Employment / Confidentiality Agreement / Non-Compete Covenant

COMMON EMPLOYERS’ MISTAKES

Many companies, sooner or later, will encounter problems with their employees that concern employment law. Some of these problems stem from common mistakes made by employers. While this article highlights some examples of these mistakes, it should be only taken as general information and may not be relied upon as a solution to any specific legal problem. The first mistake employers make is not paying their employees properly. Sometimes it’s because some companies misclassify their employees as independent contractors. Generally, the more control a company has over an individual, the more that person will be considered an employee and vice versa. Other times its due to misunderstandings on the overtime laws. Most employees are generally entitled to minimum wage and overtime pay.

The second mistake employers make is inconsistent treatment of employees. For example, if one employee is fired for consistently arriving late but other employees are not fired for the same behavior, this can open the door for possible discrimination complaints. Employers also need to document all disciplinary actions and avoid any preferential treatment to any employee, especially if such employee is a family member or friend.

Another mistake employers make is not following their own procedures in their company handbook. Some companies do not even have a handbook but if they do, they have to follow their own procedures whenever problems arise with employees. This handbook should also be updated yearly to account for any changes in the law.

Finally, some employers risk serious exposure by not having worker’s compensation coverage. Although Texas (as of this writing) does not require employers to have worker’s compensation coverage, employers can avoid injury lawsuits by having this protection in place. Employers do not realize that if an employee is injured on the job and there is no worker’s compensation coverage, certain defenses are lost by the employer and can subject the employer to a lengthy lawsuit.

Employers need to consult an employment lawyer to make sure that their companies are not at risk from employment lawsuits. Most mistakes can be avoided and lawsuits can be minimized if companies take the time to review their internal employment policies and take the steps necessary to put good procedures in place.

EMPLOYMENT AT WILL

The basic rule of Texas employment law is employment at will, which applies to all phases of the employment relationship and means either party in an employment relationship may modify any of the terms or conditions of employment, or terminate the relationship altogether, for any reason, or no particular reason at all, with or without advance notice, except for some reasons, for examples:

• a statute to the contrary;
• an express agreement to the contrary;
• discrimination, revenge, or employee’s refusal to comply with employer’s request to conduct illegal acts.

EMPLOYMENT HANDBOOK

An employment handbook can help employers clearly explain the workplace policies. Every employee receives the same information about the rules of the workplace and will know what you expect from them (and what they can expect from you), and twill help employers obtain valuable legal protection if an employee later challenges the employers in court. Many employers also prescribe some form of discipline policies. Employers need to fully understand and follow the rules they themselves prescribed in the handbook.

NON-COMPETE AGREEMENT

Most courts have ruled that the public policy is to promote competition, not limit it, and that before an agreement limiting competition will be enforced, the employer must show how non-enforcement would harm it and that enforcement would not place an unreasonable burden on a person’s right to practice a profession or trade or otherwise make a living. Texas law provides that a covenant not to compete is enforceable only if it is ancillary to or part of an otherwise enforceable agreement and contains reasonable limitations as to time, geographical area, and scope of activity

NON-DISCLOSURE AGREEMENT/ CONFIDENTIALTIY AGREEMENT

In the course of performing their duties, employees may have access to or gain knowledge of confidential information concerning the Company. The public does not have access to this kind of information. The information may include, for examples:

• Company’s customers/clients, and other employees;
• Company’s vendors’ lists
• Marketing or pricing strategies;
• Secret recipes/processes, and etc.

The information usually provides the Company competing edges over their competitors The Company has an important business need to safeguard this kind of information and hence may ask employees to sign a Non-Disclosure Agreement or Confidentiality Agreement.

CLASSIFICATION OF EMPLOYEE AND INDEPENDENT CONTRACTOR

It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.

Different Tax Treatment: Generally, employers are required to withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee, while they are not required to do so with independent contractors.

Applicability of Minimum Wages and Overtime Provisions of the Fair Labor Standards Act (FLSA): In order for the FLSAs minimum wage and overtime provisions to apply to a worker, the worker must be an employee of the employer, meaning that an employment relationship must exist between the worker and the employer.

The Test for Classification

The general rule for Internal Revenue Services to use is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

The Department of Labor considers various factors and no one set of factors is exclusive, yet the following factors are generally considered when determining whether an employment relationship exists under the FLSA (i.e., whether a worker is an employee, as opposed to an independent contractor):

1) The extent to which the work performed is an integral part of the employer’s business. If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer and less likely that the worker is in business for himself or herself. For example, work is integral to the employer’s business if it is a part of its production process or if it is a service that the employer is in business to provide.

2) Whether the worker’s managerial skills affect his or her opportunity for profit and loss. Managerial skill may be indicated by the hiring and supervision of workers or by investment in equipment. Analysis of this factor should focus on whether the worker exercises managerial skills and, if so, whether those skills affect that worker’s opportunity for both profit and loss.

3) The relative investments in facilities and equipment by the worker and the employer. The worker must make some investment compared to the employer’s investment (and bear some risk for a loss) in order for there to be an indication that he/she is an independent contractor in business for himself or herself. A worker’s investment in tools and equipment to perform the work does not necessarily indicate independent contractor status, because such tools and equipment may simply be required to perform the work for the employer. If a worker’s business investment compares favorably enough to the employer’s that they appear to be sharing risk of loss, this factor indicates that the worker may be an independent contractor.

4) The worker’s skill and initiative. Both employees and independent contractors may be skilled workers. To indicate possible independent contractor status, the worker’s skills should demonstrate that he or she exercises independent business judgment. Further, the fact that a worker is in open market competition with others would suggest independent contractor status. For example, specialized skills possessed by carpenters, construction workers, and electricians are not themselves indicative of independent contractor status; rather, it is whether these workers take initiative to operate as independent businesses, as opposed to being economically dependent, that suggests independent contractor status.

5) The permanency of the worker’s relationship with the employer. Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee, as opposed to an independent contractor. However, a worker’s lack of a permanent relationship with the employer does not necessarily suggest independent contractor status because the impermanent relationship may be due to industry-specific factors, or the fact that an employer routinely uses staffing agencies.

6) The nature and degree of control by the employer. Analysis of this factor includes who sets pay amounts and work hours and who determines how the work is performed, as well as whether the worker is free to work for others and hire helpers. An independent contractor generally works free from control by the employer (or anyone else, including the employer’s clients). This is a complex factor that warrants careful review because both employees and independent contractors can have work situations that include minimal control by the employer. However, this factor does not hold any greater weight than the other factors. For example, a worker’s control of his or her own work hours is not necessarily indicative of independent contractor status; instead, the worker must control meaningful aspects of the working relationship. Further, the mere fact that a worker works from home or offsite is not indicative of independent contractor status because the employer may exercise substantial control over the working relationship even if it exercises less day-to-day control over the employee’s work at the remote work-site. 

Texas Workforce Commission has listed 20 factors for the test, for examples,

1. Instructions as to the details or methods about when, where and how the work is to be performed;
2. Receipt of training from the company or not;
3. Integration of the worker’s services into the company’s overall operation;
4. Whether the services are required to be rendered personally by the worker;
5. Who is responsible for hiring, supervising or paying helpers;
6. Whether the relationship between the company and the worker is continuous;
7. Whether there are set hours of work; and etc.

The misclassification of employees as independent contractors have presented one of the most serious problems in the U.S. and may be subject the employers to severe penalties from the government.