In the fourth of our webinars on The Ruby Files: Managing the Challenging Employee, we continue to follow Ruby as her changing circumstances present her employers with a variety of legal complications. Fresh off claims of sexual harassment and age discrimination at a bank, Ruby applies at a relatively new company in the technology industry, which is experiencing challenges relating to recruitment and employment. Ruby is hired as an independent contractor, but things don’t quite work out. She quits, and then claims constructive discharge because of her working conditions. After Ruby’s departure the company discovers that she has taken client lists and other proprietary materials on her way out the door. What is the company’s next move?

1. The Ruby Files: The Case of the
Disappearing Secrets and an
Independent Contractor
Eric E. Packel, Stephen E. Fox,
Jeffrey S. Bell, Judy Yi, Matt Todd

2. Background Facts
 Outside Tech, Inc.: large technology service
company who contracts with companies to
develop or service software and information
technology systems.
 Outside Tech employs some I.T. technicians, but
also contracts with some as independent
contractors.
 Ruby applies at Outside Tech
 Outside Tech enters into Independent Contractor
Agreement with Ruby

3. 3

4. 4

5. Independent Contractor Relationship –
Misclassification Implications
 U.S. DOL / IRS audit (monetary penalties)
o DOL Press Releases of its activities: https://www.dol.gov/whd/workers/misclassification/pressrelease.htm
 Class action lawsuits
o Uber Technologies Lawsuit (2016): Uber Technologies agreed to pay up to $100 million to settle class-action
lawsuits in California and Massachusetts in which drivers sought to be reclassified as employees instead of
independent contractors. Uber drivers claimed they were entitled to be reimbursed for their expenses that
Uber should have to pay (e.g., gas and vehicle maintenance), and challenged Uber’s practice of telling
passengers that the gratuity is included and not to tip the drivers, even though the drivers were not receiving a
tip
o FedEx Ground Package System Inc. (2016): FedEx has agreed to pay drivers in 20 states $240 million to settle
lawsuits claiming the company misclassified them as independent contractors
 National Labor Relations Board rulings
o IC Diagnostics. Fiddlehead Theatre Company, Inc., No. 01-RC-179597 (NLRB, July 26, 2016): The NLRB ruled that
musicians who played in performances for a Massachusetts production company, Fiddlehead Theatre Company,
Inc., are employees and not independent contractors and that a union election should proceed
o XPO Cartage, Inc., No.21-CA-150873 (July 14, 2016); Laca Express, Inc., NLRB Region 21, No.21-CA-150928 (June
28, 2016): The NLRB Regional Office in Los Angeles issued unfair labor practice complaints against XPO Cartage
and Laca Express, based on charges filed by the International Brotherhood of Teamsters: that drivers have been
misclassified as independent contractors and inhibiting them from engaging in Section 7 activity
5

6. Independent Contractor
Relationship – Best Practices
 Have a written independent contractor agreement
 Maintain consistent separation of documents, forms, terminology for
employees and independent contractors
 Do not have employees and independent contractors perform the same or
similar work
 Do not provide tool, supplies, insurance and other benefits offered to
employees
 Do not reimburse expenses
 Do no supervise day-to-day work in the manner and schedule for the work
to be completed (can demand certain product or result, but not how it is
done)
 Ensure you have trade secret and confidential information protections (e.g.,
Defend Trade Secrets Act)
 Be careful with prohibiting competition
 Be careful with indefinite independent contractor engagements
6

7. Outside
Tech, Inc.
Marine Sky
Company B
Independent
Contractor
Technicians;
Ruby
Employee
Technicians
Company
A
7

8. Conversation
Rachel: Hey Ruby. When are we getting lunch?
Ruby: I don’t know. I started a new job.
Rachel: Ruby. Another job? How many jobs have you had this
year??
Ruby: It’s not my fault I was sexually harassed and had to find a
new job. Can you blame me??
Rachel: Ruby lighten up. You just don’t seem like yourself. So
what is the new job?
Ruby: It’s an I.T. job. I was hired to go out to other companies
and help with their computer systems.
Rachel: What company?
8

9. Conversation
Ruby: It’s called Outside Tech. Lots of employees. Very professional,
which I like.
Rachel: Professional how?
Ruby: Oh you know. I had to fill out a bunch of fancy forms, top secret
stuff.
Rachel: Like what?
Ruby: I’m not sure, just top secret. They are giving me access to top
secret information. I’m like a spy I guess. Well, not a spy, but I get to
learn all sorts of cool stuff. I didn’t really read what I signed.
Rachel: Hmmm.
Ruby: Yeah, and if things don’t work out, then I’ll know some pretty
cool stuff. Maybe a future here.
9

10. 10

11. 11

12. 12

13. 13

14. DOL Conversation
Investigator: DOL, Special Investigator Robbins speaking.
Ruby: Oh hi Special Investigator. This is Ruby Breaker. I have a
concern with my new employer.
Investigator: Did you say Ruby Breaker? From before?
Ruby: Yes! How have you been?
Investigator: What’s your concern? I’m on my lunch break.
Trying to eat a cheese sandwich here.
Ruby: Oh well, my employer has some employees I think may
not legally be employed. And with all this talk about
immigration, I got concerned. Plus, I heard they aren’t getting
paid the same as me.
14

15. DOL Conversation
Investigator: Why don’t you come down again?
Ruby: Oh yay! It will be great to catch up with you, see how
you’ve been. I will say, I have gotten some great information on
how to service companies. I’ve also learned a lot about the
marine business. Technical stuff but kind of fun.
Investigator: I really need to finish this cheese sandwich. It’s
getting soggy.
Ruby: I hate when they get soggy and flimsy…
Investigator: Ms. Beaker, come down if you want.
15

16. Immigration Issues
 Did Outside Tech need to complete an I-9
Form for Ruby?
 What about other independent contractors?
 What are Marine Sky’s obligations?
16

17.  Outside Tech is required to complete I-9 forms
newly hired employees.
 The I-9 requirement does not apply to
independent contractors.
 Outside Tech can’t engage independent
contractors if it knows the contractors are not
authorized to work in the US.
– Actual knowledge
– Reasonable person standards
17
Immigration Verification

18. Contractor Immigration Liability
 Companies can minimize exposure through independent
contractor immigration compliance certifications.
 Outside Tech’s options with its own independent contractors
– Contractor certifies to Outside Tech that he or she is legally authorized
to work in the United States
 Outside Tech’s agreements with end users such as Marine Sky
– Marine Sky may demand Outside Tech certify compliance with
immigration laws
– Agreements apply to both employees and contractors
– May require Outside Tech to perform I-9 audit
18

19. 19

20. 20

21. Is Ruby an Independent Contractor
or an Employee?
IRS 20-Factor Test / “Right to Control” Test: Behavioral Control, Financial Control, Type of
Relationship
1. Level of Instruction. If the company directs when, where, and how work is done, this control indicates a possible
employment relationship.
2. Amount of Training. Training workers suggests an employment relationship since the company is directing the
methods by which work is accomplished.
3. Degree of Business Integration. Workers whose services are integrated into business operations or significantly
affect business success are likely to be considered employees.
4. Extent of Personal Services. Companies that insist on a particular person performing the work assert a degree of
control that suggests an employment relationship. In contrast, independent contractors are free to assign work to
anyone.
5. Control of assistants. If a company hires, supervises and pays a worker’s assistants, this control suggests a
possible employment relationship.
6. Continuing relationships. A continuous relationship between workers and companies indicate that employer-
employee relationships exist. However, a contractor arrangement can involve an ongoing relationship for multiple,
sequential projects.
7. Set hours of work. The establishment of set hours of work by a company indicates control typical for employees.
8. Full-time required. If workers must devote full time to company’s’ business, the company has control over the
worker’s time. Independent contractors are free to work when and for whom they choose.
9. Need for On-Site Services. Control is indicated if the work is required to be performed on the company’s
premises, especially when it can be performed elsewhere.
10. Order or sequences set. Control is indicated if workers are not free to choose their own patterns of work but must
perform services in the sequences set by the company.
21

22. Is Ruby an Independent Contractor
or an Employee?
IRS 20-Factor Test / “Right to Control” Test:
11. Requirements of reports. Control is suggested if workers must submit regular oral or written reports to company.
12. Method of payment. Hourly, weekly or monthly pay schedules points to an employer-employee relationship,
provided that this method of payment is not just a convenient way of paying a lump sum agreed on as the cost of a
job. Independent contractors are usually paid by the job or on straight commission.
13. Payment of business and/or traveling expense. Companies paying workers’ expenses of this nature suggests
an employer-employee relationship.
14. Providing tools and materials. If a company furnishes significant tools, materials, and other equipment, it
suggests an employer-employee relationship.
15. Significant investments. Contractors typically invest in and maintain their own work facilities. In contrast, most
employees rely on their employer to provide work facilities.
16. Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize
significant profit or loss through their work generally are employees.
17. Working for multiple companies. If workers perform services for a number of unrelated persons at the same
time, they are usually independent contractors.
18. Availability to public. Workers are usually independent contractors if they make their services available to the
general public on a regular and consistent basis.
19. Control over discharge. A company’s unilateral right to discharge workers indicates that the workers are
employees. In contrast, a company’s ability to terminate a worker generally depends on contract terms.
20. Right to terminate. Workers are employees if they have the right to end their relationships with a company at any
time without incurring liability. Contractors cannot terminate services without liability, except as provided in their
contract.
22

23. U.S. Department of Labor: “Economic Realities” Test:
A multi-factored “economic realities” test is commonly applied to determine whether an
employer “suffers or permits” work creating an employment relationship triggering the FLSA.
The July 15, 2015 Administrator’s Interpretation discusses six factors:
1. Is the work an integral part of the employer’s business?
2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
3. How does the worker’s relative investment compare to the employer’s investment?
4. Does the work performed require special skill and initiative?
5. Is the relationship between the worker permanent or indefinite?
6. What is the nature and degree of an employer’s control?
Many state laws, such as state overtime laws, unemployment insurance, worker’s
compensation, implicate different tests for classifying independent contractors and employees.
Thus, an independent contractor relationship should be assessed on a state-by-state and law-
by-law and basis.
23
Is Ruby an Independent Contractor
or an Employee?

24. Resignation Conversation
Ruby: Hey Mr. Smith. I wanted to tell you I am leaving Outside Tech.
Mr. Smith: Oh I’m real sorry to hear that. Can you tell me why?
Ruby: Well I don’t like the way they are paying and treating their employees.
Mr. Smith: Employees? I thought you were an independent contractor.
Ruby: Whatever. Same difference. Anyway, I am so glad I had this
opportunity to learn some really neat stuff here at Marine. I never knew how
a lot of this worked, and now that I do, I am really glad.
Mr. Smith: Well let’s not get ahead of ourselves. Let me remind you that you
signed an agreement and you can’t disclose any of the information that you
learned here.
Ruby: Excuse me? Are you threatening me?
Mr. Smith: I’m not threatening you. I am advising you.
Ruby: Well that’s *******! I don’t work for you. I’ll show you! You ****!
Mr. Smith: Why don’t you just get out of here Ms. Breaker.
Ruby: Gladly!

25. What Is a Trade Secret?
“Trade Secret”
 Form of intellectual property (different from patents,
copyright and trademarks)
 Focus is on proprietary, commercially valuable, information
 Examples:
– Confidential manufacturing processes
– Formulae
– Customer lists
– Business plans/strategies
– Technologies not protectable by patent
– Employee records
• M.C. Dean v. City of Miami Beach, (SDFL) (5/16/15)
© Polsinelli 2016 25

26. Uniform Trade Secrets Act
 Traditionally, trade secrets were a matter for
state law before Uniform Law Commission
published UTSA in 1979
– 47 states and 3 others (DC, PR, VI) have adopted
• Not NY, MA (pending), NC (but very similar)
– Variation from state to state
• Modest, but sometimes case dispositive: burden of
proof; innocent acquisition; scope of information
protectable; “reasonable” measures to protect, etc.
© Polsinelli 2016 26

27. UTSA General Provisions
 Provides definitions of “trade secret,”
“misappropriation,” and “improper means”
 Statute of limitations is 3 years
 Authorizes preservation of secrecy during
legal action (i.e., gag and protective orders)
 Provides remedies of injunction, damages and
attorneys’ fees
27

28. Defend Trade Secrets Act of 2016
 Rationale
 Belief that US needed to federalize trade secret law
 Trade secrets becoming more economically
important
– Over $3 billion (same as all exports to Asia)
– 2.1 million U.S. jobs
 Patent protection coming under fire
 State-by-state variations increasing, making
uniform protection more difficult
© Polsinelli 2016 28

29. DTSA: Outline of Provisions
 Forbes: “The New DTSA is the Biggest IP
Development in Years”
 Federal jurisdiction of theft of trade secrets in
interstate or international commerce
 Civil remedies for trade secret misappropriation
– Injunction
– Reasonable royalties
– Damages
 New remedy—civil seizure
© Polsinelli 2016 29

30. DTSA: Outline of Provisions
Employment Law issues:
 No injunction to prevent new employment
 Injunction aimed at new employment must be based
on evidence of threatened misappropriation, and not
“merely information the person knows”
 Safe harbor for “whistleblowers” and “anti-
retaliation” disclosure of trade secrets
 Whistleblower and retaliation protection must be
referenced in employment agreements and NDA’s
© Polsinelli 2016 30

31. UTSA-DTSA Similarities
 DTSA definition of “trade secret” is
substantially similar to UTSA
 DTSA definition of “misappropriation” is
substantially similar to UTSA
 DTSA definition of “improper means” is
substantially similar to UTSA
© Polsinelli 2016 31

32. UTSA-DTSA Similarities
Remedies:
 Injunction – UTSA § 2(a)/ DTSA §2(a)(3)(A)
– Actual/threatened misappropriation may be enjoined
• For length of time the trade secret exists
• Sufficient time to eliminate any competitive advantage
due to misappropriation
 Reasonable Royalties – UTSA § 2(b)/DTSA
§2(a)(3)(A)(iii)
– “Exceptional circumstances”
© Polsinelli 2016 32

33. UTSA-DTSA Similarities
Remedies:
 Damages – UTSA § 3/DTSA §2(a)(3)(B)
– In addition to injunctive relief, may receive damages
• Includes the actual loss AND the unjust enrichment caused by
misappropriation
– “Willful and malicious” behavior results in up to 2 times
regular damages §2(a)(3)(c)
 Attorney’s Fees – UTSA § 2 (b)/DTSA §2(a)(30(D)
– Court may award attorney’s fees to the prevailing party for
willful and malicious misappropriation or actions made in
bad faith
© Polsinelli 2016 33

34. Remedies - Damages
 Damages
– “Actual loss” caused by the misappropriation
– “Unjust enrichment” not addressed in actual loss
computation
– Reasonable royalty as damages calculation
method (“in lieu of other methods”)
 Enhancement
– “Willfully and maliciously” misappropriated
– Not more than 2 times regular damages awarded
© Polsinelli 2016 34

35. Remedies – Attorney’s Fees
 Attorney’s fees may be awarded if
– Misappropriation claim was made “in bad faith”
• “May be established by circumstantial evidence”
– Motion to terminate injunction is made or
opposed “in bad faith”
– Trade secret is “willfully and maliciously
misappropriated”
– “Reasonable” attorney’s fees may be awarded
• Octane Fitness standard?
• Costs?
© Polsinelli 2016 35

36. UTSA-DTSA Similarities
Other Provisions:
 Preservation of Secrecy—permits sealing and “gag
orders” during any legal action concerning the trade
secrets
 Statute of Limitations—claims may be brought 3
years after the misappropriation is discovered or
should have been discovered by the exercise of
“reasonable diligence” (UTSA § 6/DTSA §2(a)(d)
© Polsinelli 2016 36

37. Remedies – Ex Parte Civil Seizure
Civil Seizure
 New remedy—potentially very powerful
 Order may issue “only in extraordinary
circumstances”
 Limitations
– Stringent requirements for issuing
– Stringent requirements for elements of order itself
© Polsinelli 2016 37

38. Ex Parte Seizure Order
 Requirements for issuing order: DTSA §2(b)(2)(A)(ii)
– Appropriate when ordinary injunction “would be inadequate”
because party would “evade, avoid or otherwise not comply”
• Legislative history examples:
– Fleeing the country
– Planning to disclosure immediately
– “Otherwise not amenable” to enforcement
– Immediate and irreparable injury
– Harm to applicant of denying order …
(1) Outweighs harm to “legitimate interests” of ‘Seizee’
(2) Substantially outweighs harm to third parties
© Polsinelli 2016 38

39. Ex Parte Civil Seizure
 Applicant must show “likelihood of success” that:
– Information is a trade secret
– 'Seizee' misappropriated by “improper means”
– ‘Seizee’ has “actual possession” of property to be seized
– Application describes matter to be seized “with reasonable
particularity” and identifies its location
– 'Seizee' would otherwise “destroy, move, hide or otherwise
make inaccessible to the court” if applicant put ‘Seizee' on
notice
– Applicant “has not publicized” the requested seizure
• “Don’t want to make news” – Leg history
• Query—only an “applicant” … what happens if media
monitoring court dockets publicizes application?
© Polsinelli 2016 39

40. Whistleblower Protections
 DTSA provides safe harbor to whistleblowers who provide
trade secrets to government
 Whistleblower entitled to civil/criminal immunity for disclosing
trade secret so long as purpose of disclosure is to report or
investigate a suspected violation of law and is made:
– To the whistleblower's attorney
– To a government official
– In a court filing under seal
 If whistleblower files lawsuit for retaliation against employer
based on reporting of a suspected violation of law,
whistleblower may also use the trade secret in that anti-
retaliation lawsuit
40

41. Whistleblower Protections
 Employer must provide notice of immunity in any
employment contract that governs the use of trade
secret or confidential information
 Notice of immunity must be provided in the contract
itself or the contract must cross reference to a
company policy document that discusses the
employer’s reporting policy for suspected violations of
the law
 If employer fails to include notice in contract, it is
prohibited from being awarded exemplary damages or
attorneys' fees in suit under DTSA
41

42. Advantages of DTSA
 Principal advantage—nationally consistent
substantive and procedural law
– With USTA state-to-state differences, while minor, can be case-
dispositive (e.g., burden of proof; threatened misappropriation,
innocent acquisition; scope of information protectable;
“reasonable” measures to protect)
 Other advantages
– Private party civil access to federal courts
– More sophisticated judiciary
– Remedies enforceable nationwide; nationwide subpoena power
– Simpler trans-state procedural issues (e.g., discovery management)
– Significant new remedy—civil seizure
© Polsinelli 2016 42

43. Next Time
“Transition and the fight for bathroom equality.”
Save the date: October 12, 2016
43

44. Contact Information
Eric E. Packel
Shareholder | Polsinelli
Kansas City, MO
816.360.4249
epackel@polsinelli.com
© Polsinelli 2016 44

45. Contact Information
Jeffrey S. Bell
Shareholder | Polsinelli
Kansas City, MO
816.360.4264
jbell@polsinelli.com
© Polsinelli 2016 45

46. Contact Information
Stephen E. Fox, Esq.
Shareholder | Polsinelli
Dallas, TX
214.661.5582
sfox@polsinelli.com
@StephenEFox
https://www.linkedin.com/in/stephenefox
© Polsinelli 2016 46

47. Contact Information
Matt Todd
Shareholder | Polsinelli
Houston, TX
713.374.1650
mtodd@polsinelli.com
© Polsinelli 2016 47

48. Contact Information
Judy Yi
Shareholder | Polsinelli
Kansas City, MO
816.360.4129
jyi@polsinelli.com
© Polsinelli 2016 48

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