Employment Law Update: Independent Contractor or W2 Employee?

To determine whether a worker is a W2 employee vs. an independent contractor, the IRS looks at several factors, but the most important factor is the amount of control the employer exerts over the worker’s behavior.

What this means is whether the employer directs or controls how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.

The behavioral control factors fall into several categories:

  • Type of instructions given;

  • Degree of instruction;

  • Evaluation systems; and

  • Training.

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IN THE NEWS: Bryan Tuk's Editorial in The Pittsburgh Current on PA HB561

You can click here to read Bryan’s editorial in The Pittsburgh Current. Below is an excerpt:

While performing for an audience can be a thrill, it is also a job that requires professional musicians to work very hard in order to make a living.  

The economics of the local music business aren’t pretty either.  The money that is offered most local musicians for your average gig at a bar or hotel would shock people if they knew.

With all of these pressures in mind, seemingly out of left field, the Pennsylvania House of Representatives passed a Bill recently that will make the economic life of the professional musician much, much more difficult.

This odious piece of legislation is House Bill 561.   

HB561 allows liquor licensees (hotels, bars, restaurants) to hire minors to perform as musicians, but the same bill expressly prohibits any payment to those performers for their services.  Yes, you read that correctly.  The language of the Bill actually forbids payment to minors even though they are working at the establishment.  

Selling Your Business - Where to Start?

Whether you have built up your business over decades, or your business has developed quickly, selling a business can be a tricky process.  It may have taken you five years or twenty years, but either way, starting and growing a business to maturity is an all consuming proposition.

Many times, the sale of a business can set up your retirement if you can realize enough value from the transaction.  But how do you begin?

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Key Documents to Protect Your Business: Restrictive Covenants

Often when I speak with a business owner about their business, their co-founders or their workforce, the topic of whether or not anyone has signed a restrictive covenant comes up.  Surprisingly, many businesses don’t have these agreements in place when they should, and trouble results.

Everything described in this post depends on the individual facts and circumstances of the matter – specifically the exact language of the document.  This is for general background knowledge only and if you have any questions regarding restrictive covenants in your specific situation, please email me or call me at (610) 393-6763.

What’s a restrictive covenant?  Good question.  A restrictive covenant is an agreement between the company and an individual employee that prevents the company from the individual from taking action that may injure the company when the individual’s employment is over.  Of these covenants can occur either in stand-alone document or as provisions in an employment contract.

Restrictive covenants are appropriate for companies in any industry that have sales people, key employees, co-founders, or anyone who has an intimate knowledge of the business (such as the ingredients in the “secret sauce”).  If it’s a restaurant, it could be key recipes.  For sales or service oriented companies, protectable information could be customer lists and contact information.  For tech companies, there could be software code that needs to be protected.  Restrictive covenants are also extremely important for professional services businesses such as medical practices and engineering firms.

There is also a statute in Pennsylvania that protects certain trade secrets that has some degree of overlap, but we’ll cover that in a separate post.

Generally, the term “restrictive covenant” encompasses three separate types of restrictions.

The first type of restriction is certainly the most widely known: the non-competition agreement.  In the non-competition covenant– commonly known as a “noncompete agreement” – the parties agree that the employee following the end his or her employment with a company will not take any action to compete with the company within the relevant market.  The actual geographic or market restrictions have to be specifically described in the contract itself.  The language used in the noncompetition covenant must be precise. This is generally not a task that I advise my clients to do by themselves without counsel.

If the language contained in the noncompetition covenant is  unclear, and the noncompetition covenant has to be enforced in court, know that trial court judges in Pennsylvania have tremendous discretion to modify the terms of the agreement according to the judges on equitable principles. In other words,  if you were involved in a dispute over a vaguely worded noncompetition agreement, ultimately the trial court judge can essentially rewrite the terms of the noncompetition covenant according to that judge’s sense of fairness, and perhaps not the same thing that the company intended.

The second type of restrictive covenant is usually a nonsolicitation covenant relating to the company’s customers or prospects.  What this provision in the contract does is prevents the departing employee from contacting we’re soliciting any of the companies customer base.  In some cases, the covenant also can protect the company’s prospects that have been contacted by the employee  in the recent past.  It should be noted that courts in Pennsylvania often interpret this as a one-way restriction: the former employee may not contact customers or prospects in violation of the agreement.  However, if those customers or prospects initiate the contact with the employee, then that often is not seen as a violation of the agreement.

The third and final type of restrictive covenant commonly used is a nonsolicitation covenant relating to the company’s employees.  This provision is designed to prevent a single departing employee from recruiting other company employees to also leave the company. This is designed to prevent the nightmare scenario where all of the company’s top sales people leave at the same time, potentially crippling the business.

In a future post, more detail to come on the enforceability of these agreements.  Stay tuned…