penalties on that amount.
  • Will not be subject to an employment tax audit with respect to the previous misclassification of those workers, pending their proper classification under the VCSP going forward.

Because the taxpayer pays only 10% of the employment tax liability (approximately 10.68% under Internal Revenue Code (IRC) section 3509, participation in the VCSP allows the employer to pay to the IRS about 1% of the compensation paid to the workers being reclassified.

Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the three-year limitation period that generally applies to payroll taxes.

Public, private and exempt businesses are eligible for the program, as are government entities. All applicants must meet the following requirements to be considered for the program:

  • Have classified the workers as non-employees in the past
  • Have filed all required 1099s for the workers for the previous three tax years
  • Must not currently be under audit by the IRS
  • Must not be under audit by the Department of Labor (DOL) or a state agency concerning the classification of the workers in question
  • File Form 8952 at least 60 days before they want to begin treating the workers as employees

For the complete IRS program overview, click here.

While the IRS' solution is intended to save companies on back taxes, interest and penalties stemming from prior misclassification practices, employers should be careful when considering this option as a way to properly classify their employees.

Considerations

It is essential that companies implement extensive due diligence prior to applying for the VCSP, from both a tax and non-tax perspective. Companies need to be clear on the status of their current and former employee populations to weigh the risks versus the benefits of this program and the impact it could potentially have on the company overall. Some specific considerations include the following:

  • Not all companies who apply will be accepted into the program. Due to variable requirements and circumstances, an application may not be accepted, and a company may be flagged for an immediate audit by the IRS.
  • If accepted into the program, companies agree to forgo their rights to assert the Safe Harbor Act of 1978. Companies who meet the requirements and participate in the program would be required to waive their right to the employment tax relief benefit for those misclassified employees.
  • The VCSP does not guarantee immunity from other agency audits. Under the new information-sharing agreements, the program could potentially expose companies to additional liabilities with other federal agencies, specifically the DOL and state agencies which can conduct separate misclassification audits.
  • The program does not protect companies from possible private lawsuits from misclassified employees. Companies would still be at risk for civil and class-action lawsuits filed by misclassified employees seeking compensation for retroactive overtime pay and benefits.
  • Once the program is implemented, companies may be at a higher risk for future audits. The VCSP is for previous employee misclassification only; all future employment classification must be managed properly and accurately to avoid potential audits.

While this program offer from the IRS may be a constructive solution for certain companies dealing with employee misclassification issues, it is still important to seek expert advice to weigh the pros and cons of applying for the VCSP. It is also critical to have an IC compliance program in place moving forward to properly classify IC populations now to avoid such issues in the future.

TAGS: Compliance, Misclassification, Independent Contractor, IC

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