Monthly Archives: August 2016

NEW ARIZONA CASE EXPLORES COMPANY LIABILITY FOR THE ACTS OF INDEPENDENT CONTRACTORS

Control
  

def: the power to influence or direct people’s behavior or the course of events.

Because employers “control” the acts of their employees, courts hold businesses liable for employees’ conduct performed in the course and scope of their employment.  Example:  when a truck driver employed by ABC Trucking crosses a double yellow line and kills an oncoming motorist, the truck driver and ABC Trucking are both liable for negligence.

But what if that same driver is an independent contractor, not an employee of your company?  Or what if the driver is an independent contractor your family hired to move its furniture across town, or shuttle your kids between ball games?  Would you still be liable even though the driver was not your employee?

Equally important, what if you think you have an independent contractor relationship with a worker, but exercise too much control over their work and the person is deemed to be your employee?

The Arizona Court of Appeals tackled these questions last week.  Read on and gain a fingertip feel for how to hire and work with independent contractors in a way that does not make you liable for their mistakes

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A FATAL ACCIDENT AND A LAWSUIT

In Santorii v. MartinezRusso, LLC, a RE/Max Professionals real estate agent was returning from a real estate sales appointment when the car he was driving crossed the center line and struck another man’s tractor-trailer.  Both men died in the collision.  The wife of the truck driver brought a wrongful death lawsuit against RE/Max Professionals alleging that it was vicariously liable for its agent’s negligence.

The specific issue in the case was whether real estate brokers should be held liable for their salespersons’ negligent driving.  The Court answered “no.”  But, in deciding this particular issue, the Court of Appeals made broad pronouncements which are applicable to all businesses.

THE COURT CONFIRMS THE APPLICABLE TEST TO DETERMINE IF A WORKER IS AN INDEPENDENT CONTRACTOR OR AN EMPLOYEE

The Santorii Court stated that the following criteria must be evaluated in determining whether an employer-employee relationship exists:

  1. The extent of control exercised by the master over details of the work and the degree of supervision;
  2. The distinct nature of the worker’s business;
  3. Specialization or skilled occupation;
  4. Materials and place of work;
  5. Duration of employment;
  6. Method of payment;
  7. Relationship of work done to the regular business of the employer;
  8. Belief of the parties.

The degree of control exercised over a worker is the main factor courts consider in deciding whether a worker is an employee.  The right to control is present when a company can control the details of how work is performed and can give specific instructions with the expectation that they will be followed.  Thus, where a  delivery truck driver struck a motorcyclist, the Arizona Supreme Court concluded that there were fact questions regarding whether the driver was an independent contractor or an employee when the delivery company:

  • designated pick-up and delivery times
  • selected the delivery route, and the manner in which the papers were to be delivered
  • could send a supervisor on the delivery route
  • could tell the driver when to add customers and follow specific customer requests

In yet another case, the Arizona Supreme Court held that an employer was not liable for the wrongful death caused by its traveling salesman because the employer had “no control or right of control” over the manner of the salesman’s travel.   The court recognized that under the contract between the employer and the traveling salesman, the employer may have had some control over sales procedures, but found that such control “would not justify an inference of any right to control the time, method or manner of the operation of [the salesman’s] automobile.” The court noted that evidence showing that the salesman could sell anywhere in the United States, sold other companies’ products, and essentially had full discretion over his own sales trips established the employer’s lack of control.

Applying the foregoing principles, the Santorii court ruled that the real estate agent was an independent contractor and, in turn, RE/Max Professionals was not liable.  Despite working exclusively for RE/Max Professionals for over a six-year period, the agent was a licensed professional who had nearly complete discretion in the time, manner, and means in which he traveled to meet clients.

In addition, the contract between RE/Max Professionals and the agent identified the agent as an independent contractor who was “free to devote” his time, energy, effort, and skill as he saw fit.  The agent was not required to keep specific hours, attend sales meetings, or meet any sales quotas, and although RE/Max Professionals provided optional office space, administrative services, sales leads, and training, the agent was charged a monthly fee for these services.  Moreover, there was no dispute that the agent chose the territory where he worked, created his own advertisements, prospected for clients, drove his own car, worked from his home office, worked purely for commission, and set up his own appointments.

TAKEAWAY:  TO AVOID LIABILITY, CAREFULLY DRAFT INDEPENDENT CONTRACTOR AGREEMENTS AND DO NOT EXERCISE TOO MUCH CONTROL

The Santorii decision does not mean that real estate companies are home free.   First, the decision was narrowly limited to assessing liability for agents’ driving a car (versus, for example, negligent business practices).  Second, had the brokerage company exercised more control over its agent, it easily could have been found liable for the agent’s negligence. 

Santorii is a strong reminder for businesses and others to thoughtfully consider their relationships with independent contractors.  This means (1) having counsel draft independent contractor agreements that, if challenged, are defensible and supportable; (2) making sure that your business does not exercise too much control over your non-employee workers; and (3) having adequate insurance if you fail to heed Nos. 1 and 2.

Getting sued is not the only problem that can befall companies who misclassify employees as independent contractors.  The U.S. Department of Labor and IRS are always on the lookout for businesses that misclassify workers.  For more on this topic, read this article.

For help on drafting independent contractor agreements or for further information on other employment law topics, contact Art Bourque at Bourque Law Firm.

DEPARTING EMPLOYEES: WHAT INFORMATION CAN THEY TAKE TO COMPETE WITH YOUR BUSINESS?

Improvements in the job market over the last several years have increased employee mobility among businesses.  As a result, I am seeing a substantial uptick in cases where employees have elected to get a “jump start” on their new jobs by absconding with confidential and proprietary information.

This article discusses:

  • The boundaries of what employees may take from their former employers when embarking on new jobs, or starting new businesses.
  • Preventive measures to avoid the theft of company information.
  • How to stop an ex-employee in their tracks when there has been a theft of confidential or proprietary information.

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THE RULES OF THE GAME

Employees who take customer lists, marketing data or strategies, website designs, manufacturing processes, or other company information are often found to have misappropriated “trade secrets.”  A trade secret is defined as information, including a formula, pattern, compilation, program, device method, technique or process that both:

(a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use.

(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

In Arizona, “misappropriation” is defined as either:

(a) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means.

(b) Disclosure or use of a trade secret of another without express or implied consent by a person who either:

(i) Used improper means to acquire knowledge of the trade secret.

(ii) At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was derived from or through a person who had utilized improper means to acquire it, was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use or was derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.

(iii) Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

“Improper means” is defined as including “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy or espionage through electronic or other means.”

To state a claim for misappropriation of trade secrets, one need not allege that the person/party itself stole the trade secrets; it is sufficient to allege that the party is using trade secrets that it knows or has reason to know were acquired through improper means.  In other words, misappropriation is not limited to the initial act of improperly acquiring trade secrets; the use and continuing use of the trade secrets is also misappropriation.

THE FINE LINE BETWEEN TRADE SECRETS AND PUBLIC INFORMATION

A customer list may be entitled to trade secret protection when it represents a selective accumulation of detailed, valuable information about customers — such as their particular needs, preferences, or characteristics — that naturally would not occur to persons in the trade or business.  On the other hand, matters of public knowledge are not trade secrets.  The subject matter of a true “trade secret” must be sufficiently novel, unique, or original that it is not readily ascertainable to competitors.

Whether information constitutes a trade secret is decided on a case-by-case basis.  For an understanding as to how the law is applied, observe the following case rulings:

  • specific policyholder information, including amount of outstanding loans and dividends accrued, was trade secret
  • general knowledge of business and customers acquired during employment was not trade secret
  • customer list containing detailed information about customers’ “personality traits, hobbies and likes, credit history, buying habits and pricing agreements” was trade secret
  • customer list containing “pricing information and knowledge about particular roofs and roofing needs of customers” was trade secret
  • customer list containing client names, “farm description, past insurance coverage, and loss histories” was trade secret
  • customer list was trade secret when employer winnowed potential customers down to the “elite” 6.5%
  • customer list was not trade secret when compilation process was “neither sophisticated nor difficult nor particularly time consuming,” market was highly competitive, and customers did not have exclusive business relationships
  • to be protected as a trade secret, customer list must be “more than a listing of firms or individuals which could be compiled from directories or other generally available sources”
As a general principle, the more difficult information is to obtain, and the more time and resources expended by an employer in gathering it, the more likely a court will find such information constitutes a trade secret.

STOPPING WOULD-BE MISAPPROPRIATION:  AN OUNCE OF PREVENTION IS WORTH A POUND OF CURE

The best means to protect your company’s trade secrets is not after the proverbial toothpaste is out of the tube, but rather through implementing vigorous and sustained measures to ensure the secrets are not taken in the first instance.

Contact counsel to develop a solid program to protect your trade secrets.  Among other things:

  • Have employees sign non-disclosure agreements
  • Consider non-compete and non-solicitation agreements
  • Embed in employee handbooks non-disclosure and other language regarding the confidentiality of company information
  • Protect and secure information stored in your company computers and devices
  • Monitor employees’ use of company information
  • Perform “self-audits” from time to time to ensure that management and employees have not been lax or loose with company information
  • Maintain password and information security
  • Establish procedures for on-boarding/off-boarding employees
  • Consider marking certain documents and materials as confidential

CLAIMS AGAINST EX-EMPLOYEES WHO HAVE ABSCONDED WITH TRADE SECRETS OR OTHER CONFIDENTIAL INFORMATION

In most cases it is wise to send the ex-employee, and possibly their new employer, a “cease and desist” letter.  If this proves ineffective and/or significant damage has already been done, employers can seek an injunction to stop the ex-employee from using the information and, separately,  seek damages arising from the misappropriation.

In counseling businesses as to whether it is “worth it” to file a lawsuit, I engage in an interactive process with management designed to focus on (1) the damage which has occurred to date; (2) the potential for future business losses; and (3) the risk that other employees or ex-employees will be emboldened into similar misconduct by inaction.  This cost-benefit analysis is a perfect way to understand the facts, law, and develop a solid plan going forward.

If you are interested in a methodology for dealing with any kind of contract dispute, read “How to Successfully Handle Any Type of Contract Dispute.”

For further information on contract or other employment law topics, contact Art Bourque at Bourque Law Firm.