The seven deadly sins of business law

By Margaret Leroux

Should have, could have, would have, the workplace is full of "if only" scenarios that keep business owners or managers awake at night. And for good reason.

Following are real-life situations faced by area employers, with advice from legal experts on how you can avoid the mistakes these businesses made.

The seven deadly sins of business law we explore here are of the type that most small- to midsized business owners are usually unaware of until they find themselves in violation — or, in the case of intellectual property and non-compete laws, when they find that their safety net has a hole big enough to drive a business through. Many of these dilemmas can be avoided, say the experts with whom we spoke.

Independent or employee? Tell it to the attorney general

Is the technician who comes to your office to service your fried hard drive an employee of the company that provides your service contract or an independent contractor? You may not care, as long as the hard drive is fixed. But, as a result of a recent change in the state’s independent contractor law, employers who use independent contractors such as computer technicians face stiff penalties if they make mistakes on how they’re classified. This could have serious repercussions for your service contract provider.

What’s more, the Massachusetts Attorney General’s Office has taken an aggressive position that most people who work for an entity will be considered employees, says James E. Wallace Jr., senior partner in the law firm of Bowditch & Dewey. In the Athol Daily News case before the state Supreme Judicial Court in 2003, Wallace successfully argued that adult newspaper carriers are independent contractors for purposes of unemployment compensation.

Last year, the Legislature amended the state’s independent contractor law. The key phrase - that work by an independent contractor must be "outside the usual course of business of the employer" - is the source of the problem. If that computer technician is servicing your customers, he’s working in your usual course of business.

This change in the Massachusetts law gives a much narrower definition to the term independent contractor than the standards used by the Internal Revenue Service, which considers 20 factors in determining worker status in its common law test.

Complicating the independent-contractor-or-employee scenario, the state Department of Revenue uses the IRS 20 factors in determining workers’ status for state tax withholding purposes and state unemployment compensation eligibility follows the standards of the independent contractor law before it was amended.

To make things even scarier for Massachusetts employers, subsequent to the change in the law, the attorney general issued an advisory noting that businesses and individuals, including corporate officers and managers, are liable for civil and criminal prosecution for violation of the independent contractor law.

"It’s now more difficult for companies to claim that a worker is an independent contractor," Wallace says. He advises employers to carefully examine their independent contractor agreements to determine if they comply with the amended law.

"Just having the agreement isn’t conclusive," he says. Employers should have additional documentation that independent contractors aren’t subject to their control in performing the work. Make sure there’s proof that independent contractors provide their own vehicles and tools, that they’re not subject to personnel policies or required to attend meetings, Wallace advises. 

Hostile workplace: E-mail jokes aren’t so funny if you land in court

When employees send off-color or suggestive e-mails, they’re not only wasting company time; they also could be putting their employer and themselves at risk for lawsuits claiming sexual harassment.

"Once the send key is hit, the individual who authored the e-mail loses all control over who the final recipients are," says Robert Kilroy of the labor and employment law department of Mirick O’Connell DeMallie & Lougee LLP. "This not only creates a possible problem for the author, but also for the employer who owns the e-mail system."

E-mails containing off-color jokes that some recipients consider offensive can contribute to a hostile work environment. An employee barraged by them may feel there is no place to go within the company for help. If the complaint isn’t addressed, the likelihood of a harassment claim against the employer increases.

If the e-mails come from a supervisor or if a manager knows about the e-mails and ignores them, the stakes are higher. The range of liability can result in monetary damages, including punitive damages in severe harassment cases.

Training at all levels of the company is the most preventative measure against potential harassment claims, according to Kilroy. "Good training incorporates scenarios designed to make clear that an individual’s view of the world and willingness to engage in off-color banter might not be shared by others in the workplace and may create a hostile workplace environment," he says.

Without training, a supervisor can react defensively and retaliate against the complaining employee by changing work assignments or giving the silent treatment. "This only exacerbates the situation," Kilroy says, "and could result in a case where, even if no sexual harassment was found, the company can be held liable for retaliation."

Massachusetts law requires any employer with six or more employees to have a written policy against sexual harassment and to distribute it annually as well as to every new employee at the time of hire.

A proper sexual harassment policy must include:

• a description and examples of sexual harassment; a statement that it is unlawful to retaliate against an employee for filing a complaint or cooperating in an investigation of a complaint for sexual harassment

• a range of consequences for employees who are found to have committed sexual harassment

• a description of the process for filing internal complaints about sexual harassment with work addresses and telephone numbers of those to whom complaints should be made

• a list of the appropriate state and federal employment discrimination enforcement agencies and directions on how to contact them.

If employers want to insure their workplace isn’t hostile, they need to go beyond distributing the policy against sexual harassment, Kilroy reiterates. "Mere distribution of policy alone will likely prove ineffective in insuring a workplace culture that minimizes the risk of a hostile environment claim."

Comp time or overtime? New labor regs spell out the difference

It was a monster project and the design team put in a lot of extra hours meeting the deadline. When the manager told the group to take Friday off, she mentally gave herself a pat on the back for being an enlightened employer. But, if any of those employees should have been paid overtime instead, the design company could be audited by the Department of Labor, required to reimburse employees for back pay, and possibly be fined.

Overtime regulations were revised last year, for the first time in more than 50 years. The biggest change was in the salary base for overtime eligibility; most employees who are paid less than $455 per week are eligible and any employee who earns $100,000 or more is ineligible.

But there are new duties tests covering executive, administrative and professional employees that complicate the overtime eligibility picture, according to Maura Greene, partner at Bowditch & Dewey, LLP, practicing in the labor and employment and construction services group.

For many employers, the new overtime regulations should prompt a review of the employee handbook, Greene advises, especially if it’s been cobbled together from various sites on the Internet. "It’s fairly complex," Greene says. "Job titles are irrelevant because an employee’s responsibilities may not meet the duties test for exemption."

The new regulations specifically address computer-related occupations. Though a wide range of job descriptions are exempt, the regulations note that employees such as drafters, who are not primarily engaged in computer systems analysis and programming, are not exempt. To be sure they’re in compliance, employers may need to conduct a case-by-case review of job descriptions.

The regulations also offer some protections to those exempt employees paid on a salary basis. For example, employers can’t make deductions for time when work is not available. If an employer makes improper deductions, the exemption from overtime pay will be lost for all employees in the same job classification. A fact sheet explaining the Department of Labor’s overtime regulations is available online at www.dol.gov/fairpay.

There is a "safe harbor" provision contained in the regulations for employers who demonstrate that the deductions were isolated or inadvertent and that the employee was reimbursed. Most importantly, the regulations note that employers should have a clearly communicated policy prohibiting improper deductions including a complaint mechanism.

Protect your investment– in ideas

When a large, multi-national corporation asked a local manufacturer to develop a sub-system to solve a technical problem for one of its components, the business jumped at the chance to diversify. A big incentive was the potential to add production of the component part to its already successful product line – one that the entrepreneur-led company had already protected with a patent, trademark and copyright. The manufacturer spent countless hours and significant capital perfecting the new system, but didn’t invest in protecting their newly-developed intellectual property. When the project was completed, the large corporation used the system, but sent the manufacturing overseas.

Protecting your company’s intellectual property is as important as securing the premises or safety of your employees. Yet, many small businesses are so focused on getting the product out the door, they ignore or take for granted the important investments they’ve made in ideas.

The considerable costs involved in researching, developing and marketing a product should make protecting the process imperative. In fact, our country’s founders felt so strongly about the importance of intellectual property rights that they’re included in the Constitution.

"There’s a tremendous benefit in protecting the results of the creative process," says Gerry Blodgett, partner in the Worcester law firm Blodgett & Blodgett, which specializes in intellectual property law. "It encourages people to invest in new ideas because they are more likely to make a profit," Blodgett says, "and the beauty of the process is, having this monopoly is only as valuable as the idea."

Filing for a patent, trademark and copyright are obviously an entrepreneur’s first line of defense; so are non-disclosure agreements. Entrepreneurs themselves should resist the temptation to talk or write about a new invention. Information published before the patent is filed triggers the one-year time limit for filing. "Entrepreneurs tend to have the notion that, if their idea is good enough, they will be taken care of," Blodgett says.

Not so for the local manufacturer described above. Without the ability to recoup its considerable investment because it lacked the protection of a patent or trademark, the company had no grounds to claim infringement. The business eventually filed for bankruptcy protection. Hundreds of jobs were lost and so was a valuable contribution to the local economy.

Employers and illegals trapped in limbo

The morning mail brought bad news for a manufacturing company in Central Massachusetts: a dreaded no-match letter from the Social Security Administration. This notification - that the names and social security numbers the employer had reported didn’t match names and numbers on file -meant trouble, even though the company had paid the required Social Security taxes on the employees’ earnings.

An influx of illegal immigrants has increased the potential for such a scenario for employers in Central Massachusetts, according to Kirk Carter, a director of the law firm Fletcher Tilton & Whipple, where one of his areas of concentration is immigration law.

They find work in low wage, unskilled jobs that are among the most difficult for employers to fill: in nursing homes as aides, in manufacturing on assembly lines; jobs that pay only $8 to $10 an hour.

Many of these immigrants entered the country legally, but have over-stayed their visas and now face harsh penalties. With the prospect of having to return to their home country and with being prohibited from re-applying for a visa for three years or even 10 years, depending how long they’ve overstayed, these illegal immigrants are not coming forward to ask for help.

They’re among five to six million illegal immigrants currently in the U.S. with no way to rectify their situation. A few legislative solutions have been proposed, "but none seems to be getting much traction," Carter says.

These illegal immigrants "may be married to a U.S. citizen, have a job and kids, but they’re in limbo," he adds.

So are employers of workers that the Bureau of Citizenship and Immigration Services (BCIS formerly known as the INS) deem in violation.

"The law is that it’s the employer’s responsibility," Carter says. "If you know your employees are illegal, you’re exposed. If you continue to employ them knowing they’re illegal, you could be fined from $100 to $1,000 a day."

He advises employers to "take your responsibility seriously. Continue to verify the eligibility of every employee."

That means complete an I-9 Employment Eligibility Verification form within three days for each and every new hire.

"Most employers only want to do the minimum," Carter concedes. "If they scratch the surface too deeply, they’re afraid of what they’ll find."

The employer described above met with the employees challenged by the SSA and found that an error in names rectified the standing of some. Others acknowledged they used bogus numbers and their employment was terminated.

Non-compete doesn’t mean no competition

The sales rep for an office supply company was a supervisor’s dream: bright, high energy, dependable and personable. When she resigned, the boss was disappointed; when she went to work for the competition and visited her old customers, the now-furious boss went to court, seeking an injunction against the former sales rep.

Taking swift action against an employee who violates a non-compete agreement is certainly one way a business can protect itself. But the defense should have started when such an employee was hired by requiring her to sign a well-written non-compete agreement, according to Louis Ciavarra, partner in the Bowditch and Dewey law firm.

A non-compete agreement is simply what it says, an agreement, usually included in terms of employment, that prevents an employee from doing business that competes against the employer. Non-compete agreements can specify length of time and geographic areas.

Not all employees need to sign; only those with access to sensitive information or those who would be able to start a business that would compete against the employer.

The catch is these agreements have to be structured so the intent is to protect the following:

• trade secrets

• confidential business information

• the goodwill of the company

They can’t be used solely to keep competition at bay.

"A non-compete agreement is an enforceable contract only when it serves a legitimate business purpose," Ciavarra says. "If it’s only to restrict competition, then it’s not."

If an employer expects the court to recognize the validity of its non-compete agreement, it had better be specific about what the agreement is protecting. A non-compete agreement should be narrow rather than wide.

"Be reasonable in your expectations," Ciavarra says. "If the restrictions are too broad or too long, the agreement will not be enforceable." The veteran business litigator notes that 20 years ago it was common for non-compete agreements to be in force for three years. Now a year is standard, sometimes even six months.

Employers should take the following steps to bolster a non-compete agreement:

• Get a written non-compete agreement at the beginning of employment and update it anytime an employee’s duties or responsibilities change materially.

• Establish written policies on dissemination of company information.

• At the time of termination, make sure there’s an exit interview, a written re-affirmation of the non-compete agreement and have the employee sign it.

Checking references: can’t ask, won’t tell

What you don’t know about a new employee can be harmful if you haven’t been diligent about checking references. In an infamous local case, the company that ran the Loft bar in the former Centrum was sued for negligent hiring when a bartender assaulted a patron. The employer knew that the bartender had a criminal record but didn’t check to see that it included criminal assault.

That case occurred in Worcester almost 20 years ago. Since then, in another high profile Massachusetts case, an enraged employee shot and killed a Wakefield technology company’s senior vice president for human resources and six others after his salary was garnished to pay a tax debt. News accounts after the tragedy noted that the employee had been dismissed from his previous job for making threats.

Finding out that your potential new employee is or was a violent offender is a big challenge in today’s legal climate, where threats of lawsuits claiming defamation and rights to privacy prevail. An employer could run a criminal check, but that information would be limited to a person’s current status; no criminal history would be available.

The situation is particularly tough in Massachusetts, one of a few states where there are no shield laws limiting employers from liability based on information in a job reference.

"It’s a major dilemma for employers trying to get references," says Demitrios Moschos, partner in the law firm of Mirick O’Connell DeMallie & Lougee and chair of the firm’s labor and employment law department. "A labor lawyer’s standard advice is to give only dates of employment and job titles."

The only practical way an employer can get additional information, Moschos continues, is to "have potential employees sign a release that shields the employer from any lawsuit as a result of giving out information about the employee."

Employers on the other side of the reference seeking scenario should limit their liability by training and establishing a policy for inquiries.

"One person in the company should be trained and designated as the only one to handle reference inquiries about former employees," Moschos says. "And, without a release that person should confirm only dates of employment and job titles."

Margaret LeRoux is a contributing writer. She can be reached at mleroux@charter.net