Employment Law (Mgmt 445)

Employment Law(Mgmt 445) The Regulation of Employment (Chapter 1); The Employment Law Toolkit (Chapter 2) Professor Charles H. Smith Spring 2012

Introduction • We will cover a number of basic issues in this opening presentation, including • Definition of “employer.” • Definition of “employee” as opposed to “independent contractor.” • At-will employment rule and exceptions to it. • Wrongful employment termination. • Employment contract issues such as • Covenant not to compete. • Arbitration agreement. • Confidentiality clause for trade secrets.

Employment Law Overview • The area of employment law is very interesting for a number of reasons including • There are many laws – constitutions, cases, statutes, and administrative rules and decisions – that govern employment relationships. • Employment law can include legal topics such as contract law as well as public policy (e.g., political, social or economic issues). • In many situations, neither the business nor the worker is 100% right or wrong. • Many people measure their self-worth by their jobs so, if a person loses his/her job or has some problem with a job, that person may be very emotional about it and could try to use the legal system to exercise those emotions.

Employment Law Overview cont. • For starters, let’s quickly look at • Exhibit 1.1 (text, page 4) – “Realities about the Regulation of Employment.” • Exhibit 1.2 (text, page 6) – “Realities about Who Is an Employee and Who Is Not.”

Definition of Employer • California Code of Civil Procedure § 706.011(d) – “a person for whom an individual performs services as an employee.” • Text, page 25 – “one who employs or uses others to do his or her work, or to work on his or her behalf.”

Definition of Employee • California Code of Civil Procedure § 706.011(c) – “a public officer and any individual who performs services subject to the right of the employer to control both what shall be done and how it shall be done.”

Definition of Independent Contractor • California case law – “one who, in rendering services, exercises an independent employment or occupation and, represents his employer only as to the results of his work, and not as to the means whereby it is to be accomplished. . . . The chief consideration which determines one to be an independent contractor is the fact that the employer has no right of control as to the mode of doing the work contracted for.” (Green v. Soule, 145 Cal. 96 (1904).) • Third Restatement of Agency (2006) – “independent contractor” is “equivocal in meaning and confusing in usage” and therefore does not use the term.

Employee vs. Independent Contractor • Why is this distinction important? Employees and independent contractors both work for – and get paid by – the employer, don’t they? • Not so fast – there are significant differences in the rights and responsibilities of the employer and the worker depending on whether the worker is an employee or independent contractor.

Employee vs. Independent Contractor cont. • Examples of when this distinction matters • Worker’s compensation benefits • Employee’s exclusive remedy vs. employer for injury caused by accident occurring the within course and scope of employment is W/C; no court. • Independent contractor gets no W/C benefits for on-the-job injury but can sue employer in court for negligence. • Withholding taxes • Employer must withhold federal and state taxes from employee’s paycheck; no such requirement for independent contractors.

How to Tell the Difference Between an Employee and Independent Contractor • Incorrectly classifying worker can cost employer a lot of money. • Fortunately, there are many cases and other guidelines which can be used to correctly classify a worker.

How to Tell the Difference cont. • Guidelines used by government agencies such as • IRS Publication 15A, which can be found at http://www.irs.gov/pub/irs-pdf/p15a.pdf (pages 6-9 only), has three main categories – behavioral control, financial control, and type of relationship – with several sub-categories under each category.

How to Tell the Difference cont. • Many courts have interpreted this issue using the same or similar standards such as • Chapter-End Questions 6 and 8 (pages 32-33). • Murray v. Principal Financial Group, Inc. (pages 35-36). • NLRB v. Friendly Cab Co. (pages 37-40).

How to Tell the Difference cont. • Many experts and organizations have devised their own helpful guidelines such as • “Employee or Independent Contractor? Twenty Questions” by Christina Morfeld at text, pages 17-18. • “Employee or Independent Contractor: Differences You Need to Know” by Ellen Feig at (http://www.legalzoom.com/everyday-law/workplace/employee-vs-independent-contractor-differences).

At-Will Employment Rule • “An employment, having no specified term, may be terminated at the will of either party on notice to the other. Employment for a specified term means an employment for a period greater than one month.” (California Labor Code § 2922.) • However, a valid employment contract are often made with no fixed term so presumably employment that lasts less than one month is still governed by the at-will employment rule.

At-Will Employment Rule cont. • Basically, the at-will employment rule works to the benefit of the employer who can terminate the employee at any time for any legal reason. • “Any legal reason” certainly includes “good” reasons such as theft, violation of company rules, or layoffs due to economic woes. • But, it also may include reasons that show bad business acumen such as the result of coin flip or drawing straws. • Employee’s two-week notice – legal requirement or just a good idea (or both)? • Student examples.

Exception to the At-Will Employment Rule – Contract • Ultimately, the employment relationship is based on contract principles which can be used to support a wrongful termination lawsuit. • An employment contract can be written, oral, implied from industry standards or other sources, or some combination of any or all of these. • Take care to know about all related documents that could possibly impact the employment relationship, such as the contract with the particular employee, employee handbook, and union agreement. • Student examples.

Exception to the At-Will Employment Rule – Contract cont. • “Good cause” is often stated in an employment contract or related documents as the standard for terminating an employee. • If good cause required, then firing an employee without good cause is a breach of the employment contract. • Good cause can be shown by the employee’s actual misconduct or the employer’s honest but mistaken belief that misconduct has occurred.

Exception to the At-Will Employment Rule – Contract cont. • Definition of good cause (BAJI 10.13) – "Where there is an employment agreement not to terminate an employee except for good cause, an employer may not terminate the employment of an employee unless such termination is based on a fair and honest cause or reason. In determining whether there was good cause, you must balance the employer's interest in operating the business efficiently and profitably with the interest of the employee in maintaining employment.”

Exception to the At-Will Employment Rule – Contract cont. • Employment contract and/or related documents may also set forth process to be followed before an employee can be terminated even if good cause not required. • Not following the stated process can be a breach of the employment contract. • Examples of these processes include • Opportunity to be heard. • Right for counsel or union representative to be present. • Written notice of reason(s) for proposed termination. • Disciplinary steps short of termination such as warning or suspension.

Exception to the At-Will Employment Rule – Contract cont. • Employer’s promise of “lifetime job”, “permanent position” or “you can work here as long as you like” – does this provide any job security to the employee? • Case studies – Melott v. ACC Operations, Inc. (page 57); Stillwell v. Salvation Army, 167 Cal.App.4th 360 (2008). • Implied covenant of good faith and fair dealing – does this require the employer to proceed fairly when terminating an employee? • Case study – Guz v. Bechtel National, Inc. (pages 89-90).

Exception to the At-Will Employment Rule – Public Policy • Employee cannot be terminated if it would violate public policy which can be shown by termination in retaliation for • Employee’s refusal to perform illegal act. • Employee is a whistleblower. • Student examples.

Exception to the At-Will Employment Rule – Public Policy cont. • Elements of a wrongful termination lawsuit based on violation of public policy are • Based on law found in constitution, statute, case, etc. • Inure to the public benefit instead of just serving the employee’s individual interest. • Fundamental and substantial. • Well-established at the time of termination. • Nexus between public policy violation and adverse action vs. employee (causation).

Exception to the At-Will Employment Rule – Public Policy cont. • Public policy case studies • Chapter-End Questions 1, 2a, 2c and 2e (pages 80-81). • Palmateer v. Int’l Harvester Co. (pages 84-85). • Scott v. Phoenix Schools, 175 Cal.App.4th 702 (2009). • Franklin v. The Monadnock Co., 151 Cal.App.4th 252 (2007). • Carter v. Escondido Union High School Dist., 148 Cal.App.4th 922 (2007).

Actual Termination of Employment • No precise words/method required; just need to show clear intention to sever the employment relationship. • Ordinarily, no due process or other rights unless stated in contract. • Student examples.

Constructive Termination of Employment • “Constructive discharge occurs when the employer’s conduct effectively forces an employee to resign. Although the employee may say, ‘I quit,’ the employment relationship is actually severed involuntarily by the employer’s acts, against the employee’s will. As a result, a constructive discharge is legally regarded as a firing rather than a resignation.” (Turner v. Anheuser-Busch, 7 Cal.4th 1238 (1994).)

Constructive Termination of Employment cont. • The Turner case lists several elements for constructive termination – the issue is what would a reasonable employee have done under the circumstances based on • Intolerable working conditions which are unusually aggravated or amount to a continuous pattern – must be sufficiently extraordinary and egregious to overcome the normal motivation of a competent, diligent and reasonable employee to remain on the job to earn a livelihood and serve the employer. • Employer must intentionally create or knowingly permit the intolerable working conditions. • Employer’s breach of employment contract or violation of public policy. • Employee’s length of time on the job may be relevant to determination of whether working conditions were intolerable; longer time on the job can show working conditions were not intolerable after all.

Employer Fraud • No cause of action can be based on employer’s fraudulent inducement of employee’s resignation • Case study – Hunter v. Up-Right, 6 Cal.4th 1174 (1993). • But, there can be a cause of action based on employer’s fraud which causes employee to quit prior job in order to take job with employer • Case study – Lazar v. Superior Court, 12 Cal.4th 631 (1996).

The Employment Contract • As parties to a contract, employer and employee have great discretion to craft the employment contract. • In reality, the employment contract is often presented by employer to employee on a “take-it-or-leave-it” basis – especially in this economy! • The highlights of most employment contracts include compensation and job duties though other seemingly minor matters may turn out to be very important – see following slides.

Covenant Not to Compete • Many employment contracts feature a covenant not to compete which is a provision stating that the employee, after the employment relationship ends, is prohibited from competing with the employer for a certain time period and/or in a certain geographic area.

Covenant Not to Compete cont. • Purpose is good – employee should not be able to personally benefit from training, customer introductions, etc. provided by employer. • However, covenant not to compete in an employment contract is illegal in California under B & P Code § 16600; case study – Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008).

Covenant Not to Compete cont. • There are a few ways to “get around” an otherwise illegal covenant not to compete • Other states may allow “reasonable” covenant. • In California, reasonable covenant legal if part of transfer of ownership interest in company. • Confidentiality clause – advisable if employee deals with company’s trade secrets; also protected by trade secrets statutes but good to show “reasonable efforts” to maintain secrecy of the trade secrets (see slides re Confidentiality Clause for Trade Secrets).

Arbitration Agreement • Many employment contracts include an arbitration agreement which means that any dispute between employer and employee must be submitted to arbitration and right to go to court is waived. • Courts will enforce arbitration agreements just like any other contract • Required by statutes as well as precedent. • Arbitration viewed merely as different – but not inferior – place for resolution of disputes. • Practical issue – courts always looking to reduce crowded dockets!

Arbitration Agreement cont. • Person who opposes enforcement of arbitration agreement can rely on any contract defense – popular defense is unconscionability. • Leading case is Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002) – federal appellate case that applies California law. • In Circuit City, the court refused to enforce an unconscionable arbitration agreement.

Arbitration Agreement cont. • In Circuit City, the court used two-part standard – both parts must be shown in order to invalidate arbitration agreement • Procedural – arbitration agreement presented on “take-it-or-leave-it” basis since it was a condition of being hired. • Substantive – “harsh, one-sided nature” of arbitration agreement proved by • Only employee required to go to arbitration; Circuit City could go to court or arbitration. • Limits on damages available to employee. • Employee required to split arbitration fees with Circuit City.

Confidentiality Clause for Trade Secrets • Definition – “‘Trade secret’ means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: [¶] (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and [¶] (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (California Civil Code § 3426.1(d) (emphasis supplied).) • Trade secrets violation often alleged when employee leaves company to work for a competitor • Example – ex-employer makes accusation that former employee stole customer list or secret formula – why would the employee think taking this information to the new job is acceptable?

Confidentiality Clause for Trade Secrets cont. • Victim of misappropriation of trade secret usually wants an injunction for actual or threatened misappropriation in order to stop defendant from using, transferring, publishing, etc. the trade secret • TRO or preliminary injunction before trial; permanent injunction as part of judgment after trial or motion for summary judgment • Grant or denial of injunction at beginning of lawsuit can decide the case or lead to early settlement, so important to move quickly. • Plaintiff must make two showings for injunction to issue before trial – (1) likelihood of prevailing on the merits and (2) irreparable harm. • Victim can also sue for damages (money), attorney’s fees, and other court orders preserving the secrecy of the trade secret.

Confidentiality Clause for Trade Secrets cont. • Under CACI 4404 (jury instruction), reasonable efforts to maintain the secrecy of trade secrets include • Whether documents or computer files were marked with confidentiality warnings, • Whether employees were instructed to treat the information as confidential, • Whether access to the information was restricted to persons who had a business reason to know the information, • Whether the information was kept in a restricted or secured area, • Whether people with access to the information were required to sign confidentiality or nondisclosure agreements [very important – see next slide], • Whether the plaintiff took any action to protect the specific information, • The extent to which any general measures taken would prevent the unauthorized disclosure, and • Whether the plaintiff could have taken other reasonable measures.

Confidentiality Clause for Trade Secrets cont. • The existence or lack of a confidentiality agreement about trade secrets can be a deciding factor • Various federal courts applying other states’ trade secrets statutes have ruled that the absence of confidentiality agreement shows a lack of reasonable efforts to preserve secrecy. • Existence of confidentiality agreement is enough to justify denial of summary judgment in California; case study – San Jose Constr., Inc. v. S.B.C.C., Inc., 155 Cal.App.4th 1528 (2007).

Employment Law (Mgmt 445)