I can't tell whether this article wants me to sympathize with JustMed, talking as it does about the "bitter irony" of their contractor/employee's standing to sue them for failing to honor employment obligations. These people brought on an engineer, who was apparently solely responsible for developing the core IP of the company, paying him for years only in stock. When they eventually deigned to pay him, they didn't withhold taxes.
The word for someone who performs a core company role in exchange for nothing but equity is "cofounder".
The word for someone who is paid to do work but who is responsible for all their own taxes is "contractor".
It freaks me out that the Appeals court decided that these factors weren't "dispositive" of the engineer's relationship with the company, because (pp) "that's how startups work". The hell it is. If you want people to work for you, you get an employment contract together. If they're employees, you pay them, and you do W2 withholding.
This case illustrates the dictum that "hard facts make bad law."
In essence, the court went out of its way to try to do equity in what it viewed as a case of an opportunistic founder who tried unfairly to stick it to his co-founders. It is at best a mercy decision and an aberrant one at that (a legal outcome that turns basically on the idea that startups are "different" rests on pretty weak legal reasoning and is likely to remain a one-fer decision).
Founders are often are ignorant about who owns IP as it is created in these sorts of loose, early stages. Very important to get this right (see a piece I wrote on this issue here: http://grellas.com/faq_business_startup_015a.html).
No, this is the end of the road (the case was decided by the Ninth Circuit Court of Appeals, which is the highest level of appeal court in the federal court system except for the U.S. Supreme Court - and this case has no chance whatever of being of sufficient interest to the Supreme Court for them to want to review it).
At the same time, the case has almost no precedential value even apart from its poor reasoning. A narrow class of cases come before the federal courts that deal with straight state law issues, and they are decided in federal court only because there is a diversity of citizenship between the parties (i.e., the parties are citizens of different states). When a federal court decides such cases, it is forced to interpret state law and its decisions are regarded as minimally persuasive (because the state courts are their own best interpreters of state law). Thus, even if it were well-reasoned, it would scarcely carry much weight for future decisions in Idaho. And, since Idaho law is all that is involved, it would carry no weight at all for cases arising elsewhere.
This case seems like basically every other contractor/employee status dispute, except turned on its head.
Normally, the company has tried to reclassify people who are morally employees as "contractors" to avoid the benefits and terms obligations that come with full-time employees. And no, despite what the "agreement" between the parties may have been, you can't simply call someone whose work obligations are structured identically to employees a "contractor"; companies routinely get dinged for trying to do this.
The hell it is. If you want people to work for you, you get an employment contract together. If they're employees, you pay them, and you do W2 withholding.
The engineer in question was married to the founder's sister, and she died. Obviously there was a lot of personal relationship intertwined into the business relationship. In addition, there's a traumatic event in the lives of both the founder and the engineer. This probably meant there was no real contract, thus judges could swing in favor of either one of them. Your comment makes it seem like this is a typical business vs. the contractor case, which it isn't.
I hear what you're saying, but all these mitigating factors that you bring up appear to make it less likely that the guy was simply an employee of the company.
This is again again opposite of a typical employee/contractor status dispute. Same issues, but the company wants things playing out in the "employee" direction so they can claim IP.
Well, they are spelled out, but there is still a lot of unclarity in the execution of these rules. Enough so that some large consumers of contractors make everyone go through another consulting organization.
As an example, the phrase Does the company control or have the right to control what the worker does and how the worker does his or her job? seems a bit open to interpretation. Lets say you are a contractor working on a BFE Java or .net application. The project has its source control rules, its status reporting rules, its code convention rules, and all are likely under the control of an employee of the company in question. Sounds like the company has the right to control in this very common case.
So I argue that the rules may be extensive, but they are not very clear.
The company is lucky they aren't located in California. Here, even if you are identified as an employee, you may retain ownership over works you have created unless you have signed a "work for hire" agreement or something similar.
This is a great point and is the reason why most established companies have a standard contractor agreement that they never change that has a work-for-hire clause, along with the NDA and IP language, and a formal statement of work that specifies payment schedule and acceptance criteria.
The word for someone who performs a core company role in exchange for nothing but equity is "cofounder".
The word for someone who is paid to do work but who is responsible for all their own taxes is "contractor".
It freaks me out that the Appeals court decided that these factors weren't "dispositive" of the engineer's relationship with the company, because (pp) "that's how startups work". The hell it is. If you want people to work for you, you get an employment contract together. If they're employees, you pay them, and you do W2 withholding.