• Throw out your restrictive covenants

    My friend Jordan Dolgin has a great post today on an alternative approach to non-solicitation clauses in your employment agreements.

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  • Staffing – Employees vs. Independent Contractors

    I’m often asked whether it’s better for the company to work with people as employees or as independent contractors (also called contractors or consultants – the differences are of style, not meaning). Consulting is common in the technology business in Canada, particularly during any recession, and as businesses staff up it’s an important question to ask.

    Like most everything else, the answer is “it depends”. If you need occasional help, or a discrete task performed, using the services of an independent contractor can make a lot of sense – there’s no fussing with payroll, there are no employment benefits, existing teams are not disrupted, and there is often very little overhead involved. But the employment relationship is generally better suited for situations involving more permanence, and the law reflects this in a variety of ways. Here’s a summary, then, of legal considerations you should take into account when making this decision.

    1. Employers are required to make certain source deductions – like income taxes, Canada pension plan contributions and employment insurance premiums – from salary and wage payments to employees, but not from payments to contractors, who are responsible for paying their own. Companies that in this regard treat personnel as independent contractors when they are in substance employees face the risk of being challenged on that determination, with a possible outcome being assessed for unpaid amounts, plus penalties and interest. Independent contractor agreements typically include indemnities under which the contractor agrees to make the client whole if this happens – but good luck collecting on the indemnity, which typically only becomes relevant because the contractor is having trouble paying its taxes and therefore is probably unable to satisfy a demand under an indemnity.

    2. The employer’s obligation at common law to give reasonable notice on termination can be involved as well. This is because a staff member who was originally brought on as a contractor might in substance be an employee instead, or might over time in substance become an employee, in the eyes of the law.

    An example of a scenario in which this could become an issue would be a staff member arguing after termination that on termination they were actually in substance an employee and not an independent contractor (even though they were described as an independent contractor in company records, in their agreement, and even though source deductions were not made) and therefore entitled to more notice of termination than agreed to in the independent contractor agreement. This claim is typically only worth making for longer-term staff members – people for whom the difference between termination notice for employees at common law and contractual termination notice under an independent contractor agreement can be significant.

    How do you know who is an employee? The law generally looks at the person’s substantive relationship to the business (after all, if it were as easy as just picking the right job description, it would be easy for employers to avoid a whole host of legal obligations to employees.) The cases take a variety of approaches, but in substance if a person has only one client, works in the client’s office, works full-time, uses the client’s computers and other tools, works when and on projects directed by the client, and with the client’s employees, there is a pretty strong case to be made that the person is in substance an employee and not a contractor. And team members who start out as contractors can certainly see their relationship to the company evolve over time in this direction.

    3. If a person who is in substance an employee is compensated as an independent contractor instead, certain amounts such as overtime, vacation pay, statutory notice and severance payments can be due to the person, and if not paid can result in substantial fines against the company and its directors.

    4. The rules are somewhat complex but the result is that in Canada, employees receive preferential income tax treatment of the gains from a stock option grant. The differences between this treatment and the approach taken with contractors can be significant.

    5. The default rules in Canada concerning who owns the intellectual property created for the company treat employees and contractors differently. Under the Copyright Act, for example, the employer generally owns copyrights created in the course of an employee’s employment. Under patent and other forms of intellectual property law the rules are somewhat different, but the essential point is that the result one gets can differ depending on the status of the team member.

    For most companies, however, this is not an issue because they require each new team member to agree to a form of agreement that gives to the company ownership of intellectual property created in the course of employment.

    6. Finally, the rules on SRED tax credits treat employees and consultants differently. Mark MacLeod has the details.

    For a variety of reasons, the choice between treating team members as employees and independent contractors can mean very different results. And treating people who are in substance employees as independent contractors instead can have unexpected and adverse results. It’s a distinction you should take seriously, and consider early.

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  • Employment – Making the Offer and Varying the Contract

    From time to time, I’ll be posting information of interest provided by other lawyers and professionals with whom I sometimes work. Today, I’m posting an article by Daniel Lublin of Whitten & Lublin LLP. Dan recently wrote a piece on a case that illustrates the dangers when employees and employers do not share a common understanding of the terms of employment. For employers, one of the lessons of this piece is to ensure that when the offer is made to the employee, the terms of the offer are clear. If there is an employment agreement to be signed, it should be given to the prospective employee before the job is accepted, and the employee should be given time to reflect and seek advice. And of course, if the terms of employment are varied later on, the variation must be done properly.


    Fresh “consideration” required to support variation of contract

    On Krzysztof Rejdak’s first day of work, he found himself in a pickle. He was given an employment contract with a three-month probationary term and asked to sign his name. For Rejdak, who had already resigned from his previous long-term job, his options were grim: he could either sign his name and agree to be a probationary employee or he could refuse and potentially be unemployed. Fortunately for Rejdak, he later learned in court that not all signed agreements will ultimately be enforced.

    For seven years, Rejdak honed his skills as a sports editor at the Ontario-based sports television network, The Score. When an opportunity came about at The Fight Network Inc., a start-up digital television channel focusing on fighting, Rejdak’s response was swift. He interviewed for an editor’s position.

    Impressed with his skills, The Fight Network then telephoned Rejdak and offered him the job. After they had discussed his title, salary and start date, Rejdak was satisfied with the offer and the next morning he resigned from The Score.

    Later in the day, Rejdak showed up at The Fight Network set to work. But his bosses were surprised to see him there so quickly, since he hadn’t yet signed the standard employment contract given to all new employees. Rejdak was then given a contract containing a three-month probationary period.

    (read the rest here)

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  • Before you start your startup

    I see a lot of people who are at the very early stages of planning a new business. As a result, I’ve developed an informal standard ‘laundry list’ of cautions to pass along to these clients in the first call I have with them.

    Many people are surprised to learn that there are legal steps they should be taking toward their new business before they start building it. But there are, and they’re important, and dealing with these issues can be difficult and expensive if they’re left until some later time. (In a recent example, problems in this area cost a new client months of time in the market and a lot of money in legal fees for a litigator).


    In brief, before you start you need to ensure that (i) any intellectual property and confidential information you create for your new business will be your own; (ii) you comply with any obligations you have in agreements with your current employer or with clients.


    Here’s the background on why these issues come up:

    (1) The default rule in Ontario, absent a written agreement, is that if you’re an employee, the copyright to any work you create in the course of your employment belongs to your employer – but this is subject to any specific agreement with the employer. If you’re not an employee (we generally call these people “independent contractors”) the copyright belongs to you unless there’s a written agreement that says it belongs to your client. (Patent ownership rules are different, and unfortunately, somewhat murky. Heenan Blaikie’s site has a good short summary. I covered these issues in a post a while ago.

    (2) In addition, whether or not there is a written agreement, employees and contractors can have confidentiality obligations (and in some cases, other obligations as well) to their employers / clients.

    (3) In any event, in the technology world, written employment and independent contractor agreements are the norm. As a practical matter, these always say that the employer, and almost always say that the client, owns the creative output of the relationship (all kinds – not just copyright), and these agreements typically also contain an array of other protections for the employer / client that are, at least in the employment context, almost always biased strongly in the employer’s favour. (And, frankly, these agreements often contain drafting mistakes that can make it very difficult to know just what they mean.)

    As a result, if you have a job or are an independent contractor when you start your startup, there are a variety of potential pitfalls. Be aware of them, and plan for them.

    Avoiding Problems

    What should you do you do to avoid these situations? First, when you join a new employer or take on clients, you should read the fine print in the agreements, and make sure you understand it. Try to resolve uncertainties before you’re stuck with them.

    Next, when you’re starting to gear up for your new startup, keep in mind the checklist that U.S. lawyer Yokum Tatu has on his blog. It’s a really great post written by a lawyer who genuinely knows what he’s talking about, and it’s a generally fair statement of the situation here in Ontario (there are differences between the law in California and in Ontario, but at a high level the approach is similar).

    Last, as you start up, make sure you have good documentation in place between co-founders and with any contractors and employees you have working with you. For the most part, these documents are simple, and any lawyer familiar with startups should have them for your free or very inexpensive use. I’ll be posting on these in the not-too-distant future. (Note: there are various forms on this site – you can see them all here).

    These are probably the single best things you can do to help launch your new project; a little attention when you join your new employer or take on clients and also when you first get the itch to start something on your own could save you a lot of aggravation down the road.

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  • Startup ABC’s – Pre-Startup IP Issues

    (This post is a condensation of a conversation Rick Segal and I recently had in a session at StartupEmpire’s StartupSchool)

    I think many people would be surprised to hear that there are important steps you need to take for your new business before – even well before – you start it. But it’s true. The single most common request I’ve had over the past year from startups is to help them deal with intellectual property ownership problems created because of pre-startup work relationships. Indeed, in the last year I’ve seen one startup abandoned because of this issue and one exit scrapped. And many other problems have been worked through, with varying degrees of success and difficulty. All of this is a shame because these are generally easy – at least relatively – problems to address if you get at them early.

    What’s the issue?

    Generally, your employer expects that work you create on the job belongs to them. After all, you’re getting paid for it – this is only fair. Where your work product is protectable by copyright, the Canadian Copyright Act echoes this principle in Section 13(3), which says:

    Where the author of a work was in the employment of some other person under a contract of service or apprenticeship and the work was made in the course of his employment by that person, the person by whom the author was employed shall, in the absence of any agreement to the contrary, be the first owner of the copyright, but where the work is an article or other contribution to a newspaper, magazine or similar periodical, there shall, in the absence of any agreement to the contrary, be deemed to be reserved to the author a right to restrain the publication of the work, otherwise than as part of a newspaper, magazine or similar periodical.

    I’ll make two points about this. First, putting aside cases where the work is an article or other contribution to a newspaper, magazine or similar periodical, the copyright in work “made in the course of employment” belongs to the boss. Second, because this is triggered by employment, it applies only to employees – this means that in Canada the copyright in work created by a person who is not an employee – we generally call these people ‘independent contractors’ – is owned, in the absence of any agreement, by the independent contractor.

    What the Copyright Act says is only the beginning, though. Many employers – probably almost all in the tech sector – are not content to leave this issue to the Copyright Act. They prefer written agreements with their team members, generally because (i) there are intellectual property rights created by their employees (such as inventions, trade secrets and others) that are not addressed by the Copyright Act, (ii) they also work with people who aren’t employees, and are therefore not covered by the Copyright Act, and (iii) there are other aspects to the business relationship, like confidentiality, payment, non-solicitation, and many others, that should also be addressed in a written agreement.

    As a result, one of the first things one gets from a potential new boss is their form of employment agreement or consulting agreement, and sometimes also a separate IP ownership, confidentiality and non-solicitation agreement. Sometimes the provisions of these agreements that deal with IP ownership are very similar to the words used in Section 13(5) of the Copyright Act – they state that the company owns work created “in the course of employment”. But usually they go further than this, and claim for the company not only work that is created in the course of employment, but other work as well.

    Here’s an example. One pro-company formulation of this concept that I see quite often says that anything created by the worker during the calendar period they were working for the company (whether during business hours or not – whether in the office or not – whether using company equipment or information or not – even whether working on a project requested by the company or not) is owned by the company. While this is an extreme example, I see troublesome language in these contracts all the time. And I’ve seen many problems in these contracts caused by drafting errors – even very serious ones (these problems are not, I’m sad to say, rare, and can often make it very difficult to sensibly interpret a contract). I’m not saying, of course, that there aren’t cases where an approach that might at first blush seem extreme isn’t appropriate – but those cases are pretty rare, at least on the ‘net.

    Why is this an issue for tech startups? Well, code, visual design and written work is often the subject of copyright. And all of these forms of work – as well as others that are potentially copyrightable – are often developed by and for tech startups, especially those active on the Web. But if the individual creating that work was working for someone else when the work was created, the chances are pretty good that the Copyright Act or a written agreement between that individual and that someone else raises questions about who actually owns that copyright. And if you don’t settle those questions early – preferably before the work is created – you could have problems – potentially very serious problems – later on.

    How? Here’s an example that mashes together a few cases I’ve worked on recently: A client approached me wanting to sell his business. The main asset was an app. The key team members had written the code in the evenings and on weekends while they were employees of another company. The work was outside of their employment with that company, but to be sure about their position, they approached their supervisor to tell him what they were doing on their own time, and the supervisor verbally acknowledged that that side project was not the property of the company. Fast forward, and the team has left their former employer and is now in their own company, working on the app full-time, and is approached by a potential buyer. The buyer does some basic due diligence and learns that the core of the app was built while the key team members were working for the former employer. The team produces their old employment agreements, and discover that they contain copyright ownership language that seems to be very much in favour of the employer. I say “seems to be” because what’s more, the agreements are not well-drafted – people reviewing the documents can’t say for certain who owns the copyright created during the team’s employment, or since. Worse yet, the buyer is a competitor of the former employer and suspects that when the employer learns about the deal it might want to interfere just to slow down the competition. Cue litigators. Cue sick feeling in your stomach.

    How Do You Deal With This?

    There is only one sure way. Before you sign an agreement giving someone else rights to what you create, review it carefully. If you’re not sure about your position, have it reviewed by a lawyer. If you still have concerns about your ownership of Project X, clear them up with your boss in writing. And if Project X isn’t yet on the horizon, raise it as soon as it is – ideally, before you start working on it, but certainly before you start creating meaningful work product.

    For a variety of reasons, people are often reluctant to raise these issues with their boss. First, they don’t want the boss to know they’re living another life or planning a departure – it’s important, for promotions, bonuses and the like, to be seen as loyal and committed. Second, they don’t want to be seen as a complainer – someone who “can’t see the big picture” and gets bogged down in “unimportant detail”. And of course, sometimes Project X will compete with the employer – the worker has figured out an approach that they think is better – and breaking that news to the boss is trouble for a variety of reasons.

    I think some of these concerns are often misplaced. Many people understand now that no one is just one thing in the world of work. And the best employees often have a lot more than just one thing going on at any one time. Smart employers seek out creative people, and are not surprised when their creativity takes them in new directions. And smart employers know that someone who is particular about detail and principled about setting correct expectations before they start work will behave that way on the job too.

    But only you can decide what the right approach is in your situation. Just be aware that keeping your head down now could create serious problems later on. And keep in mind also that written agreements with your boss sometimes also contain language requiring you to keep your boss informed of even your outside projects.

    Last, you should keep in mind that every member of the team you might be putting together is in the same position – you need to vet all of them to make sure no one is coming aboard with a problem.

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