Tag: Business & Corporate

Many businesses, especially start-ups, find that it makes sense to engage freelance consultants for particular tasks rather than adding employees to their payroll.  There are many financial and strategic reasons for a company to engage a consultant for certain projects, such as flexibility, expertise, and efficiency.  However, it is important that companies identify which types of projects are suitable to be done by consultants rather than employees, and what legal issues should be addressed when using consultants.

I.  Ownership of the Work Product

First and foremost, from a legal perspective, business owners should determine whether the work product created in connection with a particular project must be exclusively owned by the company, or whether it would be acceptable for the consultant to utilize the materials used or produced in connection with the project for other companies.  In general, there are three levels of exclusivity that are required in connection with a free-lance project.

1. The least critical level of exclusivity is generally seen when a product or service is not customized, so that there is an expectation that the consultant will provide the same product or service to other competing companies.  For example, companies often expect that billing or other back-office software produced by consultants will be used by companies in the same industry, and most business owners would not find it detrimental to their company’s business if a competitor used the same software.  Accordingly, the company would only require a non-exclusive license to use the work product from the consultant, and the consultant would maintain ownership of the work product.
2. The second level of exclusivity is seen when a company would accept that certain preexisting materials are owned by the consultant and merely licensed for use as part of a final work-product, but that other aspects of the product are owned by the company and may not be reused by the consultant.  A customized website is a good example of this level of exclusivity.  Most companies would not be comfortable if their website designer reused customized materials or the look and feel of a website created by a hired freelancer for a competitive company, but would understand that the freelancer will use certain preexisting materials and tools in the website that will be also be used by the freelancer for other websites.
3. The third level of exclusivity is seen when a company requires that all work product be completely original and never used by the consultant for another project.  This may occur when a project is critical to the company’s competitive advantage, such as the development of a novel product or service that will distinguish the company from its competitors.  In that situation, it must be made clear that the company is the owner of the work product, and that the consultant does not have any right to use the work product in connection with other projects. 

Absent a written agreement between a consultant and its client, the law provides that the consultant is the owner of any work product produced in connection with a project, and the consultant is providing the client with a non-exclusive license to use the work product.  If a particular project falls within the second or third levels of exclusivity described above, it is imperative that a written agreement be put in place prior to the work being completed by the consultant to confirm who owns the work product and whether the consultant will have the right to re-use any of the work-product for other clients.  This type of agreement is generally called a "Work for Hire" agreement, but can also be incorporated into a consulting agreement which sets forth other material terms of the consultant’s engagement with the company.

II.  Confidentiality

Unlike an employee, who has a duty to keep company secrets confidential, a consultant has no such duty unless there is an agreement in place requiring confidentiality.  A written confidentiality agreement should therefore be put into place to protect the company’s trade secrets from being disclosed by freelancers who are often given broad access to company information in order to complete their work.  Even with a written confidentiality agreement, confidential information should only be provided to the consultant on a "need to know" basis.

III.  Independent Contractor Status

One reason that companies choose to hire freelancers is to avoid adding another employee to payroll.  It is important that the company understand that, regardless of the title given to a particular worker, state and federal agencies, such as the IRS and Department of Labor, may reclassify a consultant as an employee and require that the company pay significant penalties for the misclassification.  The factors considered for determining whether the consultant is an independent contractor vs. employee are as follows:

1. Behavioral control  — Does the business have a right to direct and control how the consultant does the project? Does the company train the consultant to do the project in a particular manner, or does the consultant complete the project using his or her own methods and training?,
2. Financial control — Is the consultant’s business as an independent financial operation, with investment, expenses and other clients and the risk of earning a profit or suffering a loss from the project, or does the consultant receive a set salary, have all expenses paid by the company, and and no other clients in the relevant market?
3. Type of relationship — Is there a written consulting agreement place?  Does the company provide the consultant with similar benefits that would normally be provided to employees, such as health insurance and vacation pay, and (i.e. pension plan, insurance, vacation pay, etc.)? Is the relationship for a set term or does it continue indefinitely?  Is the consultant working on a key aspect of the company’s business which would generally not be outsourced?

If, after examining these factors, it is determined that one or more factors is applicable that lead to the designation as an employee, the company should reconsider its decision to engage the consultant as an independent contractor rather than an employee.

There are many times where engaging a freelance consultant to complete a particular project benefits a company.  With careful consideration of the legal issues that make the relationship with a consultant different than that of an employee, the relationship could be rewarding to both the company and freelance.

Following the approval of New Jersey’s Community Development Block Grant (CDBG) Disaster Recovery Action Plan, the NJ Economic Development Authority (EDA) was tasked with administering $460 million of the state’s CDBG Disaster Recovery allocation to assist storm-impacted businesses. Recently, the EDA approved the creation of the Stronger NJ Business Loan Program. The Stronger NJ Business Loan Program is the second of these CDBG-funded business recovery initiatives and will utilize $100 million of the allocation.

As a follow up to my blog last month outlining key considerations with regard to the preparation and administration of a corporate code of ethics, this entry will discuss some important aspects of the substantive content that should be included in a corporate code.

In an opinion issued May 10, 2013, Petersburg Regency, L.L.C. v. Selective Way Insurance Company, the Appellate Division of the New Jersey Superior Court held that if the parties agreed to arbitrate their dispute, but did not clearly identify the parameters of the arbitration, they would be bound by the provisions of the New Jersey Arbitration Act. The facts are quite complex. In September 2004, Petersburg Regency, L.L.C. (“Regency”) filed a complaint against Selective Way Insurance Company (“Selective Way”) for claims arising out of a hurricane which damaged a hotel owned by Regency in Petersburg, Virginia.

In a recent opinion, the Appellate Division of the New Jersey Superior Court held that if the parties agreed to arbitration in the underlying agreement, the dispute will be referred to arbitration, rejecting a claim that the right to demand arbitration was waived. Stephen Lerner (“Lerner”) and Robert Heidenberg (“Heidenberg”) were partners in a partnership. The partnership agreement contained a provision that any controversy arising out of the agreement would be settled through arbitration by the American Arbitration Association.

The weather forecast for the weekend looks great and you would love to log some flight time. So you call the fixed based operator and reserve a Cessna Skylane to rent for a mid-morning flight. The fuel costs are absurd, but that remains the price of being a pilot. It is two hours of solid enjoyment. Everything goes smoothly and you have gained some additional confidence in your flight skills.

A central element to good corporate governance is a concise, effective and accessible corporate code of ethics. Whether an organization has fifty employees or thousands, a well-drafted code of ethics that is actively supported by management is as much a statement about an organization’s culture and beliefs as it is an effective legal document that sets forth the duties and obligations of the board, management, employees and other stakeholders of the organization.