Avoiding Legal Problems with Employees In California

  1. Employee or Independent Contractor?

    1. The primary problem with misclassifying an employee as an independent contractor is that the employer may wind up paying all the back employment taxes–including the employee’s share–plus interest and penalties.

    2. Different government agencies use different tests. Perhaps the one most used is the "common law" test, where "the most important factor is the right of the principal to control the manner and means of accomplishing a desired result".

      1. Basically, the more control the employer has, the more likely the worker is liable to be classified an employee.

    3. The 20-factor test used by the IRS is much the same.

    4. Recently, though, the IRS has shuffled most of these 20 factors (although de-emphasizing some of them) into various portions of a new three-area test that examines behavioral control, financial control and type of relationship between the parties.

    5. Labor Code Section 3351.5(c) and Unemployment Code Section 686 state that "employee" includes anyone with a written agreement stating the work will be considered "work for hire".

    6. One rule of thumb: an independent contractor must earn at least one-third of his/her income from sources other than your company OR be incorporated (or have an LLC). Be sure to have a written agreement with each independent contractor stating that he/she is an independent contractor and is responsible for his/her own taxes etc.

  2. How to Maintain "At-will" Employment.

    1. Employment begins by being "at will", meaning that either side may terminate without cause.

    2. Make certain your employment agreements and any employee handbooks specify employment is "at will". If they do not, fired employees may file lawsuits on the basis that they were not fired for proper cause.

    3. If there is any probationary period, the employee should be notified in writing (or the handbook should state) that successful completion does not alter the at-will employment status.

    4. If there are written termination guidelines, be sure these state that they do not alter the at-will status.

  3. Non-Compete and Confidentiality Provisions.

    1. Avoid non-competition clauses with employees (and with your customers) stating that your employees cannot compete with you or work for your competitors or customers after they leave your company. In California these restrictions on employees are generally invalid and can lead to lawsuits by employees.

    2. One case has held that barring a former employee from doing business with a specifically named customer, as opposed to a significant part of the industry, does not violate the law. Obviously, there can be disputes over what constitutes a significant part of an industry.

    3. Confidentiality agreements, on the other hand, are generally upheld and may cover customer preferences and sometimes customer lists.

    4. While it is clear that an employer can require job applicants to sign a confidentiality agreement as a condition of becoming an employee, having existing employees sign presents problems. The courts have held that continuation of employment does not provide adequate consideration for the agreement. Instead, the employer has to provide something additional–cash, stock, a bottle of wine etc.–to make the agreement binding.

    5. It is permissible to state in an employment agreement that the employee will not:

      1. Divert the employer’s customers during the period of employment.

      2. Organize a competing business during the period of employment.

      3. Solicit the company’s employees to work elsewhere–whether during or after the period of employment.

    6. In general California courts have held that contract provisions may validly prohibit former employees from soliciting (raising the issue of doing business with) the former employer’s customers–but not prohibit announcements. In other words, the former employee is entitled to send an announcement (including to some of the employer’s customers) stating that the former employee is with another business and giving contact information, even if trade-secret information is involved.

      1. If the customer then contacts the former employee to do business, the former employee may proceed.

  4. Employee Inventions.

    If you are in California, your agreements with employees regarding inventions must comply with California Labor Code Section 2870. This means that inventions developed entirely on an employee’s own time without using the company’s equipment, supplies, facilities, or trade secret information may NOT be assigned to your company unless they relate to your business. Making invention-assignment clauses too broad will nullify the agreement. On the other hand, failure to use an invention-assignment agreement with employees may mean an employee owns the invention.

  5. Employee Handbooks

    1. The purposes of an employee handbook are to eliminate confusion (and therefore arguments) as to what the employer’s policies are and to provide for consistency. If similarly situated employees are not treated the same, lawsuits can result.

    2. Any size business may have an employee handbook; as a business approaches 20 employees it becomes hard to do without one.

    3. In addition to at-will employment, harassment, computer-use, and arbitration--which are covered elsewhere in this handout--consider including the following topics:

      1. Inspection of workstations. To avoid privacy issues, if the employer wishes to be able to inspect workstations, the handbook should specifically state that the employer has this right.

      2. Amendments. The handbook should state that it may be amended by the company at any time.

      3. Acknowledgment of Receipt. Have each employee sign an acknowledgment of receipt of any employee handbook and any major amendments to it. (Essentially, California case law holds that, in the absence of an acknowledgment signed by the employee, the handbook does not protect the employer.)

      4. Reviews. If employee reviews are covered, be sure to leave great flexibility re timing and salary increases.

      5. Vacation. Accrued vacation cannot be taken away from employees. However, a limit can be set so that no additional vacation accrues above a certain level.

      6. Workers Compensation. Be sure to include the following language: "California workers' compensation laws govern work-related injuries and illnesses. Employer intends to fully comply with these laws, and nothing in this document is to be construed otherwise."

      7. Leave.

        1. Pregnancy. Employers with 5 or more employees must:

          1. Give each female employee a leave of absence of up to four months whenever she becomes disabled by pregnancy, childbirth, or related medical conditions.

          2. Provide the same benefits for pregnant workers that it provides for other workers who are unable to work.

        2. Family and Medical Leave. If you have more than 50 employees be sure to check the latest requirements in the:

          1. Federal Family Medical Leave Act ("FMLA").

          2. California Family Rights Act ("CFRA").

        3. Stopgap. At the least, state that all federal and California laws regarding family leave and pregnancy leave will be followed.

      8. References. Consider adding a section stating that all requests for references must be forwarded to Human Resources, and that responding directly is cause for discipline. Also consider stating that the company will verify only dates of employment and last title and salary amount.

      9. Violence. Consider adding provisions re workplace violence:

        1. State that access to the company's property is limited to those with a legitimate business interest (to prohibit visits by significant others, etc.).

        2. State that any employee who engages in any violence in the workplace, or threatens violence in the workplace, will be terminated immediately.

      10. Interpretation. State that with any question regarding interpretation the employer will have the final authority to interpret.

      11. Waiver. Make sure there is a no-waiver provision in favor of the employer.

  6. Disciplinary Procedures.

    1. Follow disciplinary procedures consistently with each employee.

    2. Before terminating any employee, give repeated oral and written warnings over time if at all possible. Be sure to write up your conversations and place them and the written warnings in the employee's personnel file.

  7. Harassment Issues.

    1. Have a written policy prohibiting sexual harassment as well as discrimination concerning race, gender, age and, in California, sexual orientation.

    2. There are two basic types of sexual harassment:

      1. "quid pro quo": a promise, express or implied, that dates or sexual favors are tied to providing additional benefits or avoidance of negative consequences; and

      2. "hostile workplace": inappropriate comments, photos, touching etc.

    3. Employers need to expressly give the employees several different people in the company to contact if they believe there has been a violation. If there is a claim of harassment, to avoid liability the employer MUST investigate and, where appropriate, appropriately discipline the offender (including termination).

  8. Computer-use Policies.

    1. Employers may be liable if their employees use the employer’s equipment to download pornography that is shown to others or download other files in violation of copyright law.

    2. Employers have a right to review employee e-mail IF the employees have no reasonable expectation of privacy.

    3. Have an express computer-use policy (either in any employee handbook or in a separate document given to each employee) which states that:

      1. Employees may only use their computer systems for purposes related to their work.

      2. Employees may not use the e-mail or on-line access to obtain or transmit objectionable materials or messages of any kind.

      3. Employees may not use the e-mail or on-line access to obtain or transmit any material protected by copyright law, trademark law etc. without the permission of the owner.

      4. E-mails and materials sent or received with the company's equipment may be subject to review by the company.

  9. Mandatory arbitration.

    1. Consider having employees sign a separate agreement to arbitrate (rather than litigate) all disputes regarding employment.

    2. If you do this, either have them sign it at the time when they first start work or give them additional consideration (small amounts of stock or money) as consideration for signing. If existing employees are not given additional compensation to sign, the agreement may not be enforceable.

    3. This area is very much in flux, but at the moment the following are required:

      1. The employee must sign an arbitration agreement.

      2. The arbitration provision must state that it includes both claims based on statutes and claims based on contracts.

      3. The agreement must provide for a neutral arbitrator, adequate discovery, and a written decision that permits limited judicial review.

      4. The arbitration clause must provide all the types of relief available in court, including punitive damages.

      5. The employer must pay all mandatory arbitration costs, including the employee’s share. (Note that this may encourage employees to pursue claims that they otherwise wouldn’t.)

      6. The clause must be mutual, binding both the employer as well as the employee.

  10. Postings.

    You must post all required federal and state employment notices. If you are in California, the California Chamber of Commerce has all the employment posters that must be posted, plus required Unemployment Insurance and State Disability Insurance pamphlets and required Sexual Harassment pamphlets. To order, go to


    then click on Required Notices and then on Required Notices Kit. Prices are currently $55 to $79 dollars per kit.