Protect Your Business Against Lawsuits

If you are a California employer, it is more important than ever to have an attorney drafted California employee handbook. If you already have one, it is essential to check your handbook to make sure the language is correct and up-to-date. Having a poorly drafted employee handbook can cause great harm to you as an employer.

Employee handbooks used to be considered a human resource tool, as well as a way to gather company policies and procedures and have them in one place. This way, the employee would have something to refer to whenever a work related question arose.

Recent court cases however, have changed the nature of the employee handbook. Employers are now viewing these handbooks as a tool to help protect their company from litigation.

One of the many important reasons to have an employee handbook is to ensure that you have created an “at-will” employment relationship. “At-will” employment means the employment arrangement is indefinite and voluntary. Either party may terminate the employment relationship at any time. There are exceptions to this rule, however. The courts may find that an employment contract exists if the employee can successfully argue that their termination violates public policy, is in violation of the implied covenant of good faith and fair dealing, or it can be proven that an implied contract was created within the written policies provided by the employer.

California Employee Handbook and Court Rulings

An important case decided by the California Supreme Court stated the proper “at-will” language “will defend a claim of wrongful termination based on a case brought for breach of contract. Dore v. Arnold Worldwide, Inc. 06 C.D.O.S. 7078 (August 3, 2006).”

The Dore case is important for California employers because it stated the use of the term “at-will” in employee-employer communications do indeed create “at-will” employment relationship. In the absence of the appropriate wording, an employee could have an argument for a wrongful discharge claim. Dore went a long way in establishing the importance of carefully worded employer-employee communications. An employee handbook is an employer’s opportunity to not only set forth company policies and procedures, but also to clearly reiterate the nature of the employment relationship. Having the employee sign an acknowledgement and receipt for the employee handbook further protects the employer.

The California Supreme Court again sent the message the “at-will” doctrine was alive and well in Guz v. Bechtel National, Inc. 24 Cal. 4th 317. The court in Guz held that employers who want to ensure their at-will employment relationship with their employees should include correct at-will language in all written communications, including employee handbooks. The court stated, “Written employer communications to employees are the best evidence of the company’s intentions about at-will or for-cause terminations.”

Employment Discrimination Lawsuits

Employment discrimination cases have skyrocketed in the past. In fact, the U.S. Department of Justice reported that cases involving employment discrimination in federal court has tripled. The Equal Employment Opportunity Commission reported that in 2010, there were almost 100,000 discrimination charges filed against employers, a record high. Even more disconcerting, the average jury verdict increased substantially during this time.

Two key cases decided by the Supreme Court greatly increased the importance of employee handbooks with regard to employee discrimination cases. After Faragher v. Boca Raton, 524 U.S. 775, 808 (1998), and Burlington Industries, Inc. v. Ellerth, 524 U.S. 742 (1998), it became critical for employers to have thorough and precise anti-harassment policies in their employee handbooks to protect them from employee lawsuits.

Prevent Lawsuits With Attorney Drafted Employee Handbooks

In each of these lawsuits, the Supreme Court held that a comprehensive anti-discrimination policy should contain very specific information, including what constitutes harassment, who is covered, how to report a complaint, the appeal process, and the type of remedial action that can be exercised. The court gave employers the clear opportunity to avoid liability by the use of a well thought out anti-discrimination policy. The courts also sent the message through these decisions that an employee handbook that merely “talks” about dealing with these complaints is not enough, and that clear procedures need to be created to investigate and correct any harassment should it occur. There may never be a point where an employer can breathe a sigh of relief with their policies and procedures regarding workplace harassment. However, with a strong and clearly stated policy in an employee handbook, the employer can establish a strong litigation posture, which can pay off if they are ever sued.

If you are a California employer, having an employee handbook is important. Not only will it help you to establish consistent rules and policies for your employees, it can reduce the potential for employee lawsuits in the future. It is imperative that your employee handbook be attorney drafted, and up-to-date. Often businesses try to save money by creating their own handbook or buy one not drafted by an employment law attorney. These methods can actually increase an employer’s liability, as poorly worded policies can be used against an employer in court.

By purchasing our California Employee Handbook, you can be assured that you have bought a high quality, attorney-drafted handbook that could potentially save you large sums of money in the end.

Keep Detailed Records

One of the most important things you can do to protect yourself is to keep detailed business records.  Document any actions taken with regard to your employees such as verbal warnings, raises, hours kept, raises, time off, etc. If your employee comes to you with a problem or complaint, make sure they put it in writing and you keep it in their employment file. Keep in mind the documents you place in their employee file could be “Exhibit A” down the road.  Whatever an employee sues you for, you will have to prove what actions you took.  Your word will not be enough; you need to produce documentation to prove your case.

Take Steps to Ensure “At-Will” Employment

California is an “at-will” employment state. This means that either party in the employment relationship can terminate employment at any time, without liability. The key here is to make sure there are no employment contracts or documents that say otherwise. ”At-will” employment can be tricky, and will not prevent a disgruntled employee from suing you to get their job back. You, as the employer, should make it abundantly clear the relationship you have with your employee is “at-will.” This should be stated in your California employee handbook and in the employment files. It is also a good idea to have the employee sign an acknowledgment form that confirms they are an “at-will” employee.

Give Accurate Performance Reviews

Giving accurate performance assessments can prevent problems down the road with your employees.  If an employee is not performing to your standards, sugar coating the problem can do a lot of harm.  If the employee continually does not perform to your standards, be honest with them.  If they do not receive accurate feedback from you and are later fired, they are far more likely to sue.

Create a Solid Unlawful Discrimination and Harassment Policy

Developing clear employment policies are important, but especially so in the areas of discrimination and harassment.  It is often recommended to train your employees on harassment and discrimination issues once a year, and have them sign documentation at the end of the training session verifying the training.

Adopt a Well Written Employee Handbook

A California employee handbook is a useful tool to help prevent employee lawsuits.  In this day of rampant employee litigation no company should be without one, especially in California.  Besides establishing consistency and uniformity with company rules, it is a great way to notify your employees of necessary laws and confirm “at-will” employment.  By having each employee sign an acknowledgment, you are further protecting yourself from problems in the future.

In Armendariz, the court concluded that arbitration agreements were enforceable as long as certain criteria were met: 1) the agreement must provide for neutral arbitrators; 2) it must provide for more than minimal discovery; 3) it must require a written award; 4) it must provide for all the types of relief that would otherwise be available in court; and, 5) it must not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of using the arbitration process. If these conditions are satisfied, the court concluded that an arbitration provision will not be found unconscionable and will be enforced.

Should an employee workplace issue arise, having a signed arbitration agreement will be invaluable to you as the business owner. Nearly any employment dispute that could arise would require the employee to use to use arbitration rather than sue the business owner in court. In California, the laws that govern these arbitration agreements are the California Arbitration Act and the Federal Arbitration Act.

Now the legal path has been cleared by the courts, a properly drafted arbitration agreement is a great document to keep the business owner out of court. Generally speaking the arbitration process is far quicker than a normal court trial.  An arbitration proceeding could take a month, while a formal court trial could take years.  This shorter time frame saves a tremendous amount of money in attorney fees for the company.

In an arbitration proceeding, there is no right to a jury trial.  This is advantageous for employers because jurors tend to favor employees over employers in their decisions.

Arbitration discovery rules are much more restrictive than in the court system.  Without this right to discovery, employees may not have the ability to produce the documentation required to win their dispute.

Arbitration proceedings are usually done through an arbitration service and employers often pay for this service. The decision made by the arbitrator is almost always final.  This is helpful because there is no rights of appeal accept in very narrow circumstances. Courts are able to review an arbitrator’s decision, but it is far narrower in scope than an appeal.

The use of arbitration agreements has increased substantially over the past decade. It is just one of many business protection documents available to business owners to help reduce the chances of lawsuits.

In the past, the Employee Handbook became something of a tool for an employee during litigation.  However, a well drafted handbook can be used to protect the company by spelling out the “at-will” employment relationship and define employee rights and responsibilities which often become the subject matter of lawsuits. By using clear language within the handbook the employer can protect themselves from the handbook being used against them in court.

“At-Will” Employment Policy

The most important reason for you as an employer to put in place an Employee Handbook is to protect your business from potential lawsuits with your employees.  It is an opportunity to strengthen and clarify your position as an “at-will” employer, for instance. “At-will” employment means that either the employer or employee can terminate the employment relationship at any time. It is presumed under California law that all employment is “at-will.”

There are however, some exceptions to this rule, such as the “implied contract”.  Under this exception if an employee has worked for you for a number of years, and has been promoted and received raises, they can claim after being terminated there was an “implied contract” and that they could only be terminated for cause.  Having the employee sign an acknowledgement of receipt for their Employee Handbook will usually take care of this issue assuming it is clearly written in the handbook the employee is an at-will employee.

The more precautions you take to maintain your right to terminate employees “at-will’ the better-off you will be in terms of future lawsuits by disgruntled employees. It is vital for the employer to mention this at every opportunity to prevent an opening for misinterpretation and misunderstanding by the employee. Of course the Employee Handbook is perfect for this.

Sexual Harassment and Discrimination

The use of a handbook establishes consistency and uniformity throughout the company.  It is also a great way to inform your employees of necessary employment rules and regulations. By law in California, employers are required to provide employees written information on harassment, including the legal definition, the remedies available to the victim and the consequences to the perpetrator.  The handbook is a perfect place to set out this information. A signed acknowledgement of receipt from each employee serves as proof that you have provided your employees with the required information.

Key to Managing Employees

Putting all of your policies in writing is important not only for protecting your company, but managing your employees.  With an attorney drafted employee handbook, employees will be clear on exactly what the company’s expectations are. If you are ever brought to court on an employee matter, one of the first questions you will be asked is what your written policy is on the issue, and was it made clear to the employee.

A well written California Employee Handbook is not only your first line of defense against employee lawsuits, but also a valuable tool to manage your employees.

While there are many factors to consider, the key factor is control:  If the worker has little or no control over the how, when, and where of performing the duties required, then that worker is likely an employee.  A secretary who is told to report every morning at 8 AM, answer the phone and file in accordance with company policy, take lunch between 12 – 1 PM, and to punch out at 5 PM, is a classic example of an employee.  Such an employee typically incurs no expenses, takes no risk of profit or loss, and works for only one employer.

A computer consultant who is hired to perform computer network maintenance, but who can determine within reason when, how, where, and by whom (his or her employees or subcontractors may actually do the work) such maintenance is performed, and who has other clients, is a classic example of an independent contractor.

Click here to view an attorney drafted independent contractor agreement for California.

In conjunction with this explanation, the declarations in Section 11 of the Agreement are a good starting point to determine whether the worker being hired is properly classified as an independent contractor:  If these declarations don’t ring true or sound appropriate for your business, the worker is likely properly classified as an employee, and this Agreement should not be used.

Section 3 of the Agreement assigns all intellectual property produced by the independent contractor to the hiring party.  This section may be deleted if it is not apply under the circumstances.  Note that the use of “work for hire” copyright assignment agreements or provisions in California automatically makes the worker an employee.  Additionally, non-compete provisions are also generally illegal and unenforceable under California law.  These words and provisions thus purposely do not appear in the Agreement and should not be added.

If you have any questions regarding the foregoing, or about the appropriateness of the Agreement for, or modifying it to fit your specific needs, you are encouraged to consult with and employ a California employment law attorney.

For California business owners and employers a non-solicitation agreement is a good alternative to a non-compete agreement. Click here to view an attorney drafted non-solicitation agreement.

In Alabama, non-competes are unenforceable against professionals such as accountants, doctors, and lawyers.  In Georgia, if any aspect of a non-compete agreement is determined to be invalid, the entire agreement will usually be deemed null and void.

Courts in most states look with disfavor on non-compete agreements and may choose to enforce them only when there is evidence the provisions of the agreement are fair and reasonable under the circumstances.  Although the precise outlines of what is considered fair and reasonable vary from state to state, in general, evidence the agreement is fair and reasonable typically includes such things as the equality of the bargaining power of the parties; whether the agreement is reasonably necessary to protect the employers’ legitimate business interests; whether the agreement prevents the party signing it from making a living in his or her chosen occupation (that is, what activities are allowed after signing the non-compete?); whether the party who is restricted has been adequately compensated for signing the agreement (or, in legal terms, whether the consideration for the contract is sufficient); and the scope of the time and place limitations.

With regard to these last two factors, time and place; it may seem tempting to fill out the form with the most expansive time and geographic limits.  Doing so, however, will make the agreement more likely to be struck down by a court as overbroad and therefore unreasonable and unenforceable.  Is it therefore often the better policy to limit competition only so far in time and place as is necessary to protect the reasonably foreseeable business interests of the employer.  As a general rule, anything over two years is likely to face an uphill battle in being enforced, which is not to say that restrictions of less than two years will always be upheld.

The geographic parameters will vary depending on the nature of business; a radius of a few miles around a pizza parlor may be overbroad, while an entire metropolitan area may be allowed in more specialized fields.  Specifying an entire state or country, except in rare circumstances, would be counterproductive.  Note that although the form recites that, “The Employee agrees the above restriction is reasonable as to length of time and geographical area and waives any objection thereto,” this sentence is designed to make it more difficult for an employee to later object to terms he or she previously agreed to in writing, but this language may be disregarded or given minimal weight by any particular judge or jury.

In most states and in most instances, the rules will be applied more stringently against employers in an employer-employee context, and less so in other contexts.

Some employers utilize non-compete agreements, even where the business using them knows there is little chance they’ll be enforceable if challenged, the reasoning being that they hope the employee signing will be ignorant of the true level of enforceability of the agreement and will believe he or she is bound by it and act accordingly.  This is, of course, a questionable tactic, because all contracts are supposed to be signed in good faith and, of course, if challenged, an agreement that otherwise might be salvageable, or a case that might otherwise be won on other grounds, may result in a courtroom loss for the employer who implemented the questionable agreement, because judges and juries tend to find a way to rule against what they perceive to be the “bad guy” and juries also often prefer the “little guy” over the business person.

So the question becomes, does an employment contract change an employee’s “at-will” status?  The effect of “at-will” employment is that an employee can be let go for any reason, at any time.  If however they have signed an employment agreement, this “at-will” status can be changed.

“At-Will Employment vs. “For Cause”

An employment contract, either written or implied can alter the “at-will” relationship. The employer’s right to terminate an employee can be effected if the employee can show that either through an express or implied contract the employee was assured that they would be employed for a specified period of time.  Also, an employment contract that outlines how and why an employee can be terminated can also cancel out the “at-will” employment status.

“For cause” employment is the opposite of “at-will” employment.  The employer can only terminate an employee for a legitimate reason. In determining whether a “for cause” relationship has been created, courts pay particular attention to whether seniority and longevity in the company create rights against termination, and the general length of employment. An agreement that guarantees future employment with the company could take the relationship out of “at will” status, for instance.  It is important to note that should the courts need to determine the nature of the employment relationship, they will not only look to the employment agreement and company documentation, but by what was said by the employer.

How to Maintain “At-Will” Employment

If you are using employment contracts for your employees and want to maintain “at-will” employment, make sure there is language in the agreement that makes it clear that it is an “at-will” employment relationship.  The clearer you make this, the better off you will be.  Employees often think that if they have an employment contract they are protected from “at-will” firings, which is not the case.  Be diligent in your wording of your agreements. Remember that a disgruntled employee will more than likely take their case, along with a copy of their employment contract to court.

Be aware that language that specifies job term, policies for firing, and future employment sends up a red flag and the employment relationship could be interpreted as “for cause.” Courts often look at the totality of the circumstances, and the employer’s intent in determining a grey area here.  Consistency is the key.

There are several problem questions that employers should not ask or discuss. These questions include but are not limited to:

Race, religion, sex, color, national origin, ancestry, age, marital status, birthplace, disability (The Americans with Disabilities Act makes it unlawful to ask a potential employee about the existence or severity of a disability or how he or she became disabled.) Arrest and conviction records – (some exceptions) citizenship (Form I-9 is the appropriate place to determine citizenship status instead of the employment application.)

The distinctions within the same topic or category can be tricky at times. For example you may inquire into the education and the schools attended by potential employees, however you may not ask for the specific dates of attendance or graduation.

Then you have the mind numbing area of misdemeanors, being convicted of a felony, arrests, and convictions. Questions concerning these areas need to be worded properly to avoid potential problems.

Employment attorneys generally agree that inquiries should be avoided that although not specifically listed, are designed to acquire information about race, ancestry, color, age, sex, religion, and disability.

Keeping current with employment laws has become a time-consuming but extremely important part of running a business.

It is no longer wise or safe to use standard or outdated employment applications. You should make sure that someone in your company reviews your job application and interview questions regularly. This should also include a yearly meeting with an attorney in your state who specializes in employment law. Legal fees may be expensive; however, those expenses pale in comparison with the costs and repercussions of lawsuits and fines.

Unfortunately for employers, non-competition agreements have been found to be unenforceable in the State of California and restricted in some other states. In August of 2008, in a unanimous decision, the State Supreme Court ruled that non-compete clauses are unenforceable in California in most circumstances (there are exceptions in connection with the sale of a business and the dissolution of a partnership).  The court stated that this finding “advances the strong California policy favoring open competition and employee freedom.”  This policy against prohibiting restraint of trade is codified in Business and Professions Code Section 16600.

So how do you as an employer protect your business interests when an employee leaves?  By addressing these issues at hire.  A good alternative to the non-compete agreement in California and some other states with restrictions on noncompetes is a narrowly defined non-solicitation agreement and employee confidentiality agreement restricting former employees’ use of trade secrets in soliciting company customers.

After implementation of a properly drafted non-solicitation agreement, the employee may not solicit your customers while they are still with your company.  After they leave, they are restricted from soliciting your customers using trade secrets of your company, as defined by state law.  Note that California courts have held that a non-solicitation agreement that is not limited to protecting trade secrets is to be treated the same as a non-compete agreement and is therefore unenforceable.  The enforceability of non-solicitation agreements thus depends on whether they are tied to protecting trade secrets or not.

A non-solicitation agreement is an excellent alternative to a non-compete agreement for protecting the interests of business owners in California and some other states.  They can help the business owner safeguard their business customers while not excessively restricting an employee’s right-to-work in their chosen profession.

Use an Employee Confidentiality Agreement to Protect Your Business

Most business owners are familiar with employee confidentiality agreements.  However, many do not fully understand how effectively it can protect your business in similar fashion as would a non-compete.  For states like California where non-competes are unenforceable, an employee confidentiality agreement by itself or combined with a non-solicitation agreement are excellent business protection document alternatives.

The provision directly below shown in bold lettering was taken from an employee confidentiality agreement that I use.

That, during the course of my employment, there may be disclosed to me or I may otherwise be exposed to certain trade secrets and confidential information of the Company; said trade secrets and confidential information consisting of:

a)  Technical information, including methods, processors, formulae, compositions, inventions, machines, computer programs, and research projects.

b)  Business information, including customer lists, pricing data, sales and financial information, sources of supply, and marketing, production, merchandising systems or plans, and business plans; client lists; intellectual property holdings; correspondence, both internal and external in nature, email, computer files, software,  data, research, techniques, and licensing and other legal agreements.

2.  I shall not during, or at any time after the termination of my employment with the Company, use for myself, divulge to others, or permit or allow to be used for my benefit or to be divulged to others, any trade secrets, confidential information, or any other data of the Company in violation of this agreement.

Consider for a moment how difficult it would be for a former employee to compete against you in business without violating this agreement.  Sure it could be done, but clearly if adhered to, it prevents a former employee from legally using your most important information and customer base against you.  Further, confidentiality agreements are generally enforceable in California and other states.

Click here to view an attorney drafted employee confidentiality agreement for California

An LLC is an interesting hybrid that has the best of different business structures rolled into one. It is a business structure where, as with a sole proprietorship or partnership, the losses of the company are reported on the business owner’s personal tax returns. Sole proprietorships and partnerships however, do not provide the owner any limited liability protection. With an LLC, as with a corporation, the owners are protected from personal liability.

Easier to Create and Maintain

An LLC has many advantages to the business owner. LLCs have all the advantages of a corporation (protection from personal liability), without the red tape and administrative costs in creating and maintaining a corporation. Because of this, they are a particularly a good option for the small business owner. Complying with corporate formation rules and the yearly maintenance that is needed is time-consuming and costly. There are statements and reports that need to be filed with the Secretary of State, and corporate books to be maintained.  The stakes to maintaining a corporation are high, failure to do so means that a creditor of the corporation could theoretically “pierce the corporate veil” and come after the shareholder’s assets.

In contrast, the creation of an LLC is quite simple.  All that is required to form an LLC in California is to file Articles of Organization with the Secretary of State and pay a $70.00 filing fee.  California also requires that LLCs create an Operating Agreement.  The Operating Agreement is a written agreement between the members setting the guidelines and procedures of how the LLC will function. While there are no set criteria as to what the document should contain, typically it would include subjects as how the company will be managed, the amount of capital contributions from each member, and how profits and losses will be handled.

Favorable Tax Treatment

The IRS has different ways of viewing an LLC for tax purposes. For instance, an LLC with only one member is taxed as a sole proprietorship.  If the LLC has two or more members it will be taxed as a partnership (unless the LLC has been elected to be treated as a corporation). Either way, the tax treatment for an LLC is preferable to that of a corporation. In contrast, C-Corporations are subject to double taxation. The corporation is required to pay a corporate tax, and then the money is taxed again as income to the individual shareholders. With an LLC, all the business losses, profits and expenses flow through the company to the individual shareholders.  This also holds true with a corporation that files for S-election status.  The drawback however, is S-corporations are complicated and costly to create and maintain. Further, Section 1361 of the Internal Revenue Code imposes significant restrictions on the ownership of S-corporations.

Owner’s Assets are Better Protected

Just as with shareholders of a corporation, LLC owners are protected from personal liability for business debts and claims. They are not individually liable for any debts or liabilities incurred while doing business for the company.  Owner’s assets cannot be seized or sold to pay other liabilities for the company. This is not the case with a sole proprietorship or partnership, where the owner is entirely responsible for any loss or debt, even if it means settling this debt with their own personal assets.

For these reasons, the LLC can be a great option for some, by combining the best features of different business structures. While the LLC is a great option for some, choosing the right business entity is a complicated process.  When in doubt consult legal counsel.