Recently in Employment Category

More Case Law for Employee Non-Compete Agreements

December 21, 2012,

Having practiced corporate law in Silicon Valley for 15 years, I must say that there is nothing more frustrating for my clients, who are mostly closely held businesses in the San Jose area, than spending months or years training an employee only to have her leave and go on to compete with the company that trained her. In particular, I represent several staffing and consulting companies and have had to listen to their complaints of how unfair this is from the employer's perspective. Often, I have to tell these hard working, small business owners that there is almost nothing they can do (except pursue a claim against the employee for misappropriation of trade secrets). In 2008, the California Supreme Court decided Edwards v. Arthur Andersen LLP, making it clear that employee post-employment non-compete agreements are unenforceable in California except in certain very limited circumstances, including in connection with the sale of a good business involving goodwill.

Now, a new California Court of Appeals case, Fillpoint, LLC v. Maas (August 24, 2012) further enforces California's attitude towards fostering open competition and disfavoring restrictions on employees. In the Fillpoint case, a major shareholder and key employee signed both a three year non-compete agreement related to the sale of his stock, and a one year post-employment non-compete in his new employment agreement. The Court paid particular attention to whether the stock purchase agreement and the employment agreement should be read together as one document. The employment agreement alone would violate California's view of post-employment non-compete agreements as against public policy. However, in connection with the sale of the business, it could be enforceable. In this case, the shareholder/employee worked for the acquired company until the three year non-compete ran out, but then terminated his employment and went to work for the competition. The company claimed that the one year non-compete covenant in the employee's employment agreement should restrict him from such competing employment. The employment agreement non-compete provision specifically prohibited him from making sales contacts or actual sales to any customer or potential customer of the company, working for or owning any business that competes with the company, and employing or soliciting for employment any of the company's employees or consultants.

The court found that the two agreements should be considered integrated because the covenants were executed in connection with the sale or disposition of stock in the acquired company. In particular, they noted the integration clause in the documents, which stated that if there were any conflicts between the two documents, the stock purchase agreement would control. The court went on to consider whether the non-compete and non-solicitation covenants should be void and unenforceable, and found that they were because they were overly broad. In particular, the court noted the over-broad restriction against selling to potential customers of the company.

So what does this new case teach us? Non-competes are still extremely limited in California. And for me, as a business attorney in the Silicon Valley where mergers and acquisitions are either a way of life or an exit strategy for most businesses, this case reminds me how careful business lawyers have to be when drafting these provisions to make sure they are enforceable. Non-compete provisions should be clear that they are connected with the purchase and sale of a business, including any specific payment allocated to such non-compete covenant. And when drafting a non-compete, do not try to make it any broader than necessary to protect the goodwill being acquired.

There is another question that comes up often in my practice. After I am done explaining how most non-compete covenants are illegal and unenforceable in California, my small business clients almost always ask about whether they can include an employee non-solicitation agreement instead, to at least prevent the person leaving from taking key people with them. I really wish I could clearly and conclusively tell them that they can, but I am not so sure anymore. In the past, we could point to the Loral Corp. v. Moyes (1985) case which held that employee non-solicits are enforceable in California. However, the Arthur Andersen case and now the Fillpoint case make this position a lot less certain, even though they don't specifically overturn Loral corp.

Where does this leave us? It seems like we say this every year, but it is time to revisit your employment agreements and independent contractor agreements. If you insist on keeping an employee non-solicitation covenant, make sure it is as narrow as possible and that your agreement has a severability clause to (hopefully) save the rest of the document in the event a court finds the restrictive covenant to be void and unenforceable.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

Tax Update: IRS Ruling Affects Automatic Gratuities

October 15, 2012,

Whether it is a group lunch to welcome a new employee to our law firm, a birthday dinner for family, or Moms' Night Out with friends, I often find myself enjoying Silicon Valley restaurants from San Jose to Palo Alto with a group of six or more. It is not uncommon to have the restaurant automatically add the gratuity, which is usually 18%, to our bill. This has always bothered me - not because I have a problem with paying the 18% (I often tip more than that), but because it is sometimes not obvious on the bill, and they still provide the blank line for you to add a tip, as if they are trying to trick people into double-tipping. Well, if you do not like the automatic 18% gratuity added to your bill, you will be happy to hear about a recent IRS ruling (Revenue Ruling 2012-18, June 25, 2012). This ruling clarifies the definition of tips verses service charges, each of which is treated differently for tax purposes. The result will likely be the end of automatic gratuities.

The IRS ruling states:
"The employer's characterization of a payment as a "tip" is not determinative. For example, an employer may characterize a payment as a tip, when in fact the payment is a service charge. The criteria of Rev. Rul. 59-252, 1959-2 C.B. 215, should be applied to determine whether a payment made in the course of employment is a tip or non-tip wages under section 3121 of the Code. The revenue ruling provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: (1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment. All of the surrounding facts and circumstances must be considered. For example, Rev. Rul. 59-252 holds that the payment of a fixed charge imposed by a banquet hall that is distributed to the employees who render services (e.g., waiter, busser, and bartender) is a service charge and not a tip. Thus, to the extent any portion of a service charge paid by a customer is distributed to an employee it is wages for FICA tax purposes."

This definition may cause several different tax and reporting issues for restaurants, including:

- Restaurants can benefit from applying a general business credit toward employer side Medicare and Social Security taxes on tip earnings, which would be lost if these tips are considered service charges.
- Services charges will have to be reported as wages, affecting overtime rates.
- Services charges would be included in the restaurants calculation of Gross Receipts.
- Restaurants could choose to keep the service charge rather than pay it to employees.

So, next time you go out to eat with a large party, take a closer look at the check when it comes. I am guessing the automatic gratuities will soon change to something like a "suggested tip amount."

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

The Brinker Case: Employers Receive Clarification on Meal and Rest Breaks

May 23, 2012,

As a business litigation attorney in San Jose, I am always concerned when clients are confronted with murky or unclear regulations. For many years, employers have been awaiting clarity on California's confusing meal and rest break laws. There has been uncertainty as to whether employers must force their non-exempt employees to take their meal breaks, or whether the employer meets its obligations by simply providing employees the opportunity to take their breaks. The California Supreme Court very recently provided much needed clarification on this important employment law issue in the case of Brinker Restaurant Corporation v. Superior Court of San Diego County.

The Court also addressed the proper method to calculate the timing of both meal and rest breaks, putting an end to the guessing game of how many breaks must be provided, and when the breaks must be given.

Employers Do Not Need To Police Employees During Meal Breaks
The Court decided that employers, while under a legal duty to provide meal breaks at appropriate intervals, are not obligated to ensure that employees do no work while on their breaks. The employer's obligation is simply to relieve its employees of their work duties, relinquish control over the employee's activities, and permit the employee a reasonable opportunity to take an uninterrupted 30-minute break. Of course, the employer must not impede or discourage the employee from taking the provided break.

Also of great importance was that the Court stated quite clearly that employers are not required to police meal breaks to ensure that no work is performed during the break. In fact, employees are free to work during their meal break, if they decide to do so.

Timing of Meal Breaks
The Court also provided clear guidance on the timing of meal breaks. The first meal break must be provided no later than the end of an employee's fifth hour of work. A second meal period must be provided no later than an employee's 10th hour of work. Meal periods can be scheduled prior to the end of the fifth hour of work, including in the first hour of work, and can occur before the first rest break.

Timing of Rest Breaks
The case also clarified when employees are entitled to rest breaks. Employees must be given one 10-minute rest break for shifts from three and one-half to six hours in length, two 10-minute rest breaks for shifts of more than six and up to 10 hours in length, and three 10-minute rest breaks for shifts more than 10 hours and up to 14 hours in length. Employees who work less than three and one-half hours are not entitled to a rest break. The Court also stated that there is no requirement for an employer to give a rest break before a meal break.

Overall, the business community and employer-side employment attorneys view the Brinker case as a common sense legal opinion that offers clear guidelines for handling employee meal and rest breaks. Furthermore, the case may have the effect of curtailing potential class-action lawsuits against California businesses that, prior to the Court's ruling, could have been accused of meal and rest break violations.

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Stopping Illegal Acts by Current and Former Employees

March 19, 2012,

As a business litigation lawyer in Silicon Valley, I have seen quite a few employee-related issues come up for businesses in San Jose and Santa Clara. For the purpose of this blog, I have combined issues of several clients into one hypothetical owner of a small Internet company. The owner discovered that one of her employees had started a competing online business and was attempting to staff the new business with her current employees. The owner was justifiably concerned as to whether her employee's acts were illegal, and whether she, as employer, had any recourse. This blog summarizes some of the litigation issues businesses face when employees take actions that violate California's unfair competition laws. Click here to read my previous blog on unfair competition by competitors.

The owner's biggest problem was the fact that her employees were being solicited to work elsewhere. Like many small business owners, this owner had worked hard to create a business staffed by well-trained employees who provided customers with excellent goods and services. The deliberate effort by the company's existing employee to pick up her other employees caused the owner undue stress and frustration.

The soliciting employee in this case was clearly in the wrong. Under California law, while working for a company, an employee cannot solicit fellow employees to leave that company and work for a competitor. To do so is a breach of a confidential relationship, a breach of an implied obligation, and possibly even a breach of fiduciary duty, depending on the soliciting employee's position. Where the employee is a fiduciary, liability for unfair competition may also extend to the hiring competitor if it knows of the employee's actions and benefits from them.

While the owner provided a top-notch online service with an established and growing customer base, she was also concerned about her employee's competing web site. California law permits an employee to make some preparations to establish a competing business while employed. However, the employer may have good cause to terminate the employee if the acts by that employee to establish the business are such that the employee cannot give his or her undivided loyalty to the employer. Once an employee ceases work, the employee may go into direct competition with his now-former employer.

It is also important to note that employers may also sue former employees who misappropriate their ex-employer's proprietary information or trade secrets. For example, businesses expend a great amount of time, effort, and money in developing customer lists. Such lists are often the most valuable asset a company a may have, and can qualify as both proprietary information and a protected trade secret. Under California law, an employee may not take an employer's protected customer address list and then begin directly soliciting the customers.

However, to qualify as protected information, the customer list should contain specific information not generally known to the public or competitors. This information might include names of contact personnel, history of previous dealings with the customer, price quotes provided to the customer, and other particular information. A company should also maintain its customer list in a confidential manner. The more rigorous a business attempts to maintain the secrecy of its customer list, e.g. informing employees of the confidential nature of the information, protecting the information with passwords, including notices that the information is proprietary, and other steps, the more likely the court will be to find that the customer list qualifies as proprietary information or a trade secret. A non-solicitation clause in an employment contract, restricting the employee from soliciting the employer's customers for a certain period of time after leaving, may bolster an employer's argument that the employee cannot lawfully use the customer list.

Trade secrets, of course, are not limited to customer lists, and include a wide variety of formats, such as business plans, bid specifications, software code, and other documents and information. Such documents and information should be proactively protected by businesses, in case an instance occurs where litigation arises due to an employee's misappropriation of trade secrets, or other acts of unfair competition.

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New California Law Regarding Willfully Misclassifying Employees as Independent Contractors

March 13, 2012,

As a corporate and business lawyer in San Jose, I have been busy speaking with Silicon Valley business owners about a recent California law affecting companies that have misclassified employees as independent contractors. When the 2008 economic crisis hit, large high tech companies and small start-ups in San Jose, Santa Clara and Sunnyvale, among other cities, adapted by hiring workers as independent contractors to avoid paying payroll taxes and offering benefits to the new hires. Unfortunately, some companies may have inadvertently misclassified employees as independent contractors.

There has been a lot of publicity around the new IRS program allowing businesses to voluntarily correct the misclassification and pay only a low penalty. However, there has not been quite as much news about the recent California law (Senate Bill 459 signed into law by Governor Brown in October, 2011) which makes the willful misclassification of employees and independent contractors illegal and subject to severe penalties. Under the California law, the Labor Commissioner can impose penalties not just on the employer, but also on the employer's accountant or other paid advisor (other than employees or attorneys). These penalties range from $5,000 to $15,000 for each misclassified person, or $10,000 to $25,000 per violation if there is a "pattern and practice" of violations. There are still more penalties for employers that charge their misclassified employees a deduction against wages for any purpose (including space rent, goods, materials, services, equipment maintenance, etc.), which is considered as another attempt to wrongfully treat them as independent contractors.

What does "Willful Misclassification" Mean?
The definition of willful misclassification in the law is: "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor." (California Labor Code Section 226.8 (i)(4).)

Contractors Beware
The labor agency is required to notify the Contractors State License Board if a contractor is determined to have willfully misclassified workers, and the new law requires the Contractors State License Board to initiate discipline against the contractor.

Everyone Beware
The new law also provides for public embarrassment by requiring employers who have willfully misclassified employees and independent contractors to prominently display a notice on their website (or if they do not have a website, then in an area accessible to all employees and the general public) saying that they have committed a serious violation of the law by willfully misclassifying employees, that they have changed their business practices so as not to do it again, that any employee who thinks they may be misclassified may contact the Labor and Workforce Development Agency (with contact information), and that the notice is being posted by state order.

It is not just the employer that needs to worry about misclassification. If you provide paid advice to an employer, knowingly advising the company to treat a worker as an independent contractor to avoid employee status, you can be held jointly and severally liable for the misclassification. This rule does not apply to business lawyers like myself, because attorneys providing legal advice are exempt from this liability, as are people who work for the company and provide advice to the employer.

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IRS Program for Employee Misclassification

February 7, 2012,

Has your business been misclassifying workers as independent contractors? If so, you should pay special attention to a recent IRS announcement of its new program giving a break to employers who voluntarily correct such misclassifications. With Silicon Valley being a technology hub, there are thousands of computer programmers and engineers working as independent contractors in San Jose, Sunnyvale, and Mountain View. High-tech companies and start-ups that employ these individuals should carefully review their HR files to see if they have misclassified any employee. If a company discovers that it has wrongly classified an employee, it should then evaluate the IRS program to determine if the company should participate in the program.

In an earlier blog, I wrote about the importance of companies classifying their workers correctly in order to avoid substantial penalties and taxes. If your company may have misclassified workers, the new IRS program will let you voluntarily correct your errors and just pay a low penalty equal to 1.068% of compensation paid to those workers last year. IRS Announcement 2011-64 provides the details. To qualify for the IRS program, your company must not be under audit, and must have consistently treated the workers as contractors for the past three years. No reasonable basis for the previous misclassification is necessary. Going forward, you must treat the workers correctly as employees. The minimal penalty may be a good idea if you consider that the Labor Department and the IRS are beginning to share leads on misclassified workers. [Kiplinger Tax Letter September 30, 2011, Vol. 86, No. 20.]

However, there are some potential downsides in addition to having to pay the penalty. So, think twice before you come clean with the IRS. First, you will lose IRS Safe Harbor protection on those workers and they will always be treated as employees going forward. Second, as part of the deal, the IRS requires you to agree to extend the statute of limitations for an extra three years, meaning you can be audited for employment taxes and misclassifications for six years. Third, the California Employment Development Department ("EDD") is not participating in the program, so it is not bound by the rules and will likely assess your identified workers for the full three year statutory period. And the EDD is likely to find out about your deal with the IRS because of their agreement with the IRS to share information, and because they will see your employer credit for paying unemployment taxes and it will not reconcile with your quarterly wage reporting, triggering an audit. [Spidell California Taxletter, vol. 33.11, November 1, 2011, pages 124-125.] California has some new misclassification penalties which are significant.

If you still feel that participating in the IRS program is a good idea and will help you sleep better at night because you have been misclassifying workers, think carefully about which workers do and do not need to be reported and re-classified. It may be that only some of your workers are misclassified, but once you claim them as employees under the new IRS program, you are stuck with that classification.

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Catching Up On New California Employment Laws For 2012

January 23, 2012,

With the new year comes new laws, and businesses in the San Jose area should be aware of the new California employment laws that are on the books in 2012. Ensuring compliance with these new laws is good for the bottom-line, as it will make for happy employees, who will in turn make for satisfied customers. Making sure that your business complies with the new laws put on the books each January 1st may help your company avoid employment-related litigation.

Hiring Practices
Starting in 2012, employers may no longer obtain consumer credit reports about employees and job applicants. There are exceptions to this law, particularly for positions requiring access to bank or credit card information and other personal information, positions that include access to $10,000 or more during the daily course of business, positions involving signatory authority, and management positions.

Also, at the time of hire, employers must now provide notice to new nonexempt employees of the following information: pay rate; overtime rate; form of pay (hourly, salary, commission, other); a list of allowances that are included as part of the minimum wage; name, principal address, and telephone number of the employer; and the regular pay day designated by the employer. The employer must provide written notice to employees within seven days of any changes to this information.

Finally, the penalty for willfully misclassifying employees as independent contractors is now between $5,000 and $25,000. This five-fold penalty increase underscores the importance of properly classifying new hires.

Employee Leave
All employers with five or more employees must maintain and pay for a group health plan for any eligible female employee who takes Pregnancy Disability Leave for up to a maximum of four months during a 12 month time period. These benefits must remain at the same level as though the employee had been working during the leave. These requirements extend beyond those of the federal Family and Medical Leave Act.

The law regarding organ and bone marrow donor leave has also been clarified for 2012. During a one year period, employees are allowed 30 days of leave for organ donation and 5 days of leave for bone marrow donation, with the law now stating that the leave days are to be calculated as business days.

Discrimination Law
The California Fair Employment and Housing Act (FEHA) has been amended to prohibit employers from discriminating against employees based on genetic information, including genetic tests of an employee or his or her family members, and the existence of a disease or disorder in family members of the employee. FEHA differs from a similar federal law in that FEHA applies to employers with five or more employees, while the federal law covers employers with 15 or more employees.

FEHA has also been updated to clarify that discrimination on the basis of gender identity or gender expression is prohibited. Previously, only the term gender identity was used. Gender expression is defined as, "a person's gender-related appearance and behavior whether or not stereotypically associated with the person's assigned sex at birth." Employee dress codes must allow employees to dress in a manner consistent with both the employee's gender identity and gender expression.

Additionally, health care service plans and health insurance policies issued to California residents must provide equal coverage to domestic partners as that provided to spouses. While this has been the standing policy in California, the new law ensures that employers located outside California and with a majority of employees located outside of California must comply with California law as it pertains to California residents.

Wage and Hour Laws
Employees alleging violations of the minimum wage may now recover liquidated damages as a result of a complaint heard before the Labor Commissioner. Liquidated damages, which serve to punish the employer, are permitted in an amount equal to the unpaid wages owed to the employee. Put simply, for every dollar an employee is awarded in unpaid wages, the Labor Commissioner is authorized to award an additional dollar in penalties. Previously, employees could receive liquidated damages only after filing a complaint in civil court.

In the prevailing wage arena, which applies to specified state or federal public works contracts, the minimum penalty for wage violations has been raised from $10 to $40 per day for each worker paid less than the prevailing wage, and the maximum has been raised from $50 to $200.

When it comes to new year's business resolutions, some cannot fall by the wayside. Resolving to make sure that your business is in compliance with the new California employment laws for 2012 is an easy resolution to keep, and one that will help keep your employees happy and avoid costly litigation.

Continue reading "Catching Up On New California Employment Laws For 2012" »

Reminder for Employers in California - Reporting New Employees and Independent Contractors

December 16, 2011,

During the past few months, we have seen an increase in hiring from small startups and larger corporations here in San Jose and other parts of Silicon Valley. At this time of year, when companies are about to review Forms W-2 and 1099 for their workers, it is a good time for a reminder about California worker reporting requirements. In California, when a company hires a new employee, it is required to report this to the Employment Development Department (the "EDD") within 20 days of hire, regardless of whether the employee is full-time or part-time, or the amount of compensation.

If a business hires an independent contractor and pays the contractor more than $600, or enters into a contract with that individual for $600 or more, within a calendar year, the business is required to report the hiring to the EDD within 20 days of making a payment. Although the hiring of a new employee need only be reported once, the hiring of an independent contractor must be reported every year. However, if a company contracts with another business that provides a tax identification number rather than a social security number, the company hiring that business does not need to report to the EDD.

It is wise for a company to report to the EDD contractors it expects to pay in January of each year (e.g. continuing contracts) when the company prepares and reviews 1099s for the prior year. There is no penalty if a company reports a contractor and then the contractor does not actually perform services in the new year. However, the EDD could assess a penalty against a business for each failure to report a contractor within the required time frames. Source: Spidells California Taxletter Vol. 33.10.

Employer Update

December 2, 2011,

Starting in April, 2012, the EDD will calculate an ex-employee's unemployment claim differently than it does now. Currently, the EDD calculates the unemployment claim based on a lookback period of one year ending two quarters prior to the termination of employment. In April, 2012, the EDD will calculate the claim based on a lookback period of one year but ending one quarter prior to the termination of employment. This is a good reason to convert to online filing if you haven't already. For online filers, the EDD will already have this information and the change will be seamless to your business. However, if you do not file online, the EDD may not yet have your wages report for the prior quarter, or may simply not have processed it yet. In that case, you will receive a request for wage verification, and the employee will receive a request for proof of wages claimed. As the employer, you will have 10 days to complete the form and mail it back.
Source: Spidells California Taxletter Vol. 33.11, November 1, 2011, pages 130-131.

Alternative Workweek Arrangements in California

November 15, 2011,

As always, be careful when dealing with employees. I recently was contacted by a small business owner in Sunnyvale who was irate because her previous business attorney assisted her with a new alternative workweek schedule and all the employees agreed. Then, years later, they had to lay off some employees and the terminated employees just made a claim for overtime for all the hours worked over eight in a day. Because the alternative workweek was not agreed to in a secret ballot, it was not upheld by the Labor Board and her company had to pay significant amounts to several ex-employees.

In the past few years, I've noticed that more and more small businesses and corporations in San Jose and throughout Santa Clara County have moved a portion, or all, of their employees from a standard five day, eight hours a day workweek to a four day, ten hours a day workweek. A company that is interested in implementing this type of alternative workweek schedule must go through the proper process for implementing the schedule, or the company may risk misclassifying employee hours worked and end up paying penalties and fines for the misclassification. If an alternative workweek schedule is implemented correctly, an employer may be exempt from paying overtime to employees working up to ten hours a day, four days a week. Alternative workweek schedules can be proposed for an entire work unit or as a part of a menu of options for a work unit.

In California, there are several actions that must be taken before an alternative workweek schedule can be adopted by a company. A company cannot simply impose the new schedule on its workforce. One required action is for the company to hold a meeting with employees who would be affected by an alternative workweek schedule. The meeting is held so that the employer can discuss the effects of the alternative workweek on the affected employees and the employees can vote on the proposed schedule.

The following are some steps that should be taken before the vote can take place:

• The employer must first provide a written notice to the affected employees. The notice will inform the employees that the company would like to adopt an alternative workweek schedule, and invite them to attend a meeting to discuss the effects of the alternative workweek and vote on the proposal. The written notice, which must be provided 14 days before the actual vote, should disclose the effects of the proposed arrangement on employees' wages, hours and benefits, and include meeting logistics.

• The proposed alternative workweek schedule must be adopted in a secret ballot election by at least two-thirds of the affected employees in the work unit. The secret ballot election must be held during regular working hours at the employees' work site.

• Ballots for the election can only be cast by the affected employees.

• The results of the election must be reported by the employer to the Division of Labor Statistics and Research within 30 days after the results of the vote are final. The report must be given in letter format and must include the date of the election, a final tally of the vote (number of "yes" and "no" votes), the size of the unit considering the change to an alternative workweek, the nature of the employer's business, contact name and phone number. This information becomes public record.

• The letter must be sent to the following address:
Division of Labor Statistics and Research
455 Golden Gate Avenue, 9th Floor
San Francisco, California 94102

• If a work unit votes in favor of an alternative workweek schedule, employees who are affected by the change may not be required to work those new work hours for at least 30 days after the announcement of the final results of the election.

If an employer adopts an alternative workweek schedule consisting of four, ten hour days, the employer must still pay overtime pay of 1½ times the hourly rate for any hours worked in excess of ten hours per day up to twelve hours, and double time for any hours worked over twelve. The employer must also have a standard five days, eight hours schedule available for employees who are unable to work the four day schedule.

If you have any questions about implementing an alternative workweek, talk to a professional with experience in this area and don't assume that if all the employees agree everything will be fine.

Continue reading "Alternative Workweek Arrangements in California" »

Employee Terminations

October 24, 2011,

Whether your company is a large manufacturer corporation in San Jose or a small service partnership in Los Gatos, you will eventually be forced to deal with terminating an employee. Terminations can be especially daunting because they are one of the most common reasons companies are sued. Therefore, whenever possible, it is important to plan and prepare for a termination before actually firing the employee.

I recently helped an LLC in Santa Clara set up a progressive discipline plan for their company in order to set up systems to assist management and employees before someone gets to the termination stage. Before an employee is fired, many companies use a form of progressive discipline when dealing with employee problems. Under progressive discipline an employee receives greater disciplinary measures when employment continues to be unsatisfactory. It is imperative that all disciplinary actions are documented in writing. If a system of progressive discipline is used, all managers should be trained on that system. If managers are not properly trained, a disgruntled employee may have a stronger claim for wrongful discharge than if the system had not been used at all. Whether a system of progressive discipline is used or not, it is critical that all disciplinary actions be documented.

If a termination is inevitable, you should have a plan in place before firing an employee. However, there are times when you must fire an employee immediately, without any prior planning, because he has done something that poses a threat to other employees, your company or your clients. Prior to termination, you should review any termination procedures in the employee handbook, to the extent they exist, to ensure that your company is following its own procedures. If you are worried about an employee making a claim against the company upon termination and you want to request the employee release the company from all claims, you should contact an attorney to assist you in preparing a severance agreement.

On termination, you must provide the former employee with the final paycheck including any accrued but unused PTO or vacation pay, a change of status notice, and the EDD pamphlet "For Your Benefit, California's Programs for the Unemployed." If the employee is a shareholder or option holder, you should review all applicable documents prior to the termination for notices or deadlines related to termination of employment. However, do not give the employee legal or tax advice regarding those documents or their rights.

When conducting a termination, conduct it in a neutral, private place such as a conference room. Have the final paycheck and change of status notice ready for the meeting. If you are offering a severance agreement, have that agreement prepared as well. Many employees will not sign the severance agreement immediately so be sure to give them the allotted time in the agreement to sign it and don't give the employee any severance payments until the severance agreement has been signed, or 8 days later if the employee is over 40 and therefore subject to age discrimination rules.

You should always have two managers present during a firing. During the meeting, tell the employee within the first few minutes that he is being fired and tell the employee why he is being terminated. Although you do not need a reason to fire an at-will employee, you may not do so for the wrong reason (e.g. discrimination), so be careful in what you say. Also, if you say the termination is a result of restructuring, but the reason is really poor performance, the inconsistency may be used against you if the company is sued. Do not argue with the employee and do not be so complimentary that the employee wonders why he is being terminated. You are not required to give employees a written reason for termination. However, if you decide to, be sure that your legal counsel reviews those reasons. Avoid any reference to anything that could be considered evidence of discrimination, especially if you are terminating someone who is in a protected class. Always be courteous to the employee. You should also explain any benefits, such as COBRA, that the employee may receive. Have someone take notes during and after the termination to document the process and what was said at the meeting. Lastly, you should remind the employee of any continuing obligations to the company, such as confidentiality.

Once an employee has been terminated, be sure to get any company keys, cell phone or laptop that the employee had. Also be sure to change phone codes, computer passwords, alarm codes or other passwords that the employee may have had access to.

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Employment Basics for Employers - Employee Performance Reviews

October 4, 2011,

Silicon Valley is experiencing a "war for talent," even as the nation struggles with unemployment. The Bay Area has not been unaffected by unemployment, but with the number of high technology startups based in cities such as Palo Alto, Mountain View, San Jose, and Santa Clara, companies are finding themselves competing for talent. The value of human capital is greater than ever, which is why it is essential for companies to perform assessments on their employees. Employees can be a company's most valuable asset or its greatest liability.

Conducting employee performance reviews is one of the most important and often most dreaded tasks of management. Employee reviews take a lot of time and cause a lot of stress for managers even if the reviews are generally positive. Many employers try to avoid employee performance reviews. However, regardless of the size of your company, not conducting performance reviews can really hurt you both in productivity and in an increased risk of employment-related litigation.

I recently worked with a San Jose consulting business that was sued by a former employee of the corporation. The company had a salesperson in their Mountain View office that was drastically underperforming, but had never documented those failures in any way. The corporation eventually fired her and the salesperson then sued the company for wrongful termination. An employee file documented with poor performance reviews could have made that case go away much faster, and kept the settlement offers much lower. Below are some suggestions to make the most out of review time.

First of all, employee reviews should be conducted at least once a year, sometimes twice a year or more depending on the company and the employee. Good performance review practices help communicate issues before they get to the point of firing. In addition, if an employee is having performance issues, don't wait until review time to bring them up. Deal with the issue immediately.

Second, when conducting employee performance evaluations, be honest. Many managers give their employees high marks, even if they're not justified, just to avoid a confrontation. If an employee is performing poorly, discuss the poor performance in their review. Don't give an employee all high marks, especially if you are not happy with their performance. This could cause a problem if you decide to fire an employee for poor performance later. The employee may claim he or she had no idea that there was a performance issue and that former employee may try to sue on the basis that the real reason for termination was something else like discrimination. Courts like to see documentation of poor performance issues and the employee review is a great place to document any problems.

Third, consider keeping notes throughout the year when your employees do something positive. You can then bring these up during the evaluation instead of just focusing on the most recent items. This helps you provide specific examples of strengths and weaknesses. Give employees goals so they have something to strive for throughout the year.

Fourth, consider having employees complete self evaluations. Self evaluations help managers know where employees may not be receiving appropriate feedback throughout the year, especially if there is a large discrepancy between a manager's evaluation and an employee's self-evaluation.

Fifth, try to use a form of evaluation that actually fits the employee's job description, rather than a pre-printed form, or a form someone else is using. The right form will enable you to objectively measure an employee's performance on specific essential taxes required for their job. When conducting several evaluations at once, be careful to avoid certain pitfalls including the tendency to evaluate all employees as outstanding, average or poor, especially if that is not a true reflection of their performance.

Finally, use the evaluation process as an opportunity to talk to your employees and allow them to provide feedback to your organization. This is an excellent opportunity to gather ideas for your business, improve your organization, reduce grievances and prevent lawsuits. It is also an excellent opportunity to train your management staff in the evaluation process.

Employment Basics for Employers - E-mail and Voicemail Monitoring

September 19, 2011,

This blog focuses on an employer's rights to monitor electronic communications.

One of my Mountain View clients recently had an employee leave and wipe out all of his e-mails before he signed off for the last time. The employer immediately had its IT group recover the e-mails, and a corporate officer read through them. They found several emails where the employee was corresponding with others in the company about leaving and forming a competitive company. They called to ask me, after the fact, whether it was okay for them to read the employee's emails and what rights they have now to act on the information.

There are a number of laws that affect access to another person's emails. One of these, the Electronic Communications Privacy Act of 1986 (the "ECPA") prohibits unauthorized persons to access electronic communications, including wire taps and stored communications like e-mails. If you violate the ECPA, you could be subject to fines and prison terms up to one year, as well as civil damages and attorneys fees. However, there are three exceptions which may allow employers to monitor employee communications.

First, there is an exception for employers to monitor communications within the ordinary course of business from telephone equipment provided and used in the ordinary course of business. So, employers can monitor calls, voicemails or e-mails employees use in their regular business affairs. However, if during your monitoring the employer finds that what it is reading is a personal communication, it must stop.

Second, there is an exception when the company has the consent of the employee. This usually means that the company has given the employees actual knowledge of a clear monitoring policy. For example, if your employee handbook says the company policy is that it can monitor and disclose calls, voicemails and e-mails whether business or personal, and the employees sign off on the receipt of the handbook using company equipment, with that policy in it, then you can listen in, read, and disclose communications whether they are business related or not. Also, note that there are differences between monitoring and disclosing information. In particular, California law requires the consent of both the originator and the recipient parties in order to disclose the contents of a message.

Third, there is an exception for the employer as the person or entity providing access to stored electronic communications. In other words, if you provide for voicemail on a telephone system you own, or e-mail on an internal system you own, you can access anything stored on those systems, but possibly only for messages sent internally.

Note that there are different rules related to union organization under the National Labor Relations Act which generally prohibit employer surveillance of protected union activities.

Despite these exceptions, this is a relatively new area of law that has not been enforced much by the courts, so I still recommend that employers only access e-mail for essential administrative and investigative purposes when there is a reasonable suspicion of employee misconduct. This is also important because studies have shown that employee monitoring can lower morale, which will likely lower productivity.

Employment Basics for Employers - Employment Agreements

September 6, 2011,

Silicon Valley employers expect a hiring boom in technology jobs in the next two years, especially in the areas of social networking, cloud computing, and mobile technology, according to a recent study headed by NOVA, a nonprofit, federally funded employment and training agency in Sunnyvale. As a result, many companies will face basic employment issues, such as recruiting qualified employees, performing reference checks on potential candidates, and having solid employment agreements in place. In my last blog I discussed when you should consider using an employment agreement rather than just a simple offer letter for a new employee. Generally employment agreements are used for top executives and high level managers. Here is a brief summary of some of the terms you should have in those high-level employment agreements.

Position
o This can be either a general description for higher executives, or a list of tasks, authority level and who the person reports to for other employees.
o You should include expectations of performance, including statements of the amount of time and effort you are expecting. My agreements often say that the employee is expected to devote substantially all of her time and efforts to the company and may not work for any other employers without the company's permission. For some companies you may also want to say that your employees may not own stock in your competitors.
o Make it clear that the position is at-will, and explain what that means.
o Refer to any company rules and regulations like an employee handbook, if you have one, and don't forget to say that the company can change the rules and regulations at any time and that the employee must comply with any changes.

Confidentiality/Non-competition/Non-solicitation
Be very careful with post-termination non-competition agreements in California, as they are generally against public policy and can only be enforced in limited circumstances. An illegal non-competition clause can actually invalidate the whole agreement if you are not careful. There are additional considerations if the company and/or the employee are outside of California. Make sure you work with an attorney if you are thinking about including a non-competition clause in your employment agreements.

Compensation
o Salary or hourly? Equity compensation? Exempt or non-exempt? Bonus eligibility? Be aware that there are special rules for computer professionals in California.
o Be careful with commissions - there are a lot of traps for the unwary when dealing with compensating salespersons, including wage and hour laws like minimum wage, as well as commission accrual and payment, especially after the employee is terminated. Advanced planning and a good agreement can save your company a lot of time, money and effort when it comes to a salesperson who leaves your company.
o Expense Reimbursements - generally you are required to reimburse employees for expenses in performing their duties, but you want a clear system for pre-approval, and it is often good to set out in their agreement what expenses you expect to cover and what you will not (e.g. cell phones, professional dues, parking, equipment costs).
o List any benefits you provide such as vacation and sick leave, health insurance, life insurance, 401(k) and profit sharing plans.

Term/Termination
o Although most companies will want the employment to be at-will, agreements with executives and senior management usually have some limits on termination without cause, including potential severance pay.
o Your employment agreement should also cover post-termination requirements such as the return of company property and continuing obligations, or a reference to a separate nondisclosure agreement.

No matter what you put in your employment agreement, make sure you include a provision that the company may change the terms without the consent of the employee. However, you should still proceed with caution before making a change so that you do not violate wage and hour laws or cause a constructive termination, potentially giving the employee rights against the company.

Employment Basics for Employers - Making the Offer

August 8, 2011,

Most businesses have to deal with filling opened positions at their company at one time or another. In my continuing series on basic employment concerns for employers I have so far discussed searching for new employees, evaluating potential applicants, and doing and responding to reference checks. This blog discusses what you do once you have found someone you would like to hire.

When you have found someone you want to hire, you should always make the offer in writing. Your offer letter should, at a minimum, include their name, the position, the pay (and whether it is salary or hourly), where and when the work will be performed, what benefits are offered by your company, and that the employment is "at-will." As I discussed in my previous blog, you can condition employment on a medical examination to confirm that the potential employee is physically able to do the job, or determine if any physical limitations exist, and establish a record of medical conditions.

I also recommend conditioning employment on confirmation of the employee's identity, the results of a background check and confirmation that the employee can legally work in the U.S. Under the Immigration Reform and Control Act of 1986, employers are required to verify employment eligibility and identity. Because national origin and citizenship status could be used to discriminate against potential applicants, it is better to ask for this information only after you have made the job offer. After you confirm the employee's identity and eligibility by reviewing the various identification documents the employee provides, you must have the employee complete an INS Form I-9, and you must complete the employer's part of the I-9 within three business days of hiring the employee.

Employment Agreements
For most employees, an offer letter stating the terms of their employment is sufficient. However, for certain managers and executives and for employees that will have access to confidential information and trade secrets of your company, you will want them to sign a confidentiality and nondisclosure agreement as well as an Inventions Assignment Agreement. For top executives, they may require specific terms that should be set forth in an employment agreement. Employment agreements, if not drafted correctly, can cause a lot of liability for a company, so I definitely recommend you have your company's employment agreement drafted by an attorney or HR person who is very well informed in this area. For many of the companies I work with, I will provide them with a form of offer letter and a form of employment agreement suited for their needs, and then they can complete it for new hires and just have me review any significant changes or additions.

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