Is it common practice for the programmer with fixed salary to compensate all losses in case of bug in his/her code that caused these losses? [closed]

Question

I was looking for remote job on Linux kernel hacking, which is a kind of dream job. Eventually I found one, sent a resume, passed an interview and even got an offer, and salary was good enough. So far, so good.

Since programmers work for the company remotely, the programmers must register their own company (individual entrepreneur), and company-employer works with these legal entities. As opposed to employment contracts, the company is free to write anything it wants in the contract with legal entity, and so, when they sent the contract to me, I've read that if the company incurs losses (supposedly) because of programmer's work, the programmer must compensate all the losses completely. From what I know, this amount could be A LOT more than programmer's salary.

From my experience, the reality of software development is that there is always a possibility of bugs. Of course, developer strives to write bug-free code, writes tests and so on, but, sometimes the bugs are found in old tested code. So, there is virtually no way for the programmer to insure from very serious problems in his/her life, because of this item in the contract.

I believe that this kind of liability is unacceptable for this kind of collaboration: the only way the for employer to put liability like that on programmers is to draw some percent of profits, not fixed salary.

I tried to limit the liability: I proposed that maximum what could be drawn from the programmer is a full salary from previous month. This proposal was declined by the employer, and I decided not to work for them, although it makes me sad that I had to decline otherwise very interesting position.

Am I wrong?

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UPD: Regarding the country: I'm in Russia, and the company I'm talking about here is Russian as well, but I was primarily interested in whether such practice is common in different parts of the world, not only in Russia: I've also heard that some Russian people work for US companies by similar scheme: they register their own companies, and sign contract with US companies. I'm glad to know that such practice is not common (from many answers and comments). Probably I'll try to work toward this goal.

Answer 1

Such a contract clause is very uncommon for salaried employees. Usually an employee can only be made liable for any damages they cause during their job when they have caused the damage intentionally or at least were grossly negligent (varies depending on where you are).

By forcing employees to register a company and work as a contractor, the company is trying to circumvent various employment laws, likely more than just liability. Depending on jurisdiction this might in fact be illegal. In the United States, for example, this is called "Misclassification of employees as independent contractors" and can be considered tax fraud. Ask a lawyer familiar with your local work laws for details.

But the legal problems are a problem for the employer, not the employee.

Contracting instead of being employed is usually only a good idea when the compensation is not just "good enough" but so good that it outweighs all the rights and benefits you lose compared to regular employment. Social security benefits, for example. You can easily look up what a private insurance would cost you which offers the same benefits. Subtract this from your salary. Another factor is vacation and sick leave. A contractor usually does not receive any payment when they are sick or on vacation. This is another factor which reduces your average salary. Is your salary still "good enough" when you factor that in? And then there are also other benefits which are difficult to express in money, like protection from wrongful dismissal.

Regarding the liability clause, you could try to check with an insurance expert what it would cost you to get a liability insurance which covers the case described in the contract. When the insurance expert says that they won't insure you against that kind of risk (at least not for any reasonable amount of money), they likely have a good reason not to. They are smelling a trap, and you would be well-advised to follow their instincts and say no to the job (nobody is as good at estimating risks as insurance companies - it's the primary skill they need to stay in business).

Answer 2

First, what you need is legal advice. I am not a lawyer, so take the following for what it might be worth.

If you have to set up your own company, you're not salaried; you're a contracted worker. As such, you have a say in the contracts you enter into. In the USA, employers cannot legitimately classify you as a contractor if they dictate when/where you work, require you to be on premises, etc. In other words, they don't want an employee, so they don't get to treat you like an employee. If they do, they risk big tax problems, because that's likely what they're trying to avoid.

Since this is your dream job, you may not want to just walk away from it, just over this. Here's what I would do. Request to amend the contract to include that upon delivery, they will provide written notification of acceptance of your delivery, after which they assume full responsibility. This is especially appropriate if they intend to keep your work as their intellectual property (which is common for contracted work).

The expectation is that they will test your product and decide whether it meets their requirements. As a developer, your job is to understand their requirements well enough to implement them to the level that they will accept. Once they do, it's their product and their responsibility.

Have a qualified, competent attorney review your contract before you sign it (who is paid by you, not the company, so they represent your interests). They may also recommend clauses in your favor such as...

1. Additional scope (how to handle requirements changes after the fact that are beyond normal software development tweaks).

2. A specific timeframe after delivery for which you will provide warranty on your work (fix your bugs at your cost). It would be crazy for you to enter into any contract that keeps you responsible for the rest of your life.

3. Payment terms, whether they be hourly (within limits your or they agree to), or fixed price.

4. There are others. Choose a good lawyer who is experienced in software contracts.

If the company refuses to treat you like an independent business entity, and insists on your accepting their contract as is, you need to walk away and never look back.

Answer 3

No, I don't think that's typical and, actually, depending on where you are I think there's a question of illegality.

When an employer hires you they're generally paying you for your time. That's why there's a lengthy hiring process to find someone who can build what they're looking for in a reasonable amount of time. In software development there is risk in hiring and development. In development you should go through testing trials and what not to mitigate any risk, but you obviously can't remove it entirely.

Besides, who decides the scope and breadth of losses? If there were an error, which may happen, do you automatically have to pay your employer for assumed damages? What kind of work environment is that? My work life is stressful enough. I certainly don't need that over MY head.

I'm not saying the employer shouldn't be satisfied with the end product and there should be a stipulation as to when a product IS satisfactory, but personally I don't think there's a reason to work for a company that might literally charge you if something, somehow, some way goes haywire.

Answer 4

No ... and yes.

You are making the deal as a company or an enterpreneur, that is something totally different than a deal between an employee and an employer. Following points need to be consiedered with regart do the applicable jurisdiction!

1. Different world - as a business you are on the other side of the barricades. Effectively everyting (in legal terms) there usually is to protect you as an employee turns the other way when you are a business.

2. Much more freedom in negotiations - you are liable to an extend (freely) set up in the contract. You don't like it, you don't sign it (like you did).

3. Possibilities to cover your possible losses - as a business you can get a business insurance. Usually a very expensive and a very limited one. A quick survey among my insurance agents in the middle of Europe says you almost can't insure against the risk in question (software bugs). But - you can set up your legal entity to hold only a limited amount of liablity (LLC or similar sort of a legal entity) that you'll need to 'sink' (make bankrupt) in case of a high liability proceeding. In some countries, it

4. Legality - as Philipp and Kent say in their very fine answers, what you may be illegal. But it very well may not - which depends on your jurisdiction. In some heavily regulated regions, like European Union, you becoming a business (legal entity) may be the only viable (legally plausible) way for them to make use of your services.

5. Mabye a necessity - it may be that their legal setup only allows them to 'hire' you in this sort of way if you assume the complete and total responsibility of your actions (or, better said, the legal entity they are signing the deal with). For example, it is illegal to close your business voluntarily in France when you have employees. Crazy as it may sound.

Conclusion: however crazy it may look at the first sight, there may be a set of instruments that the company must use (or rules to follow) and there may be a nice of instrument you can use to protect yourself against seemingly high liability.

Answer 5

I've been offered a contract like that. It was written by my employer's client's lawyer, and designed of course by the lawyer to be favourable to the client.

I reviewed the offered contract, decided for myself which clauses I wanted to delete or edit, and said that I'd accept (agree to) the contract with those (reasonable) changes.

For what it's worth, for example, there's a difference between "negligence" and "gross negligence": you might be willing to accept liability for the latter but not the former.

I won't try to advise you on what you should have in a contract; but I have had the experience of being offered an unfavourable one.

Answer 6

This is a legal question so you'd really, really want to get the contract reviewed by a lawyer that can advise you about what it means to you in your very specific situation. Undoubtedly, there are ways to protect yourself. Having a non-lawyer read a contract and summarize it for a group of non-lawyers to comment on is likely to introduce all sorts of potentially catastrophic errors and omissions.

First off, if you are establishing a legal entity DmitryCorp separate from yourself, you would very likely want to create a limited liability corporation. Broadly, that would shield your personal assets and expose just the assets of the corporation to a suit. If the corporation loses a suit for more than it is worth, DmitryCorp can happily file for bankruptcy while Dmitry the person retains all his assets (and his sterling credit report). Of course, here is where a real lawyer will give you a ton of clarifications about how to establish such an entity, how to ensure that you don't run afoul of various laws, what you have to do to keep your liability limited, etc.

Second, DmitryCorp can very likely purchase errors & omissions insurance that would cover your corporation in case of a claim based on buggy code it produced. A number of corporations that hire contractors require that the contracting company maintains this sort of policy in part to prevent contractors from maintaining an asset-less DmitryCorp that can't ever be sued. How expensive that is and exactly what it covers is something that you'd need to work out with your insurance agent and your lawyer.

Reviewing the contract with an actual lawyer will tell you whether this company is really putting onerous terms in the contract that you really can't protect yourself against or whether setting up a corporate entity and buying appropriate insurance would realistically protect you. Of course, you'd need to factor in the cost of establishing this protection (including the tax consequences) when deciding how much you'd need to charge the company for your services to make it worth your while.

Answer 7

This is not common and you are not wrong for walking and away.

Anyone in a similar situation should get legal advice.

One thing to consider is the legal advice the employer is getting. Sometimes they have over zellous and over bearing legal advice that knows little about software development.

For example I once worked for a web company where my contract forbid me from making code available to third parties, so in theory I could not do a release. Or another supposed open source company where I could not make code public.

Legal often lags a long way behind culture, and has very different priorities to coders.

Answer 8

I contracted for years, so I can speak about this with some authority.

If you are a independent contractor then you should get at a minimum professional indemnity and public liability insurance.

Contracts can include clauses which can mean that in the event of a issue your personal business entity can be liable for damages in the event of negligence or professional misconduct. I have only ever seen one claim attempted, ( against a third party not myself ) and when it went through court it was proven that there was no negligence since everyone worked in such a manner that one could assume a reasonable programmer would work and it was simply a unfortunate series of events.

What this means in effect is that you have to write code like an engineer and not like a cowboy. If you pay a builder to build a house for you, and they in turn pay a carpenter to build the internal frame, what do you do in the event that the house collapses 2 weeks after you move in ? Take the company to court over the cost of the house, your damaged effects, and having to rent while your house is rebuilt ( and this will cost more then what you paid for the house to be built ).

The building company will then have to either pay up or find someone to blame, if they find that the fault laid with the frame then company will the take the carpenter to court ( for that full amount + legal fees ), who then in turn may be able to prove that they were not negligent..

Further investigation may show that the nails used to build the house had some manufacturing flaw,that maybe 1 in 10000 have a hairline crack down the middle and fail to bear the advertised load... And then the carpenter takes the manufacturer of the nails to court.

So end of the day you paid 90k to build a house, you sue the builder for 120k when the house falls down, and then the person responsible for all of this at the end is a nail manufacturer who was paid $23 for a bunch of substandard nails and ends up with a total damages bill of 400k.

Answer 9

sigh insert the ubiquitous IANAL disclaimer.

(Assuming this company is based in the United States)

If you are ineligible to set yourself up as an LLC S Corp, I wouldn't even seriously try to acquire the contract. I would set the rate so high that I price myself out of the market just to get the negative response on the contract that I require to sue them.

Assuming that you can set up as an LLC S Corp:

I would make sure there is a timeliness clause in the remittance of my accounts receivable so that they can't hold onto your checks such that they remain the property of your corporation rather than your personal distribution. One of the major benefits of an LLC S is that your corporate revenue "passes through as a distribution" to you and is taxable as personal income rather than corporate income. Without a clause in the contract dictating that they must remit payment in a "timely" fashion, they could let all of your invoices sit in AP, the AR record would remain the property of the corporation rather than you personally, and all of your income could be just as at risk as if you were operating under a sole proprietorship.

I would pore over the contract with a fine toothed comb to make sure they do not sneaking in a personal liability clause or a "real damages" clause.

Then I would demand an exorbitant rate. They are most likely in violation of Federal Labor Law by trying to have you hit the books as a vendor rather than as their employee.

If they accept my terms, awesome. If they reject, I report their actions as a potential Labor Violation and make a Federal case out of it.

In short, I would position myself so that I win and they lose. They are trying to screw you. Screw them 1st.

Answer 10

As a person who worked as independent contractor, I remember one company who had something like:

... in case of unauthorised confidential information disclosure done by the contractor, company reserves the right to take the case to the court and recover losses which contractor may or may not be aware of.

But hey, in OP's situation they are basically claiming the right to recover random amount of money. In authors situation I would suggest (besides of not working on such conditions) to have conversation with lawyer, as in some jurisdictions that clause may render the whole contract invalid.

Answer 11

Sign up! No problem: Create a limited liability company with virtually no assets and write the contract in your company's name.

Since your company is making the contract, only your company can get sued (not you). The most you'll lose is the $2 your company is worth - 1$ for each share you issued.

Answer 12

First is there is no salary, they are fees paid to your company. Second, it's common for any legal entity like your company to purchase liability insurance in the event they're sued. This is your primary defense here. Most software contracts state the software isn't guaranteed, and that liability is limited to what was paid for the software. If you did have a clause like this you could probably limit your refund to what you were paid for writing that module or function, so fairly low money. Last, If you incorporated or LLC your company and they tried to sue you or recover fees, you could always close the company down, and have no personal liability for the suit. Yes, get legal advise and yes, don't work for them.

Answer 13

This is not a common approach - but it might have been okay to sign the contract anyway: Here's why.

First of all, the situation you've described is a contract between two companies - the one with the work to do, and the one with the talent to do the work (your company). If your company was created for the purposes of this contract, and has no other assets, then you are not reachable as a party in a suit and the company has no assets to lose in the event it is sued. The contract is between the two companies - and one may sue the other - but in the event your company is sued, you simply turn over all the assets of the company and dissolve the corporation. Your personal assets are not at risk. In fact, that is quite often the purpose of a corporation - to shield the principals from economic risk.

Of course, you would have to run your company like a company - and not just an extension of yourself. That would mean corporate meetings (a good excuse to take that tax-deductible vacation to an island resort), keep the finances separate, pay yourself on a regular basis, do the proper tax withholding, etc. If you fail in any of that, there is a doctrine called "piercing the corporate veil" that can make you personally liable.

Of course, you have to understand that this could be a really cool job working for jackasses... or maybe the only jackass is the attorney for the company who doesn't know the first thing about software or computers. In my experience, top-level managers frequently have little computer knowledge, attorneys generally have even less, and so what you may have here is an ignorant attorney trying to protect his client, and ignorant management accepting the ignorant attorney's advice.