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Employee Classification Issues For New Companies

May 1, 2009

There are several major issues facing all start-up companies relating to their workforce. This Newsletter shall provide a quick overview of three of these issues. Employee or Independent Contractor. Many new companies want to classify their workers as independent contractors because they believe that having independent contractors will simplify payroll administration by not having to withhold federal and state income taxes and social security and medicare taxes, save money on employment related taxes, and that the worker will have less rights than an employee. However, it is important to understand that the courts and the Internal Revenue Service and Franchise Tax Board are not bound by the company’s classification, and that there are substantial risks associated with a misclassification. These risks include tax penalties for failing to withhold taxes, and lawsuits by the worker for failure to pay overtime or provide employee health and welfare benefits. In an overall sense, the more control the company has over the day-to-day activities of the worker, the more likely the worker will be classified as an employee. If it is unclear as to whether a worker is an employee or an independent contractor, the company or the worker may file IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and the IRS will review the facts and circumstances and officially determine the worker’s status.

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TRADE SECRET PROTECTION

August 2, 2006

A company’s trade secrets are valuable and often provide a business with a competitive edge. However, not all information used by a business qualifies as a trade secret. Under California law, a “trade secret” is a company’s proprietary and confidential information, including: formulas, programs, methods, techniques, processes, designs, plans, business knowledge and operational information, customer lists, financial information, and business plans.

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DRESS AND GROOMING STANDARDS FOR EMPLOYEES

May 1, 2006

Many employers desire to impose dress and grooming standards for their employees to ensure their employees present a clean and professional image to customers. Generally, an employer has the right to establish standards for the personal appearance of its employees, as long as the standards do not discriminate on the basis of sex, religion or race, and the standards are applied in a nondiscriminatory manner.

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EMPLOYEE HANDBOOKS

April 1, 2006

An employee handbook sets forth the policies of the business. Since it is given to all new employees upon starting employment, it is an important tool for establishing good communication between the company and the employee. There are many reasons for a company to have an employee handbook, including the following: Efficient Communication. An employee handbook will reduce the time that management spends answering questions from employees, since many of the answers relating to company policies will be set forth in the employee handbook.

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EMPLOYMENT DISCRIMINATION – WHAT’S IN A NAME?

March 1, 2006

Under both federal and state law, an employer is prohibited from discriminating against an employee based upon national origin or ancestry. However, a recent case shows that such discrimination does not have to be based upon the employee’s physical or genetically determined characteristics such as skin color or physical traits. In El-Hakem v. BJY, Inc., the claim of discrimination was based upon the chief executive officer’s repeated use of a non-Arabic name instead of the employee’s Arabic name. In this case, Gregg Young, the chief executive officer of BJY, Inc. repeatedly called Mamdouh El-Hakem, who is of Arabic heritage “Manny.” Young’s explanation was that he believed that a “western” name would increase El-Hakem’s chances for success and would be more acceptable to BJY’s clientele.

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