Employees Disguised as Contractors
As your company grows, you may be looking to expand your team and add to your workforce. When hiring additional employees or engaging independent contractors you need to be well-aware that an independent contractor may actually be considered an employee, regardless of how you label the person.
Employees are entitled to rights pursuant to the applicable Employment Standards Acts (based on the province the employee resides) such as: (1) vacation pay; (2) overtime pay; (3) statutory holidays; (4) notice period or payment in lieu of such notice period upon termination; (5) severance pay; and (6) employment insurance benefits.
Independent contractors are not entitled to such benefits. However, if a government authority determines that an independent contractor is actually an employee based on the factual relationship between the parties, the independent contractor will be entitled to all of the above rights and there may be penalties that come with such determination.
There is no one test to determine whether a worker is an employee or an independent contractor, but here are some factors to consider when engaging an independent contractor:
Level of Control: Does the worker set his/her own hours of work? Does the worker determine how the services are to be completed?
Equipment: Is the worker required to provide his/her own tools and equipment for work?
Sole Income: Is the employer the sole source of income for the worker? Is the worker prohibited from taking other jobs?
Subcontractors: Is the worker allowed to engage subcontractors for the services?
Opportunity for Profit: Is the worker taking on a chance for profit and a risk of loss?
Compensation: Is the worker providing monthly invoices to the company?
The above factors may all be considered when determining whether a worker is an employee or an independent contractor. If a worker who you presumed to be an independent contractor is determined to an employee, you may face fines and penalties including and related to unpaid vacation and overtime pay, severance pay, employment payroll taxes and employment insurance deductions and remittance. All of which are costly, so way the least!
In summary, you will need to assess the relationship between the company and each of its potential workers before determining whether to commit to an employee or contractor relationship, something that your legal team is best suited to assist with to avoid costly penalties down the road.
Changes to California’s Privacy Law – Consumer Privacy Rights Act
On November 3, 2020, California voters approved the California Privacy Rights Act (CPRA), which replaces the California Consumer Privacy Act of 2018 (CCPA).
The CPRA expands consumers’ rights regarding protection of personal information. Companies collecting personal data should review the changes to ensure compliance. Indeed, we anticipate that enforcement of these laws will drastically increase when the CPRA comes into effect
For many companies, the CPRA may not directly apply, but companies may be contractually obligated to comply with the law if they conduct business with large tech firms. As as a result, it will be prudent for many companies to comply in order to ensure they can continue to service their clients.
Major changes include:
- Enforcement
The CPRA creates the California Privacy Protection Agency, a government body tasked to make the regulations and enforce the CPRA. It is predicted that the CPRA will increase the level of enforcement because it is partially funded by the fines.
- No more warnings
The new law eliminates the 30-day cure period provided by the CCPA. The CCPA provided notices to businesses not complying with the law and allowed them to fix the violations within 30 days without having to pay fines. The notice and cure period no longer exist with the CPRA.
- Sensitive Personal Information
The CPRA creates a new subcategory of personal information, which includes information such as biometric information and contents of e-mails and texts. Collection of sensitive personal information compels additional disclosure, opt-out and use requirements.
- Expansion of Consumer Rights
Consumers now have the right to opt-out of businesses sharing and selling their personal information. Under the CCPA, consumers only had the right to opt-out of the sale of their personal information. Consumer also have the right to request businesses to delete their personal information and businesses must notify third parties to delete the personal information as well.
The CPRA will become effective on January 1, 2023 with a look back period of 12-months so businesses will need to comply by January 1, 2022.
The CPRA will likely be the foundation for privacy legislation in other states and on a federal level. Similar laws will pass in the near future in many states including Washing and New York and on a federal level in both the US and Canada.
In this constantly changing regulatory environment, it will be critical to review your data collection practices and Privacy Policy to ensure that your company remains compliant and to avoid enforcement actions.
California Consumer Privacy Act comes into Force Jan. 1, 2020
The California Consumer Privacy Act (the “CCPA”) is a new law intended to enhance privacy rights and consumer protections for California residents, which comes into force on January 1, 2020.
In the lead-up to the CCPA coming into force, this blog post covers three common questions we receive: (1) do I need to comply? (2) when do I need to comply? and (3) what happens if I do not comply?
1. Do I need to comply? Probably, but not directly. Most companies that operate from Canada or in states other than California, will not directly have to comply with the CCPA as the territorial scope of the law is fairly limited, especially when compared with the EU’s General Data Protection Regulations (the “GDPR”). To fall under the territorial scope of the CCPA, you have to be a for-profit business doing business in the State of Californiaand have one of three factors apply:
(a) gross revenue of over $25,000,000 USD;
(b) handle the personal information of more than 50,000 consumers, households or devices (it is unclear in the Act, at this stage, whether this is a California or world-wide number); or
(c) derive more than 50% of annual revenue from the selling of consumers’ personal information.
While the CCPA may not apply directly to many companies, as we saw with the GDPR rollout in 2018, the CCPA will likely indirectly apply as major tech companies like Google and Apple will have to comply with this law and as such, they will likely require, as part of their own compliance requirements, that companies they do business with that collect personal information also comply. The extent of this indirect compliance is currently unclear and may only apply to certain provisions of the CCPA.
2. When do I need to comply? The effective date of the CCPA (the date at which the CCPA becomes law), is January 1, 2020, and while enforcement by the California Attorney General’s office may not begin until supporting regulations are finalized (deadline for regulations is June 1, 2020), we recommend that companies that need to comply directly begin compliance work immediately and aim to be fully compliant by January 1. Companies that only need to comply indirectly may have some time to wait and see how the CCPA will affect contracts and terms with CCPA compliant companies but it won’t hurt to be compliant by early 2020.
3. What happens if I do not comply? Beware of the cost! There are several penalty clauses in the CCPA, including $2,500 for each non-intentional violation and $7,500 for each intentional violation. If you have over 50,000 users, these penalties can easily amount to over $125,000,000. For companies that will have to comply indirectly through contracts or user agreements, beware of indemnification clauses and other liability amendments that may push these penalties onto your company.
For many companies, the CCPA may not directly apply. However, it’s important to monitor CCPA factors, relative to your company’s business, to ensure that you do not miss compliance should a factor be met in the future – this is especially important in rapidly growing startups where it’s easy for a compliance obligation to be missed. Even if the CCPA factors are not met, there may be an obligation to comply as large tech companies will likely be complying and force compliance on everyone else they do business with.
Founder Leaving the Company
While founders embark on the journey of launching a company with an abundance of optimism it may be the case that their relationship does not last as long as the company, leading to the question of how to handle a founder leaving the company? This situation goes one of two ways: (1) the company and its founders entered into agreements that address this situation and the process set forth in these agreements is followed; or (2) no agreements are in place and the company and founder are left to try and work out a resolution (difficult if the departure was not amicable).
In this post we will detail two agreements to put in place early-on in a company’s life that could ease a founder’s departure:
1. Reverse Vesting Agreement. A reverse vesting agreement subjects a founder’s shares to repurchase by the company if the founder leaves/is fired from the company within a particular period of time. Each time shares “vest”, meaning that a particular period of time has elapsed and a certain number of shares cease to be subject to the company’s repurchase right. Typical terms are described as “4 years with a 1 year cliff”. This means that the agreement lasts for 4 years and that 1/4 of the shares vest after 1 year and are no-longer subject to the company’s repurchase right. After the cliff, shares typically vest in monthly or quarterly instalments for the remaining 3 years. The repurchase price is a nominal amount, typically the amount the founder paid for the shares upon incorporation (ex. $0.00001/share).
BENEFITS: If the founder leaves within the vesting period, the company can exercise its repurchase right and repurchase those unvested shares. This is especially useful if a founder leaves early, such as within the first year and allowing the company to repurchase all the founder’s shares. Without this agreement, a founder could leave the company within the first year yet retain all their shares.
COMMON MISTAKES: (1) Too short of a term, for example 2 year vesting term when the founder is needed for at least 3 years in order to complete the product; and (2) setting the repurchase price too high resulting in shares that are too expensive for an early-stage company to repurchase.
2. Shareholders Agreement. A Shareholders Agreement addresses the relationship among the shareholders and the company and may often contain clauses addressing founders specifically. Relevant to a founder’s departure, the Shareholders Agreement may contain a section permitting the company and/or the shareholders (or maybe the other founders) to repurchase the departing founder’s shares. The Shareholders Agreement would contain a mechanism for valuing the shares and a process for completing the repurchase. Additionally, even if the shares were not purchased or no purchase mechanism exists, it may contain a voting trust serving to transfer the votes held by the founder’s shares to a company designee.
BENEFITS: By including a repurchase mechanism, the Shareholders Agreement can kick-in following expiration of a Reverse Vesting Agreement, providing a way to easily repurchase shares of a departing founder once that agreement has expired. Additionally, the voting trust ensures that the founder receives the financial benefit in the future of any shares they retain but by transferring the votes associated with those shares to a company designee it ensures that only people actively involved in the company can vote on company matters.
COMMON MISTAKES: (1) Drafting the Shareholders Agreement to only apply to initial shareholders and not containing provisions whereby the agreement automatically applies to new shareholders; and (2) not creating a clear process for valuing shares and a process for resolving any dispute over share value.
In summary, if you plan for shareholder problems at the start you will be well equipped should those problems arise in the future. While founders may not want to dwell on a divorce when they are optimistic about the future they will be glad they did if things turn for the worse down the road.