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Myth #4: Officers of the Company can be Classified as Independent Contractors
There is a propensity among startup companies to classify workers as independent contractors. It is a logistically easier and less expensive option for cash-strapped, emerging companies. To make the determination of whether a worker is an independent contractor or an employee, the courts have developed legal factors that must be analyzed (See here for those legal factors).
While most workers’ statuses are determined under these court-developed factors (called common law factors), California law specifically defines by statute certain workers as employees. One such category of “statutory employees” is officers of a corporation (California Unemployment Insurance Code Section 621(a)). Federal law mirrors California law, and defines officers of a corporation as statutory employees (Internal Revenue Code Section 3121(d)(1)). Thus, corporate officers, such as Chief Executive Officers (CEO), Chief Technology Officers (CTO), Chief Marketing Officers (CMO), Chief Financial Officers (CFO) and Chief Operating Officers (COO), cannot be classified as independent contractors under state and federal law.
Misclassification of workers, including corporate officers, can have costly consequences for employers including expensive lawsuits by workers, EDD and IRS audits resulting in payment of back taxes and significant penalties, and liability for medical care expenses for misclassified workers who were not covered by the company’s workers’ compensation insurance or company benefits.
Myth #5: We can Avoid Some Expenses if our Employees Use their Own Cell Phones and Laptops for Work
Startup employees often are required to use their own personal electronic devices and services for work-related purposes. The courts have recently stepped in to address employers’ financial obligations when employees use their own cell phones, data plans, computers and home internet access for work. And here is the take away: employers must provide expense reimbursement of “some reasonable percentage” when they require employees to use their own personal devices and services.
For example, if an employee needs a personal smart phone in order to clock in and out and/or immediately respond to emails or a home laptop and internet service for mandatory telecommuting then those devices and services would be deemed “necessary” to perform the job. As such, reimbursement of “some reasonable percentage” of the expense is required. The employer can choose to reimburse a given amount (i.e. $25 a month towards a personal cell phone bill) or a percentage based on usage (i.e. if 10% of the data plan is used for work, then 10% of the expense is reimbursed). Such reimbursement is required even if the work usage does not result in any additional expense for the employee.
Staying on top of this issue is critical as an employee who files a legal claim under California’s business-related reimbursement expense law may be entitled to recover attorney fees. This means that if the employer is sued for just $200 for unpaid cell phone expenses, it could also be liable for the thousand of dollars of fees incurred by the employee for use of an attorney to bring the claim.
Myth #6: We Don’t Need to Put it in Writing
It is typical for startups to have founders and employees who have prior personal and professional relationships - colleagues, classmates, friends and relatives. Many startups also strive for casual and collegial cultures. For both of these reasons, amongst others, some startups eschew “getting it in writing.” This, however, can be a far-reaching and detrimental mistake.
Written contracts, policies and other employment documents serve many important purposes, including allowing companies to clearly delineate expectations and benefits, avoiding misunderstandings and potential disputes, ensuring ownership of intellectual property, preserving a competitive advantage, and providing a line of defense in legal disputes.
The following are important to “get it in writing”: