5

CHAPTER 12: THE EMPLOYMENT AGREEMENT

INTRODUCTION

EMPLOYEE RIGHTS, POWERS, AND PROTECTION

Over the past eighty-five years, there has been an explosion of laws regulating the employment relationship. In the 1930s, as a result of the union movement, employees acquired economic and political power in their dealings with employers. With the emergence of the civil rights movement and the antidiscrimination legislation of the 1960s, employers began to examine their hiring and other employment practices more closely with respect to the treatment of women, minorities, and other protected groups. (Antidiscrimination laws are discussed in  Chapter 13 .) Laws concerning worker safety challenged employers to make the workplace safer. Federal and state whistleblower statutes prohibited retaliation against employees who complained to a governmental agency about working conditions or accounting practices they believed violated the law. The Employee Retirement Income Security Act (ERISA) and other statutes required employers to manage pension funds in a prudent manner to protect employees’ retirement benefits and regulated health-care and other employee benefits. Concerns about undocumented workers led to both federal and state legislation in that area.

The courts have also developed new common law doctrines that limit a U.S. employer’s traditional right to discharge an employee for any reason. These judicial decisions have moved U.S. employment law closer to the European model, which requires an employer to show just cause for a discharge. Under the current law, an employer may be bound by contracts with its employees without even knowing it. Managers must devote attention and resources to complying with the sometimes bewildering array of statutes, regulations, and common law principles that bear on their relations with their employees.

CHAPTER OVERVIEW

This chapter discusses the traditional U.S. rule that employees can be terminated at will and the exceptions to this rule. It examines the tort of fraudulent inducement and the enforceability of covenants not to compete. The laws relating to drug testing, genetic testing, lie detector tests, and certain hiring practices are also addressed. The chapter explains the employer’s responsibility for worker safety; laws related to workers’ pay, including minimum-wage and overtime payments; and several other federal laws that affect the employment relationship. In addition, the chapter explores pensions and other employee benefits. It also discusses the coverage and application of the National Labor Relations Act (NLRA), which governs union and other concerted action activities in the United States. Finally, the chapter examines how U.S. immigration law affects domestic employment of foreign workers and discusses the wrongful termination laws in the European Union and certain other jurisdictions.

12-1: AT-WILL EMPLOYMENT

For more than one hundred years, the American rule has been that an employment agreement of indefinite duration is an  at-will contract ; that is, the employee can quit at any time, and the employer can discharge the employee at any time, for any or no reason, with or without advance notice. All states originally followed this rule. Today, however, in many states, the at-will rule has been largely buried under its exceptions. Although some courts have declined to recognize these exceptions, the trend is toward some level of protection against discharge in certain circumstances.

12-1a: Employees Not Subject to the At-Will Rule

Public employees, employees who have express employment contracts for a fixed term, and unionized workers are generally not subject to the at-will rule.

Public Employees

Most employees of federal, state, and local government agencies work under civil service or merit systems that provide for tenure, require just cause for discharge, and guarantee administrative procedures to determine whether there is just cause for discharge.

Employees with Individual Contracts

A private-sector employee can avoid at-will status by negotiating a contract that provides for a specific term of employment and defines how the contract can be terminated. Although employers almost always reserve the right to fire an employee, the employment contract may require some level of severance pay if the termination is without cause. Negotiated contracts requiring just cause for termination by the employer may also provide some level of payment and benefits if the employee quits “for good reason,” which is often defined to include being required to move more than fifty miles from the original place of employment or having one’s duties and responsibilities substantially changed or reduced.

Union Contracts

Other employees rely on union contracts, which almost universally require just cause for termination and establish grievance procedures whereby an employee can challenge his or her discharge.

12-2: WRONGFUL DISCHARGE

Courts in a number of states established exceptions to the at-will doctrine through the creation of causes of action for  wrongful discharge —that is, termination of employment without good cause. Wrongful discharge is a common law–based claim supported by three theories: public policy, implied contract, and implied covenant of good faith and fair dealing. These causes of action are based on both contract and tort law.

12-2a: The Public Policy Exception

One of the earliest exceptions to the at-will rule was the  public policy exception . Even if an individual is an at-will employee, in most states the employer is prohibited from discharging the employee for a reason that violates public policy. 1  The greatest protection is given to an employee discharged due to a refusal to commit an unlawful act, such as perjury or price-fixing, at the employer’s request. Indeed, an employer’s request that an employee violate a criminal statute—or even a noncriminal regulation—is almost always deemed to be a wrongful discharge in violation of public policy.

Sources of Public Policy

Different jurisdictions vary in what they recognize as a legitimate source of public policy. Some states, including West Virginia and Georgia, accept statements of public policy only if they are expressly set forth in state or federal constitutions, statutes, or judicial decisions.

Most states, however, will consider a range of sources, including statutes, constitutional provisions, administrative regulations, professional codes of ethics, and, in some cases, common law. For example, an employee in Indiana claimed she was terminated by Central Indiana Gas Company for filing a workers’ compensation claim. Although no state statute prohibited such a discharge, the Indiana Supreme Court held that “[r]etaliatory discharge for filing a workmen’s compensation claim is a wrongful, unconscionable act and should be actionable in a court of law.” 2

The California Supreme Court held that an attorney could base a claim of retaliatory discharge on allegations that he was terminated for refusing to violate a mandatory ethical duty embodied in the rules of attorney professional conduct. 3  Andrew Rose, former in-house counsel at General Dynamics, had filed a claim for retaliatory discharge, alleging that he had been fired because he had (1) spearheaded an investigation of drug use at the company that resulted in the termination of more than sixty employees; (2) protested the company’s failure to investigate the bugging of the office of the chief of security, a criminal offense; and (3) advised company officials that General Dynamics’ salary policy might be in violation of the minimum-wage and overtime provisions of the Fair Labor Standards Act, which could potentially expose the company to several hundred million dollars in back-pay claims.

In contrast, in Jacobson v. Knepper & Moga, P.C., 4  the Illinois Supreme Court held that an attorney who had been fired by his firm after complaining that it was violating the Fair Debt Collection Practices Act could not recover for retaliatory discharge. The court found that the public policy protected by the act (protecting debtors’ property and ensuring them due process) was already adequately safeguarded by the ethical obligations imposed by the rules of attorney professional conduct, making it unnecessary to expand the tort of retaliatory discharge to protect the discharged employee attorney.

Whistleblowing Protection

In addition to protecting employees from discharge for exercising a right or duty, or for refusing to break the law, the public policy exception also protects employees from discharge for reporting an employer’s unlawful or wrongful conduct ( whistleblowing ). In whistleblower cases, courts balance the public interest in the enforcement of laws, the whistleblower’s interest in being protected from reprisal, and the employer’s interest in managing its workforce. As discussed below, certain statutory and constitutional provisions may protect whistleblowers as well.

Remedies

In Tameny v. Atlantic Richfield Co., 5  the California Supreme Court held that an employee might maintain both tort and contract actions if the employee’s discharge violated fundamental principles of public policy. As a result, tort damages for pain and suffering, and possibly punitive damages, were available.

12-2b: Implied Contracts

Most jurisdictions recognize the contract-based implied contract judicial exception to the at-will rule, whereby the parties’ conduct is sufficient to imply a contract that limits the employer’s right to discharge even when there is no written or express oral contract. Some factors that can give rise to an implied obligation to discharge the employee only for good cause are that the person (1) has been a long-term employee; (2) has never been formally criticized or warned about his or her conduct; (3) has received raises, bonuses, and promotions throughout his or her career; (4) has been assured that his or her employment would continue if he or she did a good job or that the company did not terminate employees at the same level except for good cause; and (5) has been assured by management that he or she was doing a good job. Other relevant factors include the personnel policies or practices of the employer and the practices of the industry in which the employee is engaged.

In some states, a personnel manual stating that it is the employer’s policy to release employees for just cause only, together with oral assurances that the employee will be with the company as long as he or she does his or her job properly, can create a binding contractual obligation on the company to terminate only for good cause. This obligation may arise in the absence of negotiations or any meeting of the minds, or even when the policy has not been communicated to the employee. 6

For example, Woodstock Soapstone Company’s personnel policy stated that an employee was entitled to two written warnings in a twelve-month period prior to termination for “willful or repeated violations, or exaggerated [sic] behavior not in the best interest of the company or its employees.” 7  Prior to her termination, Havill continually clashed with a corporate reorganization consultant hired by Woodstock to redefine employment duties. After the consultant complained to Woodstock’s management about Havill’s “rude” and “insubordinate” behavior, Woodstock fired her, without providing the written warning required by its personnel policy. When Havill sued, the Vermont Supreme Court held Woodstock liable for damages arising out of its breach of the implied promise of “just cause” termination and progressive discipline.

Other states, however, have been unwilling to treat written personnel policies as contracts. In one case, an employee of Citibank claimed that he could be discharged only for cause based on provisions of a personnel manual. A New York appellate court disagreed, holding that the manual did not impose any legal obligation on the employer, because the employee was still free to terminate the relationship at will. 8  Similarly, in a case involving Westinghouse Electric Corporation, the North Carolina Court of Appeals held that unilaterally implemented employment policies are not part of the employment contract unless expressly included in it. 9

Even when an implied contract is found to exist, an employer may legally terminate an employee suspected of misconduct if, acting in good faith and following an investigation that is “appropriate under the circumstances,” the employer has “reasonable grounds” for believing the employee engaged in misconduct. 10  In such a case, even if a jury subsequently found that the charges against the employee were false, the company would not be liable for breach of the implied employment contract.

12-2c: Implied Covenant of Good Faith and Fair Dealing

Courts in a minority of states also recognize an exception to the at-will employment relationship for the breach of the  implied covenant of good faith and fair dealing — that is, the  bad faith exception . 11  For example, this exception has been applied to prevent an employer from terminating an employee for the purpose of depriving that employee of compensation earned, but not received, for services performed before the dismissal. 12  Courts in New York, 13  Texas, New Mexico, Florida, and Wisconsin have expressly declined to recognize an implied covenant of good faith and fair dealing in employment cases. The states that have recognized the bad faith exception have interpreted it differently. Most courts restrict the recovery in these actions to contract damages. 14

IN BRIEF: Limits on At-Will Employment

The employer’s right to terminate an employee without cause may be subject to and restricted by:

· • Express statutory abrogation of the employer’s right to terminate employees at will.

· • Statutory prohibition of discrimination on specified characteristic (e.g., race, gender, age).

· • Statutory prohibition of discrimination for protected activity (e.g., collective bargaining, protected leaves of absence, off-duty lawful conduct).

· • Civil service systems.

· • Union contracts.

· • Express employment contracts (oral or written).

· • The public policy exception.

· • Implied contracts.

· • The implied covenant of good faith and fair dealing.

· • Whistleblower statutes.

· • Fraudulent inducement.

12-3: STATUTORY AND CONSTITUTIONAL PROTECTION FOR WHISTLEBLOWERS

As noted earlier, courts may protect whistleblowers from retaliatory discharge under the public policy exception. In addition, both state and federal statutes provide some protection for whistleblowers.

12-3a: State Statutory Protection

A number of states have statutes providing varying degrees of whistleblower protection for terminated employees. For example, a New York state statute provides, among other things, that a private-sector employer may not take any retaliatory personnel action against an employee because the employee “discloses, or threatens to disclose to a supervisor or to a public body an activity, policy or practice of the employer that is in violation of law, rule or regulation which violation creates and presents a substantial and specific danger to the public health or safety. …” 15

California’s whistleblower statute is similar to New York’s, but it does not limit protection to violations of law that create a danger to public health or safety. 16  The California attorney general also maintains a hotline that whistleblowers can use to report violations of laws by corporations. 17

Florida’s statute protects employees who (1) object to or refuse to participate in activities that violate a law, rule, or regulation; (2) have disclosed or threatened to disclose, in writing and under oath, to a government agency activities that violate a law, rule, or regulation, provided the employee has first raised the issue, in writing, with a supervisor or the employer and given the employer a reasonable time to correct the situation; and (3) provide information or testify on activities that violate a law, rule, or regulation in investigatory inquiries. 18

12-3b: Federal Statutory Protection

There are also a number of federal whistleblower statutes. Many of these apply only to federal employees who report violations by governmental agencies or employees.

Sarbanes–Oxley Act (SOX)

The Sarbanes–Oxley Act of 2002 (SOX) 19  added several whistleblower provisions applicable to nongovernment employees. One provides criminal penalties for public- and private-company employers who retaliate against a person who provides truthful information relating to the commission of a federal offense to a law enforcement officer. 20  Another provision, which applies only to public companies, prohibits a company from discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against an employee in the terms and conditions of employment because of any lawful act done by the employee, including providing information to a federal regulatory or law enforcement agency, a member or committee of Congress, or any person with supervisory authority over the employee or who has the authority to investigate misconduct. 21

In 2014, the U.S. Supreme Court held that the whistleblower provision of SOX “shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.” 22  There, the private company (FMR) had contracted to manage publicly traded mutual funds, which had no employees. FMR employees alleged that the company had retaliated against them for reporting fraud relating to the funds. The Court explained that because a mutual fund had no employees, if the “whistle [was] to be blown” on fraud that affected fund investors, the whistleblowing employee would have to be on the payroll of another company—“most likely,” the fund’s advisor. The Court noted:

… Given Congress’ concern about contractor conduct of the kind that contributed to Enron’s collapse, we regard with suspicion construction of § 1514A to protect whistleblowers only when they are employed by a public company, and not when they work for the public company’s contractor. 23

In the following case, the court considered whether an employee fired after internally reporting his belief that a press release included false statements (and therefore constituted shareholder fraud) suffered illegal retaliation under SOX.

CASE 12.1: A CASE IN POINT: IN THE LANGUAGE OF THE COURT

Perez v. Progenics Pharmaceuticals, Inc.

United States District Court for the Southern District of New York

965 F. Supp. 2d 353 (S.D.N.Y. 2013).

FACTS

Julio Perez was a chemist employed by Progenics Pharmaceuticals, Inc., a publicly traded biotechnology company. Perez’s main function was to “support development” of Relistor, a drug to treat bowel dysfunction after surgery. Progenics and Wyeth Pharmaceuticals subsequently agreed to co-develop and jointly commercialize the drug. By April 2008, they had conducted a Phase 2 clinical trial showing positive results for certain oral dosages of the drug. In May 2008, the companies issued a press release stating that the Phase 2 clinical trial showed positive and statistically significant results. The release included this quote from Progenics’ CEO: “[W]e are pleased by the preliminary findings of this oral formulation.” In July 2008, Wyeth presented a report to Wyeth executives (the Wyeth Update) that “formally recommended” that the companies not advance the tablet form of the drug to Phase 3 clinical trials. Although certain dosages showed good results, other drug targets had not been met. Both counsel for Progenics and Perez received the Wyeth Update later in July.

On August 4, 2008, Perez issued a memo to various Progenics executives identifying certain statements in the May press release and claiming that (1) the companies “are committing fraud against shareholders since representations made to the public were not consistent with the actual results of the relevant clinical trial” and (2) such conduct was “illegal.” Progenics fired Perez the next day. Perez filed complaints with the Department of Labor’s Occupational Safety and Health Administration (OSHA) alleging retaliation for issuing the memo, but they were dismissed. He then sued in federal court, alleging that Progenics had violated the Sarbanes–Oxley Act of 2002 (SOX). 24

ISSUE PRESENTED

What facts does a dismissed employee have to allege to survive a motion for summary judgment in a case alleging a violation of SOX’s whistleblower protection?

OPINION

KARAS, J., writing for the U.S. District Court for the Southern District of New York:

Plaintiff Julio Perez … brings this action against defendant Progenics Pharmaceuticals, Inc., … alleging that Defendant violated the Sarbanes-Oxley Act of 2002 … by terminating Plaintiff’s employment in retaliation for a memorandum he wrote regarding a press release about a pharmaceutical drug. …

. …

The Sarbanes-Oxley Act provides that publicly traded companies may not discharge … or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee … to provide information … which the employee reasonably believes constitutes a violation of [the fraud provisions of Title 18]. …Congress enacted this provision to combat what it identified as a “culture, supported by law, that discourage[d] employees from reporting fraudulent behavior not only to the proper authorities … but even internally.”

. …

Under the Sarbanes-Oxley Act, a plaintiff’s activity is “protected” only if the employee “provide[s] information … regarding any conduct which the employee reasonably believes constitutes … [mail fraud], … [wire fraud], … [bank fraud], … [securities fraud], [or a violation of] any rule or regulation of the [SEC], or any provision of Federal law relating to fraud against shareholders.”

…“To demonstrate that a plaintiff engaged in a protected activity, a plaintiff must show that he ‘had both a subjective belief and an objectively reasonable belief that the conduct he complained of constituted a violation of relevant law.’” “In assessing the reasonableness of a plaintiff’s belief regarding the illegality of the particular conduct at issue, courts look to the basis of the knowledge available to a reasonable person in the circumstances with the employee’s training and experience.”

. … In light of Plaintiff’s training, education, and experience, a reasonable jury could find that it was objectively reasonable for Plaintiff to rely on conversations with colleagues, his review of the Wyeth Update, as well as his own work to form his belief that the May 22, 2008 Press Release … was “misleading” and not “a true reflection of what [was] being discussed behind closed doors[.]” Further, because Plaintiff does not appear to have any knowledge or training in securities law, a jury could find that it was reasonable for Plaintiff to conclude that a press release that he found to be misleading could be securities fraud, or a violation of an SEC rule or regulation or a law relating to fraud against shareholders. … Therefore, the Court finds that Plaintiff has presented sufficient evidence to establish a genuine issue of material fact as to this element.

Defendant’s second argument is that Plaintiff cannot show that his protected activity was a contributing factor to the termination of his employment. “The words ‘a contributing factor’ mean any factor which, alone or in connection with other factors, tends to affect in any way the outcome of the decision.” “A plaintiff need not prove that [his] protected activity was the primary motiving factor in [his] termination, or that the employer’s articulated reason was pretext in order to prevail.”

Plaintiff and Defendant have different views as to why Plaintiff was terminated and each Party cites evidence supporting his/its version of events. …

. …

… Therefore, the Court finds that there is a genuine issue of material fact as to the reason for Plaintiff’s termination, and, drawing inferences in favor of Plaintiff, a reasonable jury could conclude that Plaintiff’s protected activity was a contributing factor to his termination.

Because a jury could find that Plaintiff has established a prima facie case, the burden now shifts to Defendant to demonstrate by clear and convincing evidence that Plaintiff’s employment would have been terminated in the absence of his protected activity.

Defendant argues that it would have terminated Plaintiff’s employment even in the absence of his protected activity, because Plaintiff “misappropriated the Wyeth Update and refused to explain how he had obtained a copy.” Plaintiff disputes the claim that he “misappropriated” the Wyeth Update and testified that he received the Wyeth Update by interoffice mail, that it was distributed widely within Wyeth, and that he often had access to clinical trial results as part of his job duties. Drawing inferences in the light most favorable to Plaintiff, the Court finds that there is a genuine issue of material fact as to whether Plaintiff “misappropriated” the Wyeth Update at all. …

Further, evidence that Defendant removed Plaintiff’s computer and that that Plaintiff and [Progenics counsel] had a “hostile” encounter prior to any discussion of his access to the Wyeth Update can be considered as evidence that Plaintiff was terminated because of the protected activity. Moreover, the fact that Plaintiff’s employment was terminated less than twenty-four hours after he engaged in the protected activity may be evidence of causation. Thus, drawing reasonable inferences in the light most favorable to Plaintiff, the Court finds that Defendant has failed to demonstrate by clear and convincing evidence that it would have terminated Plaintiff even in the absence of his protected activity.

RESULT

The court denied the defendant’s motion for summary judgment because there were genuine issues of material fact in dispute as to whether the employer violated the whistleblower protections of SOX. The case could proceed to trial by jury.

CRITICAL THINKING QUESTIONS

1.

Do you think the “reasonable person standard” used in SOX is appropriate?

2.

What effect is the termination of the plaintiff employee likely to have on other employees’ willingness to report potential violations of law?

12-3c: Dodd–Frank Wall Street Reform and Consumer Protection Act

The Dodd–Frank Wall Street Reform and Consumer Protection Act 25  (Dodd–Frank Act) added further whistleblower protections. The relevant provision reads:

No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower—(i) in providing information to the [Securities and Exchange] Commission [SEC] in accordance with this section; (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or (iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 …, this chapter, … and any other law, rule, or regulation subject to the jurisdiction of the Commission.  26

In 2013, the SEC announced an award of more than $14 million to a whistleblower whose information led to the recovery of “substantial investor funds” and whose assistance allowed the matter to be investigated quickly. 27

Employees who suffer adverse employment actions because they provided information to the SEC can bring a retaliation claim against the employer under Dodd– Frank. Even though the SEC’s “expansive” definition of a whistleblower appears to include individuals who report violations only internally, 28  the U.S. Court of Appeals for the Fifth Circuit ruled in 2013 that the retaliation provisions apply only to employees who report the violations to the SEC, reasoning: “Under Dodd-Frank’s plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.” 29  In contrast, certain district courts have held that employees are protected even when they report violations only internally. 30  In addition, in 2013, the U.S. District Court for the Southern District of New York held that the anti-retaliation provisions of Dodd–Frank do not apply extraterritorially—that is, the protection does not extend to whistleblowers who live outside the United States. 31

In June 2014, the SEC charged Paradigm Capital Management and its owner, Candace King Weir, with engaging in prohibited transactions and then retaliating against the employee who reported the violating activity to the SEC. The company and its owner agreed to pay $2.2 million to settle the charges, but they did not admit wrongdoing. 32  The SEC alleged that after the employee reported the prohibited conduct to the SEC, his employer engaged in a “series of retaliatory actions,” including removing the employee from his head trader position, taking away his supervisory responsibilities, and “otherwise marginaliz[ing] him.” This was the SEC’s first direct enforcement action under the whistleblower provisions of Dodd–Frank.

12-3d: Claims of Constitutional Protection by Public Whistleblowers

Discharged government workers have attempted, often unsuccessfully, to claim whistleblower protection under the First Amendment to the U.S. Constitution. Garcetti v. Ceballos 33  involved Richard Ceballos, a deputy district attorney for the Los Angeles County District Attorney’s Office, who had written a memo to his supervisors recommending that they dismiss a case due to inaccuracies in an affidavit used to obtain a critical search warrant. The supervisors ultimately decided to proceed with the case. When the trial court held a hearing on the motion challenging the warrant, Ceballos testified that he believed the affidavit was inaccurate, but the trial court rejected the challenge to the warrant.

Thereafter, Ceballos claimed that he suffered employment retaliation, including reassignment, transfer to another courthouse, and denial of a promotion. He filed suit, claiming that his employer’s retaliation violated the First and Fourteenth Amendments because the memo was a protected form of speech.

The U.S. Supreme Court rejected his constitutional claims. Although “the First Amendment protects a public employee’s right, in certain circumstances, to speak as a citizen addressing matters of public concern,” Ceballos “spoke as a prosecutor fulfilling a responsibility to advise his supervisor about how best to proceed with a pending case,” not as a citizen. As a result, the Constitution did not insulate his communications from employer discipline.

The Court reasoned: “Government employers, like private employers, need a significant degree of control over their employees’ words and actions; without it, there would be little chance for the efficient provision of public services.” But because “a citizen who works for the government is nonetheless a citizen,” when public “employees are speaking as citizens about matters of public concern, they must face only those speech restrictions that are necessary for their employers to operate efficiently and effectively.” The Court recognized that “[e]xposing governmental inefficiency and misconduct is a matter of considerable significance,” but concluded that a “powerful network of legislative enactments,” such as labor codes and whistleblower protection laws, protects employees and provides checks on supervisors who would order unlawful or otherwise inappropriate actions.

The dissent was far less sanguine about the ability of the “patchwork” of statutory whistleblower protections to protect government whistleblowers from vindictive bosses. The dissent pointed out that “individuals doing the same sorts of governmental jobs and saying the same sorts of things addressed to civic concerns will get different protection depending on the local, state, or federal jurisdiction that happen[s] to employ them.”

In Lane v. Franks, 34  the U.S. Supreme Court held that the First Amendment protected a public employee who provided truthful sworn testimony, compelled by subpoena, outside the course of his ordinary job duties. Edward Lane, an employee of the Central Alabama Community College, uncovered payroll discrepancies involving a state representative that led to a criminal trial. Lane testified at the trial after being subpoenaed. He was later terminated, along with twenty-eight other employees. Although most of these employees were later rehired, Lane and one other were not. Lane sued, alleging that his employer violated the First Amendment by firing him in retaliation for his testimony. The Court held that truthful testimony under oath by a public employee outside the scope of his ordinary job duties is “speech as a citizen” for First Amendment purposes, even when the testimony relates to his public employment. The Court also held that the speech involved matters of public concern—corruption in a public program and misuse of state funds—and that the government had no justification for treating Lane differently from any other member of the public based on the needs of the government.

12-3e: Whistleblower Bounties

Certain statutes include provisions whereby an individual may receive a monetary award in a successful whistleblower suit. In 2012, for example, the Internal Revenue Service paid a former UBS employee more than $100 million for providing information about how the bank pushed Americans to avoid taxes. 35  The False Claims Act (FCA) 36  includes a provision allowing a private person to file a lawsuit on behalf of the government to recover damages (a  qui tam suit ) for FCA violations. If successful, the person bringing suit (the relator) is entitled to receive designated percentages of the amount recovered. In 2014, a former assistant vice president at JPMorgan was paid $63.9 million for providing information leading to the bank’s $614 million settlement of an FCA case arising out of its role in the issuance of “defective” mortgage loans insured by the Federal Housing Administration and the Department of Veterans Affairs. 37

12-4: FRAUDULENT INDUCEMENT

During difficult economic times, a business may exaggerate to keep and attract highly qualified personnel. For example, in the course of recruiting Andrew Lazar to work as Rykoff’s West Coast general manager for contract design, a vice president of Rykoff made a number of fraudulent statements, including that the current head of the department in which Lazar would work had plans to retire and that Lazar would be groomed for that position, that Rykoff was very strong financially, and that Lazar would receive annual reviews and raises. Lazar alleged that he resigned from his position as president of a family-owned company in New York, relocated his family to Los Angeles, and began employment at Rykoff based on these false statements. The trial court dismissed most of Lazar’s claims, but the California Supreme Court held that Lazar had stated a cause of action for fraudulent inducement. 38

ETHICAL CONSIDERATION

What role, if any, should the law play in penalizing an employer who lies to an employee about the reason for termination in order to persuade the employee to resign? What role do ethics play in this situation?

In a subsequent case, however, the New York Court of Appeals dismissed a fraudulent inducement action brought by five at-will investment managers who alleged that they had reasonably relied on fraudulent no-merger promises by Dreyfus Corporation in accepting and continuing employment with Dreyfus and in turning down other job opportunities. The court held:

In that the length of employment is not a material term of at-will employment, a party cannot be injured merely by the termination of the contract—neither party can be said to have reasonably relied upon the other’s promise not to terminate the contract. Absent injury independent of termination, plaintiffs cannot recover damages for what is at bottom an alleged breach of contract in the guise of a tort. 39

12-5: NONCOMPETE AND OTHER AGREEMENTS

To protect their interests, companies often require their employees to sign various agreements, including noncompete and confidentiality agreements. Like other contracts, these agreements must be supported by consideration to be enforceable. 40

12-5a: Noncompete Agreements

A  covenant not to compete  is a device, ancillary to another agreement (such as an employment contract), that is designed to protect a company’s interests by limiting a former employee’s ability to use trade secrets when working for a competitor or setting up a competing business. Enforcing a noncompete agreement can be difficult because rules vary by jurisdiction. For example, California and Georgia severely limit the enforceability of noncompete agreements.

Even in states that permit noncompetes, courts will enforce only reasonable restrictions on competition. Unreasonableness can be found on many grounds, including duration of limitation, geographic extent, scope of activities prohibited, and the employer’s relation to the interests being protected. For example, the Nevada Supreme Court invalidated a noncompete agreement that restricted an employee who retrofitted lighting systems from competing with his former employer within a 100-mile radius of the former employer’s site for five years. 41  The duration placed a great hardship on the employee and was not necessary to protect the former employer’s interests.

In the following case, the California Supreme Court reiterated the strong California public policy underlying California’s statutory ban on most noncompete agreements.

CASE 12.2: A CASE IN POINT: SUMMARY

Edwards v. Arthur Andersen LLP.

Supreme Court of California

189 P.3d 285 (Cal. 2008).

FACTS

Ray Edwards II was a CPA hired to work as a tax manager in the Los Angeles, California, office of Arthur Andersen, LLP (Andersen). When he was hired, Edwards was required to sign a noncompete agreement, which stated:

· If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client.

For twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation.

You agree not to solicit away from the Firm any of its professional personnel for eighteen months after release or resignation.

About five years later, Andersen was indicted for its role in the Enron Corporation accounting scandal and began selling off its practice groups. HSBC USA, through a subsidiary, agreed to purchase the tax practice in which Edwards worked.

HSBC offered Edwards employment, but required that he (as well as any other Andersen employees it hired) sign a “Termination of Non-compete Agreement” (TONC). The agreement included provisions that required the employee to voluntarily resign from Andersen and release Andersen from “any and all” claims related to the employee’s employment with Andersen. Edwards signed the offer letter from HSBC but not the TONC. As a result, HSBC subsequently withdrew its offer. Andersen terminated Edwards’s employment without paying him severance benefits.

Edwards sued HSBC and Andersen for intentional interference with prospective economic advantage and anticompetitive business practices under the California Business and Professional Code. He alleged that Andersen had violated section 16600 of that code, which states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Edwards also alleged that the TONC’s release of “any and all” claims violated sections 2802 and 2804 of the state Labor Code, which provides that an employee’s right to indemnification from his employer cannot be waived.

Edwards settled with HSBC, but his claim against Andersen went to trial. After the trial court ruled for Andersen, Edwards appealed.

ISSUES PRESENTED

Is a narrowly drawn noncompete agreement valid under California state law? Is a contract provision requiring an employee to release “any and all” claims as a condition of employment unlawful because it encompasses nonwaivable statutory protections—specifically, the employee indemnity provision of the California Labor Code?

SUMMARY OF OPINION

The California Supreme Court began by noting that California had “settled public policy in favor of open competition” in 1872. Today, covenants not to compete are void unless they meet a statutory exemption under section 16600, none of which was present here. The court rejected Andersen’s interpretation of section 16600, which invalidates most contracts under which one is “restrained” from engaging in a profession. Andersen argued that “restrained” should be interpreted to mean “prohibit[ed],” so that a “mere limitation” on engaging in the profession will be allowed as long as it is reasonable— the so-called “narrow restraint exception” set forth in Campbell v. Trustees of Leland Stanford, Jr. University. 42  The court reasoned that “‘section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat’” and then concluded that “if the legislature had intended the law to apply only to unreasonable or overly broad restraints, language to that effect would have been included in the statute.”

The court added that “[a]n employer ‘cannot lawfully make the signing of an employment agreement, which contains an unenforceable covenant not to compete, a condition of continued employment.’” When an employer does terminate an employee who refuses to sign such an agreement, as Andersen did, that constitutes wrongful termination in violation of public policy.

As for provisions of the TONC that purported to release Andersen from liability for claims arising out of Edwards’s employment with Andersen, the court construed them to exclude nonwaivable statutory employee indemnity rights.

RESULT

The California Supreme Court held that the noncompete agreement was invalid under section 16600, expressly rejecting the “narrow restraint” exception. Thus, Andersen wrongfully terminated the employee in violation of public policy after he refused to sign the invalid covenant not to compete. The court also concluded that the TONC agreement did not purport to release Andersen from non-waivable statutory indemnity claims, and was therefore not unlawful under California state law. The case was remanded for proceedings consistent with the opinion.

COMMENT

In his dissent, Justice Kennard criticized the holding that the release of claims was lawful because it could be construed not to waive nonwaivable statutory claims. He characterized Andersen’s actions as having a “possible purpose of misleading employees into thinking they had waived rights that could not be waived, thereby minimizing the number of indemnity claims these employees might bring against Anderson.” In his view, Andersen’s insistence that Edwards sign a release that “expressly released specific claims (employment-related losses and expenses) that Andersen knew were not subject to release” was “sufficiently wrongful to support Edwards’s claim of intentional interference with prospective economic advantage.”

CRITICAL THINKING QUESTIONS

1.

Is there any way a California employer can protect itself against a disgruntled former employee working for a competitor?

2.

Did Andersen and HSBC behave ethically?

Due to differences in state laws, disputes can arise as to which law to apply to noncompete agreements. For example, an employee working in Ohio signed a non-compete with his employer, Convergys, which included an Ohio choice-of-law provision. When the employee resigned to work for a competitor in Georgia, he filed a lawsuit in Georgia seeking a declaration that the non-compete was unenforceable. The district court concluded that it could not follow “a contractual selection of law of a foreign state where such chosen law would contravene the public policy of Georgia,” declared the noncompete void, and granted an injunction against Convergys that prohibited the company from seeking to enforce the non-compete in any court nationwide. On appeal, the U.S. Court of Appeals for the Eleventh Circuit acknowledged that Georgia was entitled to enforce its public policy interests within its borders, but ruled: “Georgia cannot in effect apply its public policy decisions nationwide—the public policy of Georgia is not [public policy] everywhere. To permit a nationwide injunction would in effect interfere both with parties’ ability to contract and their ability to enforce appropriately derived expectations.” As a result, the court modified the injunction to preclude Convergys from enforcing the noncompete only in Georgia. 43

Even if an employment agreement does not contain an express noncompete, provisions having a similar effect will be unenforceable in a jurisdiction that bans noncompetes. For example, after Impaxx acquired Pac-West Labels, Impaxx asked a Pac-West employee to sign the following covenant: “For a period of one (1) year following the termination of employment, I will not (1) call on, solicit or take away any of Pac-

I have had any dealings as a result of my employment by Pac-West Labels.” Even though the identity of Pac-West’s customers was not a trade secret, Impaxx fired the employee after he refused to sign the covenant. In holding that the employee was wrongfully terminated, the California Court of Appeal rejected the employer’s assertion that the covenant was not a “true” covenant not to compete, but a mere limited restrictive covenant not to solicit:

This clause is less restrictive, and less anti-competitive, than the broad, traditional anti-competitive clauses. … It is nevertheless anti-competitive—why else would they ask employees to sign it? More to the point, “Anti-solicitation covenants are void as unlawful business restraints except where their enforcement is necessary to protect trade secrets.”  44

ETHICAL CONSIDERATION

Chambers & Owen, Inc. terminated Wayne Tatge, an at-will employee, when he refused to sign a noncompete that provided he would not work for one of the company’s competitors for a period of six months after termination of employment. a  The Supreme Court of Wisconsin dismissed the employee’s claim for wrongful discharge after concluding that the company’s requirement that he sign the noncompete did not violate public policy. The court noted that signing the agreement would not have prevented Tatge from arguing that its terms were unreasonable if the company tried to enforce it. California courts have reached a different outcome, finding that termination of an employee for refusing to sign an unenforceable noncompete agreement constitutes a wrongful termination in violation of public policy. b  Even though it was legal for a Wisconsin employer to fire Tatge for failing to sign the noncompete, was it ethical? Does it matter whether the employer knows the agreement is overbroad?

a. Tatge v. Chambers & Owen, Inc., 579 N.W.2d 217 (Wis. 1998).

b. D’Sa v. Playhut, Inc., 102 Cal. Rptr. 2d 495 (2000).

12-5b: Clawback Provisions

Sometimes employers require employees to agree to clawback provisions, which give the employer the right to recoup some or all of the employee’s stock option gain if he or she goes to work for a competitor within a certain period of time following exercise of the option. If litigation results, the outcome will vary depending on which state’s law governs. Although such provisions are enforceable under New York law, they are probably not enforceable in California. 45

12-5c: Confidentiality Agreements

As explained in  Chapter 11 , employers often require employees to sign confidentiality agreements to protect the employer’s trade secrets and to satisfy other confidentiality obligations. For example, AARS Forever, Inc. and THH Acquisition LLC 1, two providers of home health-care services and equipment, required employees to sign an agreement imposing noncompete and confidentiality obligations as well as requiring compliance with the medical privacy provisions of the Health Insurance Portability and Accountability Act (HIPAA, discussed in  Chapter 9 ). 46  The agreement prohibited (1) copying or disclosing confidential information without permission and (2) disclosing “company-related verbal communications to anyone.” Employees were also required to sign a “Confidential Acknowledgment of No Known Suspect Practices” statement providing, in part, that if they became aware of a “suspect practice,” they would report it to the employer. The acknowledgment stated: “I agree that the company cannot be responsible for suspect business practices that it would otherwise be unaware of if not made specifically aware of them by staff.”

Two employees filed suit under the False Claims Act (FCA) 47  and the Illinois Whistleblower Reward and Protection Act, 48  alleging that the employers had submitted false claims to the Veterans Administration. (As noted earlier, the FCA includes a provision allowing a private person to file a qui tam suit for FCA violations on behalf of the government.) The employers filed various counterclaims, including claims that the employees had breached their confidentiality agreements by disclosing confidential company information and verbal communications, and that they had breached the agreements requiring them to report “suspect business practices” to the employers.

The employees argued that the counterclaims should be dismissed because (1) the confidentiality agreements were contrary to the public policy interest in “detection and exposure of potential fraud against the United States” and (2) enforcing the agreements would discourage potential whistleblowers from bringing suit for these types of allegations. Although the district court dismissed the employers’ counterclaims relating to the False Claims Act, the court let most of the other counterclaims stand. Because the employees disclosed documents and communications that “went beyond the scope of those necessary to pursue” their suit under the FCA, the employers’ counterclaims relating to the breach of the confidentiality agreements were allowed to stand.

12-6: TORTIOUS INTERFERENCE WITH PROSPECTIVE ECONOMIC ADVANTAGE

Employers may attempt to prevent other companies from poaching employees in an overly aggressive fashion. In Reeves v. Hanlon, 49  the California Supreme Court held that although competition between companies for at-will employees is encouraged, inducing the termination of an at-will employment relationship may be tortious intentional interference with prospective economic advantage if the new employer engages in “independently wrongful acts” when inducing the employee to join its ranks. The court defined “independently wrongful acts” as acts “proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” 50  The defendants had left their former employer, an immigration law firm, and had then induced six other employees to leave to join their new law practice. The court found the defendants liable for damages suffered by the prior firm because they had also mounted “a campaign to deliberately disrupt plaintiff’s business” by having employees resign without notice, leaving no status reports of outstanding matters or deadlines, destroying the firm’s computer files and forms, taking confidential information, and improperly soliciting the firm’s clients.

12-7: REFERENCES FOR FORMER EMPLOYEES

Employers are often asked to give references regarding former employees to prospective employers. As discussed in  Chapter 9 , if the employer’s reference is not fair and the employer has impugned the former employee’s reputation, the former employee can sue for defamation.

Certain courts recognize a common law conditional privilege for references. 51  That privilege is limited, however. For example, the U.S. District Court for the Eastern District of Pennsylvania concluded that a principal’s comments during a faculty meeting regarding a teacher’s poor performance were not protected by the privilege. 52  The principal had abused the privilege by publishing the defamatory statements to the entire faculty and including allegedly defamatory matter not reasonably believed necessary for the purpose of informing the faculty that certain teachers’ contracts would not be renewed.

As discussed in  Chapter 9 , there is a growing trend toward statutory protection for employers that disclose in good faith information about a former employee’s performance. 53  For example, Nebraska grants civil immunity to certain employers who provide information about a former employee, such as attendance data, recent drug and alcohol test results, whether the employee left voluntarily or involuntarily, the reasons for leaving, and recent performance evaluation results. 54  To be eligible for statutory immunity, the former employer must obtain written consent (valid for six months) from the former employee using prescribed language; the consent must be in a stand-alone document or, if it is included with the application form, must be in bold letters and use typeface larger than the rest of the form. 55  Notwithstanding legislation of this type, many employers adhere to the “name, rank, and serial number” policy, under which the only information provided about a former employee is his or her dates of employment, job title, and salary. 56

In any case, companies should have a written policy outlining who may provide references and what information can be provided to companies seeking a reference. Some companies obtain a standard release, giving express permission to provide references, from all departing employees.

Although fear of a defamation claim may tempt an employer to give an overly positive recommendation, this is not prudent. As noted in  Chapter 9 , an employer giving an untrue assessment of a former employee may be liable to the new employer who relies on the recommendation and also to third parties physically harmed as a foreseeable result of the recommendation. 57

12-8: EMPLOYER TESTING AND SURVEILLANCE

Employers often administer tests to employees or conduct surveillance in the workplace in an effort to increase productivity, manage legal risks, and cut costs. Certain testing and surveillance activities may conflict with an employee’s right to privacy, however.

12-8a: Drug Testing

Many employers have adopted drug-screening programs for their employees and applicants to avoid the decreased productivity, quality control problems, absenteeism, on-the-job accidents, and employee theft that can result from drug and alcohol abuse. According to the Society for Human Resource Management, 57% of companies in the United States test their employees for drugs. 58  Some employers use drug testing in conjunction with a comprehensive drug program that provides education and assistance to an employee with a drug or an alcohol problem.

An employee may challenge a drug test for various reasons. The employee may claim that (1) the test breached his or her employment contract; (2) there was no justification for the test; (3) it violated the public policy that protects privacy; (4) he or she was defamed by false accusations of drug use based on an erroneous test; (5) he or she suffered emotional distress, especially if the test result was in error; or (6) the testing disproportionately affected employees of one race or gender and therefore was discriminatory.

Whether testing will be deemed permissible in a particular situation depends on four factors: (1) the scope of the testing program, (2) whether the employer is a public or private employer, (3) any state constitutional guarantees of a right to privacy, and (4) any state statutes regulating drug testing.

Scope of Testing Program

The first major factor, scope, concerns who is being tested: all employees (random testing); only employees in a specific job where the employer believes there is a legitimate job-related need (for example, nuclear power plant employees); groups of employees (for example, all employees in one facility because there is a general suspicion of drug use within that group); or specific individuals who are believed to be using drugs. The smaller the group tested and the more specific the reason for testing, the more likely a court will uphold the test. Random testing is the most difficult to defend.

Public Versus Private Employees

Because public employees are protected by the U.S. Constitution’s Fourth Amendment prohibition against unreasonable searches and seizures and by the right to privacy, there are greater limits on testing public employees than on testing private-sector employees. It has long been recognized that urine tests and blood tests are a substantial intrusion on bodily privacy and are therefore searches subject to regulation when imposed on public employees. The right to privacy guaranteed by the U.S. Constitution protects against invasions of privacy by public actors (i.e., state and federal governments or agencies), but does not protect against invasions by private (i.e., nongovernmental) actors. Similarly, the Fourth Amendment ban on unreasonable searches and seizures applies only to governmental activity. As a result, there are greater limits on testing public employees than on testing private-sector employees. With some exceptions, there is no federal constitutional limitation on drug testing in the private sector.

In Skinner v. Railway Labor Executives’ Association, 59  the U.S. Supreme Court held that railroads can be required to test public employees involved in a major train accident and have the authority to test employees who violate certain safety rules. The Court reasoned that any intrusion on individual privacy rights in the railroad context was outweighed by the government’s compelling interest in public and employee safety. The Supreme Court also upheld mandatory drug testing of U.S. Customs Service employees in line for transfer or promotion to certain sensitive positions involving drug interdiction or the handling of firearms. 60  Although there was no perceived drug problem among Customs employees, the Court held that the need for national security and the extraordinary safety hazards attendant to the positions involved justified the program.

In Knox County Education Association v. Knox County Board of Education, 61  the U.S. Court of Appeals for the Sixth Circuit held that subjecting public school teachers to drug and alcohol testing did not violate their constitutional right to privacy. Of primary importance in the court’s decision was the unique role that teachers play by accepting in loco parentis (“in place of the parents”) obligations to ensure the safety of children and to serve as role models. The court commented that “teachers must expect with this extraordinary responsibility, they will be subject to scrutiny to which other civil servants or professionals might not be subjected, including drug testing.” 62

State Constitutional Protection

Many state constitutions also guarantee the right to privacy. Some states extend this right to private-sector invasions of privacy; others limit it to governmental intrusions.

The California Court of Appeal held that a pupil-lary-reaction test given to all employees of Kerr–McGee Corporation at its chemical plant in Trono, California, might violate the California Constitution’s right to privacy, depending on the intrusiveness of the test and the employer’s safety needs. 63  The test consisted of shining  a light in the person’s eye and observing how much the pupil contracted. Although the court acknowledged that the pupillary test was less intrusive than urine, blood, or breath tests, it held that the trial court needed more facts to determine just how intrusive the test was. In contrast, the Alaska Supreme Court held that the right to privacy in the Alaska state constitution did not shield its citizens from drug tests by a private employer. 64

State Statutory Regulation

Many states have enacted legislation regarding drug testing of private employees, which often sets forth the notice procedures an employer must follow before asking an employee to submit to a drug test. In Vermont, for example, before administering the test, the employer must give the employee a copy of a written policy describing the circumstances under which persons may be tested, the drugs that will be screened, the procedures involved, and the consequences of a positive result.

A number of states have comprehensive drug- and alcohol-testing laws that require reasonable suspicion or probable cause before an employer may test. The requirements for establishing reasonable suspicion or probable cause vary from state to state. For instance, Connecticut permits testing when “the employer has reasonable suspicion that the employee is under the influence of drugs or alcohol which adversely affects or could adversely affect such employee’s job performance.” 65  Other states take the opposite approach and encourage broad, fair, and consistent testing in order to promote drug-free workplaces. For example, Alabama permits discounted workers’ compensation insurance premiums for employers that follow fair testing procedures, including random testing. 66

Although private employers, as well as public employers, may face some limits on implementing a drug-testing program, it should be noted that all employers have the right to make and enforce rules prohibiting drug use or possession on work premises, as well as rules prohibiting employees from being under the influence of drugs while at work. When an employee exhibits visible signs of intoxication or impairment, or inadequate performance, the employer may take disciplinary action. Because of the inadequacy of drug tests and the uncertainty about the scope of employees’ rights, however, the employer may wish instead to develop programs that provide assistance and drug education, and to counsel employees about the performance problems that drug abuse can cause.

12-8b: Genetic Testing and Health Monitoring

Genetic testing predicts whether a person has a genetic predisposition for developing a certain disease, although the accuracy of such tests varies. As discussed more fully in  Chapter 13 , the Genetic Information Nondiscrimination Act of 2008 67  prohibits employers with fifteen or more employees engaged in an industry affecting commerce from using genetic information to make decisions about hiring, firing, or compensation. 68  Genetic testing may also violate Title VII of the Civil Rights Act of 1964 when employees or applicants are singled out for testing based on race or gender. 69  The Americans with Disabilities Act (ADA) may also provide employees with a cause of action for genetic testing.

At least thirty-five states have enacted laws outlawing genetic discrimination in the workplace. 70  These laws generally fit within one of three types: (1) laws prohibiting discrimination in employment based on genetic characteristics, (2) laws prohibiting employers from requiring applicants or employees to undergo genetic testing, and (3) laws banning discrimination based on genetic test results or the refusal to take a genetic test. 71  Private employers may also face liability for violating state constitutions that protect employees from invasions of privacy.

When employees are exposed to dangerous chemicals or conditions as part of their jobs, regular health monitoring is encouraged, and in some instances, it is required by standards adopted by the Occupational Safety and Health Administration. 72  Presumably, even when regulations do not require monitoring, an employer may choose to require participation in the health monitoring program as a condition of employment in positions affected by hazardous exposure.

12-8c: Polygraph Testing of Employees

Polygraph testing is another area where an employee’s right to privacy may limit an employer’s investigative rights. The Employee Polygraph Protection Act of 1988 (EPPA) 73  generally makes it unlawful for employers to (1) ask an applicant or employee to take a polygraph exam or other lie detector test, (2) rely on or inquire about the results of a lie detector test that an applicant or employee has taken, (3) take or threaten to take any adverse action against an applicant or employee because of a refusal to take a lie detector test or on the basis of the results of such a test, or (4) take or threaten to take any adverse action against an employee or applicant who has filed a complaint or participated in a proceeding relating to the polygraph law.

These rights cannot be waived by the employee in advance. For example, a federal district court held that a bartender could still sue for violation of the EPPA even though she had signed a release form stating that her employer had reasonable suspicion of theft before the employer requested that she take a polygraph test. 74  The court held that an employee can waive rights or procedures under the EPPA only pursuant to a written settlement of a pending lawsuit, per section 2005(d) of the act.

The EPPA does not completely ban the use of polygraph exams, however. Employers may test employees who are reasonably suspected of conduct injurious to the business, as well as applicants or employees in certain businesses involving security services or the handling of drugs. In addition, the EPPA does not restrict federal, state, or local government employers from administering polygraph exams.

A number of states and the District of Columbia prevent employers from requesting that an applicant or employee take a lie detector test as a condition of employment. 75  Even when lie detector tests are permitted, no question should be asked during the test that could not lawfully be asked on an application form or during an interview.

12-8d: Employee Surveillance in an Electronic Age

Companies use a variety of techniques to monitor their employees: listening to cell-phone conversations, inspecting computer files, reading e-mails, and conducting video surveillance. Certain industries, such as telemarketing and securities trading, may conduct surveillance to show their compliance with regulations.

Employees’ use of the Internet, e-mail, instant messaging (IM), and employee blogs raises a number of issues for employers. From a productivity standpoint, employers are concerned that employees waste company time using the Internet for personal reasons during working hours. In addition, employees may subject their employers to liability, such as potential discrimination claims resulting from sexually explicit statements or ethnic slurs in e-mails and blogs, or copyright and trademark violations due to unauthorized downloading of third-party content. Employees’ personal use of the employer’s computers may also disrupt and endanger the employer’s business by allowing for easy, instantaneous, and unauthorized transfer of trade secrets. 76

Of the companies surveyed by the American Management Association (AMA), 66% monitor employee Internet use, 43% monitor employee e-mails, and about 30% have fired an employee for improper use of the Internet or e-mail while at work. 77  Although the AMA survey found that less than 15% of participating companies had a written policy regarding corporate or personal blogs, a number of companies (including Delta Airlines, Google, Microsoft, Wells Fargo, and Starbucks) have fired employees for inappropriate blogging. In most of these cases, the employer was concerned about the widespread circulation of confidential company information, such as corporate trade secrets or the e-mail addresses of top executives. Because the employees were employed at will, posting statements that were critical of their company or coworkers in a personal blog was enough to get them fired. As a result, some employees who blog about work-related items do so anonymously under a pseudonym. Even that may not prevent termination—Nintendo terminated an employee after her bosses linked her to an “anonymous” blog criticizing several of her coworkers. 78  As discussed below, however, employers must be mindful of the protections afforded by the National Labor Relations Act before disciplining an employee for comments about work-related matters.

Employer surveillance goes well beyond employee use of the Internet. Fully 45% of employers surveyed by the AMA monitor time spent on the telephone and track phone numbers called, while 16% actually record employees’ phone conversations. 79  Employers also use global positioning system (GPS) technology to track company vehicles, cell phones, and employee identification cards. GPS is used most frequently in service industries, such as delivery firms.

Because employers have a legitimate interest in monitoring their employees’ use of company-owned equipment, most courts have upheld a private employer’s right to monitor and regulate employees’ workplace movements, e-mail, and use of computers. 80  In most states, the employer is not even required to notify employees that they are being monitored. 81  In 2004, the U.S. Court of Appeals for the Third Circuit ruled that an employer may read and access employees’ e-mails without violating the Electronic Communications Privacy Act, which bars the interception of any electronic communication or unauthorized access to stored communications, as long as the employer reads only e-mail messages that were already sent and stored on the company’s own e-mail system. 82  In 2005, a New Jersey appellate court went even further and held that an employer was negligent when it failed to monitor the Internet sites an employee was visiting after supervisors became aware that the employee had a history of visiting pornographic websites on the job. 83

Under certain circumstances, however, surveillance may transgress employees’ privacy rights, particularly when government employees are involved. The watershed case in this area was O’Connor v. Ortega. 84  In that case, the U.S. Supreme Court ruled that a public employee may, in certain circumstances, enjoy a reasonable expectation of privacy in the workplace. The employee’s privacy interest must be balanced, however, by the “operational realities” of the workplace. Since Ortega, lower courts have considered (1) whether the employee was provided an exclusive working space, (2) the nature of the employment, and (3) whether the employee was on notice that parts of the workplace were subject to employer intrusions. For example, in Vega-Rodriguez v. Puerto Rico Telephone Co., 85  the U.S. Court of Appeals for the First Circuit held that governmental security operators, sitting in an open, undifferentiated work area, who monitored computer banks to detect alarm-system signals, had no reasonable expectation of privacy. As a result, the public employer’s soundless video surveillance of the workplace did not violate the employees’ Fourth Amendment rights.

To avoid potential problems, employers should establish policies for their employees’ use of the Internet, e-mail, IM, and blogs and, in addition, establish policies about how they will monitor employees’ location, computers, cell phones, and other work equipment. Employees should also be trained in the proper use of this equipment. The policies should prohibit sending unlawful, offensive, or defamatory statements, as well as making unauthorized disclosures of trade secrets via the corporate e-mail system. Employees should also be informed that they have no expectations of privacy when using the employer’s electronic resources, vehicles, and other equipment and that the company has the right to monitor use and content without notice (unless notice is required by state law). For example, Yale University has posted a notice, as required by Connecticut law, that it may, without further notice, use hidden cameras and other techniques to monitor employees’ activities, including their e-mails and use of computers and telephones. 86  In addition, companies should establish security measures and educate their employees about such policies and the manner in which they will be enforced.

INTERNATIONAL SNAPSHOT

As discussed further in the “ Global View ” in this chapter, employment practices and employment law vary significantly across the globe. Corporations that operate both domestically and abroad should consider the following factors in their business plans.

· 1. Hiring and termination policies—Because at-will employment is uncommon outside the United States, employee termination may involve specific documentation, notice, and severance provisions.

· 2. Employee benefits—Certain countries participate in collective bargaining agreements that cover entire industries, rather than only certain companies.

· 3. Privacy—These laws vary widely by country and may impact policies about using personal laptops for business purposes and employer access to employee data.

· 4. Discrimination—Policies and laws about sexual harassment, bullying, and gender identity issues are continually being modified.

· 5. Employee classification—As in the United States, proper classification as an employee versus an independent contractor is crucial. In addition, companies in certain countries may calculate base pay or bonuses differently than U.S. companies do.

· 6. Bribery and corruption—Practices vary widely among countries, and what is illegal in one country may be legal in another. (As discussed in  Chapter 24 , however, the U.S. Foreign Corrupt Practices Act has extraterritorial application.) Whistleblower laws also vary.

SOURCES: Information based on Employment Alert: 14 Global Workplace Trends for 2014, DLA PIPER (Jan. 20, 2014), available at  http://www.dlapiper.com/14-global-workplace-trends-for-2014 ; Megan Muir, Top Labor and Employment Law Issues When Taking Your Start-Up Global, UTE KRUDEWAGEN (Oct. 17, 2013), available at  http://www.lexology.com/library/detail.aspx?g=fa0e9ee6-21b4-4ac4-93a2-42c54ea29948 .

12-9: RESPONSIBILITY FOR WORKER SAFETY

Both federal and state laws require employers to provide a reasonably safe workplace.

12-9a: Occupational Safety and Health Act

The Occupational Safety and Health Act of 1970 (the OSH Act) 87  requires employers to establish safe and healthful working environments. The federal agency responsible for enforcing the provisions of the act is the Occupational Safety and Health Administration (OSHA). This agency is authorized by Congress to regulate additional workplace issues, including exposure to hazardous chemicals, protective gear, fire protection, and workplace temperatures and ventilation. About half of the states have enacted similar legislation and established enforcement agencies at the state level. Typically, in states with approved employment health and safety programs, OSHA defers to the state agency for enforcement activities.

An employer governed by the OSH Act has a general duty to provide a safe workplace, which includes the obligation to abate workplace hazards that are causing or are likely to cause death or serious physical harm to employees. 88  Conditions that are obviously dangerous or are regarded by the employer or other employers in the industry as dangerous are considered  recognized hazards . What constitutes a recognized hazard is not entirely clear. The term’s reach is broad and includes anything from sharp objects to radiation to repetitive stress injuries. 89

Dealing with the Threat of Terrorism

As a result of the terrorist attacks on the World Trade Center and elsewhere on September 11, 2001, OSHA has encouraged employers to implement emergency action plans to ensure employee safety in the event of another terrorist attack. 90  OSHA recommends that employers have plans for evacuation, anthrax risk management, and tightened security at building entrances and exits.

OSHA Inspections

In general, OSHA inspectors are allowed to enter and inspect a workplace at any reasonable time, without prior notice. During the inspection, the OSHA investigator may review company records, check for compliance with the relevant OSHA standards, inspect fire-protection and other safety equipment, examine the company’s safety and health-management programs, interview employees, walk through the facility, and use other reasonable investigative techniques. The inspection should not unreasonably disrupt the operations of the workplace.

When the inspection is complete, the inspector meets with the employer and the employee representative, if any, to review the results of the inspection. If appropriate, the inspector will issue a written citation for violations.

Record-Keeping and Posting Requirements

OSHA requires employers to maintain certain records, including the OSHA Form 300, which lists and summarizes all work-related injuries and illnesses. 91  (Certain industries, such as retail, finance, and insurance, are exempt from this record-keeping requirement.) A summary of these records must be posted annually at the job site. In addition, employers must post in a conspicuous place (1) OSHA’s official Job Safety Poster; (2) any OSHA citations for violations; and (3) notices of imminent danger to employees, including exposure to toxic substances.

Civil Violations

OSHA can cite employers for six types of civil violations: (1) willful violations that are deliberate or intentional, for which fines from $5,000 to $70,000 may be imposed for each violation; (2) repeated violations involving another violation of a previously cited section, for which fines of up to $70,000 may be imposed; (3) serious violations that have a substantial likelihood of resulting in death or serious bodily harm, for which a penalty of up to $7,000 per violation may be imposed; (4) non-serious violations, which involve hazards that are not likely to cause death or serious bodily harm, for which a fine of up to $7,000 per violation may be imposed; (5) “failure to abate” violations, for which civil penalties of up to $7,000 may be assessed for each day a violation continues beyond the prescribed abatement date; and (6) de minimis (that is, unimportant) violations, for which no notice is posted and no penalty is imposed. 92

If OSHA finds a violation, the employer is required to remedy the problem immediately. If remedial action is not taken, OSHA will seek a court order to ensure compliance. The employer may either settle the violation or seek review of the OSHA decision by the Occupational Safety and Health Review Commission. OSHA may penalize egregious violations by imposing a separate fine for each violation, rather than an overall fine for a group of violations. Additionally, evidence that shows a clear violation of OSHA standards can sometimes support punitive damages. 93

The aggregation of multiple serious violations can result in significant fines. In 2009, OSHA levied a record fine of more than $81.3 million against BP Products North America, Inc. for continuing safety violations at its Texas City, Texas, oil refinery. 94  OSHA had cited BP for 301 willful violations of worker safety laws in 2005, levied a $21 million fine, and secured BP’s agreement to take corrective action to eliminate potential hazards at the facility after 15 BP workers were killed and another 170 injured in an explosion. 95  The 2009 fine included $50.6 million in fines for noncompliance with the terms of the 2005 agreement (including 270 notifications of failure to abate, which resulted in a penalty of $7,000 times 30 days, the period during which the conditions remained unabated). The 2009 fine also included $30.7 million in penalties for 439 new willful violations for failure to follow industry-accepted controls on the pressure relief safety systems and other process safety management violations. 96

Federal Criminal Penalties

OSHA can refer a case to the Justice Department for criminal prosecution when a willful violation of safety laws causes the death of an employee or an employer provides false information to OSHA. 97  In this context, “willful” means that the employer demonstrated either “intentional disregard” of safety laws or “plain indifference” toward them. Willful violations resulting in the death of an employee are misdemeanors, punishable by $250,000 in fines for an individual or up to $500,000 for a corporation, imprisonment of up to six months, or both. 98  Providing OSHA with false information is also a misdemeanor and is punishable by a maximum of six months in jail and a $10,000 fine. 99  The OSH Act also makes it a crime for anyone to provide advance notice of a surprise OSHA inspection. This is punishable by a maximum of six months in jail and a $1,000 fine. 100

Critics have faulted OSHA for rarely seeking federal criminal penalties even in cases of worker death due to willful safety violations. 101  A 2013 study issued by the AFL–CIO found criminal enforcement under the OSH Act to be “exceedingly rare.” 102  Since passage of the OSH Act in 1970, only 84 cases had been prosecuted under the act even though OSHA had investigated approximately 78,000 worker deaths. Members of Congress have introduced legislation to substantially increase the penalties for OSHA violations. 103

Voluntary Compliance Measures

Along with concerns about the small number of criminal prosecutions, some have criticized OSHA for policies that favor voluntary employer compliance over new mandatory regulations. 104  Some industries have applauded these efforts, but critics claim that the voluntary focus and reduced regulatory guidance have made OSHA less effective.

12-9b: State Analogues to OSHA

The OSH Act encourages states to create their own job safety and health programs. If a state program meets various OSHA benchmarks, the state can gain more control over its health and safety regulation. When a state program has met all of OSHA’s requirements, OSHA may give “final approval” and relinquish its authority to regulate occupational safety and health matters covered by that program. Only a state program that is “at least as effective” as comparable federal standards will gain this final approval from OSHA. The state program may also govern hazards not addressed by federal standards. As of 2013, OSHA had given final approval to plans covering both private-sector and public employees in twenty-two states and plans covering public employees in five other states. 105

Where state regulatory programs exist, employees may file formal complaints regarding workplace safety with either the OSHA regional administrator or the appropriate state program. In addition, anyone finding deficiencies with the state program itself may file a complaint with the regional administrator. OSHA investigates all such complaints and requires the state to take corrective actions when necessary.

State Criminal Penalties

In addition to the federal criminal penalties that may be imposed under the OSH Act, state prosecutors may charge employers with a broad range of crimes, including manslaughter or reckless homicide when a violation results in an employee’s death. For example, in May 2011, the owner of California C&R, Inc. pleaded guilty to, among other things, involuntary manslaughter and willfully violating a Cal/OSHA safety order in connection with the 2008 death of an employee who fell off a four-story apartment building after Cal/OSHA had issued the company a citation for failing to have a site safety plan. Both the owner and the foreman were sentenced to one year in prison. 106

Recently, some states have substantially increased the severity of penalties for workplace safety violations. In California, for example, willful violations causing an employee’s death or prolonged bodily impairment can be prosecuted either as misdemeanors, with maximum penalties of one year in prison and a fine of $100,000, or as felonies, with maximum penalties of three years in prison and a fine of $1.5 million for a corporation or $250,000 for an individual. 107

12-9c: Tort Liability for Violence in the Workplace

Employers also face potential tort liability for violence in the workplace perpetrated by employees or their lovers or spouses. Preliminary figures issued by the Bureau of Labor show that 767 (approximately 17%) of the 4,383 work-related deaths during 2012 were the result of workplace violence; of those, 463 deaths were attributed to homicides, with suicides (225) comprising the majority of the remaining deaths. 108

To help prevent domestic violence from spilling over into the workplace, some companies hold seminars on domestic-violence issues on company time, provide a twenty-four-hour telephone counseling service for employees and their partners, and tap the phones of workers who fear an attack and provide them with escorts to and from parking lots. Sometimes, the employer seeks restraining orders in its name to keep alleged abusers from potential victims’ work sites. 109  Once an employer is informed about the risk of violence or takes an interest in the case, it exposes itself to liability for negligence if it fails to take reasonable steps to prevent injury. 110

12-9d: Workers’ Compensation

State workers’ compensation statutes provide income and coverage of medical expenses for employees 111  who suffer work-related accidents or illnesses. 112  The statutes are based on the principle that the risks of injury in the workplace should be borne by industry. The system is no-fault, and an employee is entitled to monetary benefits from the employer regardless of the level of safety in the work environment and the degree to which the employee’s carelessness contributed to the incident. Workers receive medical treatment and benefits sooner and with more certainty as a trade-off for receiving smaller total compensation than civil litigation might bring.

The amount of workers’ compensation received by an employee is determined by a set schedule, based on the employee’s loss of earning power. Usually, the employee receives payments of a specified amount at regular intervals over a definite period of time. In most cases, benefits include medical, surgical, hospital, nursing, and burial services in addition to payment of compensation. Workers’ compensation can be provided through (1) self-insurance, (2) insurance purchased through a state fund, or (3) insurance purchased through a private company.

Generally, workers’ compensation benefits paid by the employer are the employee’s sole remedy for workplace injuries. Some courts have recognized exceptions to this general rule, however, and allow employees to sue employers in tort for their injuries, in addition to collecting workers’ compensation, for the following: (1) nonphysical injuries resulting from the tort of intentional infliction of emotional distress; (2) mental distress, indignity, or loss of wages or promotion opportunities due to sexual harassment; (3) injury to reputation caused by an employer’s defamatory statements; and (4) both physical and nonphysical injuries resulting from an employer’s intentional tort or misconduct.

For example, the New Jersey Supreme Court held that an employer’s intentional removal of a safety device from a machine was an intentional wrong that would remove the employer’s immunity from a tort suit if it was proved that the employer was “substantially certain” injury would result. 113  Applying that same standard a year later, a New Jersey appellate court affirmed a lower court’s grant of summary judgment in favor of the defendant employer in a suit brought on behalf of a security guard killed during a robbery, holding that the failure of the employer to implement a corporate safety policy directive did not amount to evidence that it was a “virtual certainty” injury would occur as a result. 114  The court also held that the risk of robbery was a “fact of life” for a security guard and thus was precisely the “type of hazard of employment” that workers’ compensation was designed to cover. 115

12-10: MINIMUM WAGE, OVERTIME, AND CHILD LABOR

The Federal Fair Labor Standards Act (FLSA), 116  enacted in 1938 and amended many times thereafter, was established primarily to regulate the minimum wage, overtime pay, and the use of child labor. Many, if not all, states have established wage and hour regulations as well. In general, when federal and state laws vary, employers must abide by the stricter law. Because of the wide variance in state laws, this discussion focuses on federal law.

12-10a: Who Is Covered?

The FLSA applies to employees who individually are engaged in interstate commerce or in the production of goods for interstate commerce, or who are employed by employers of any size that participate in interstate commerce or in the production of goods for interstate commerce.

The FLSA does not apply to independent contractors. As discussed in  Chapter 5 , proper characterization of workers as employees or independent contractors can be hotly contested.

12-10b: Who Is Liable for Violations?

Individuals as well as firms may be held liable for violations of the FLSA. In Herman v. RSR Security Services Ltd., 117  the U.S. Court of Appeals for the Second Circuit ruled that Murray Portnoy, a principal in a labor relations firm, exercised sufficient control over a security company’s employees to be held liable as an employer for violations of the FLSA’s minimum-wage, overtime, and record-keeping requirements. Portnoy partially owned the security company, funded its start-up costs, and chaired its board of directors. The court affirmed a judgment of almost $160,000 against him.

12-10c: Hours Worked and Overtime

The FLSA does not limit the number of hours that an employee may work in a workweek or workday, as long as the employee is paid appropriate overtime. (But, as noted in  Chapter 9 , if an employer forces an employee to work too many hours, the employer may be liable under common law negligence for injury to a third party resulting from the employee’s fatigue.) The FLSA requires that, with certain exceptions, every employee be paid one and one-half times the regular rate of pay for hours worked in excess of forty hours in a workweek. The “regular rate” is not necessarily the hourly wage, but includes all cash compensation for the workweek. In most cases, employers can exclude profits from certain employer-provided stock options, stock appreciation rights, and bona fide stock purchases from the calculation of regular pay rates when calculating overtime pay. 118

The FLSA permits state and local governments to comply with the statute’s overtime provisions by giving employees compensatory time (comp time) in lieu of overtime pay. 119   Comp time  is extra paid vacation time granted instead of extra pay for overtime work.

12-10d: Compensation

The FLSA requires that employees be compensated for all hours worked. This includes the time employees spend putting on and removing required protective gear and walking to and from the locker room to the production floor. 120  The time employees spend before putting on protective gear or after removing it is not compensable under the FLSA, however. Section 203(o) of the FLSA allows, as part of a collective bargaining agreement, the parties to decide whether “time spent in changing clothes … at the beginning or end of each workday” is compensable or not. 121  This includes the ability to exclude from compensation the time workers spend putting on and taking off protective gear.  122

In general, the hours that an employer knows or has reason to know an employee has worked are deemed hours worked even if the employer has not asked the employee to work those hours. If an employee is asked to be on standby—that is, available to return to work while off duty—the hours spent on standby will not be counted as hours worked if the employee is generally free to use the time for his or her own purposes.

12-10e: Minimum Wage

In 1938, the FLSA established the first minimum wage at 25 cents per hour. The minimum wage in 2013 was $7.25 per hour. 123  Members of Congress introduced the Fair Minimum Wage Act of 2013, which would increase the minimum wage, in stages, to $10.10 by 2016. 124  President Obama also supported raising the minimum wage. 125

States and cities often impose higher minimum wages. For example, the minimum wage in the state of Washington is $9.32 an hour. In June 2014, the Seattle, Washington, City Council voted to require businesses employing more than five hundred workers to increase the minimum wage to $15 an hour by 2017, or by 2018 if the employer offers health-care benefits. 126  Smaller businesses will be permitted to phase in the increase over a period of five to seven years. 127

 ECONOMIC PERSPECTIVE: Is Raising the Minimum Wage Good Economic Policy?

Almost 5% of the 75.3 million hourly workers in the United States earned $7.25 per hour or less in 2012. a  Of those, roughly half were twenty-five years of age or older. A full-time worker earning the minimum wage grosses only $290 for a forty-hour week, or $15,080 a year. Eleven percent of individuals working part-time (that is, less than thirty-five hours per week) were paid the federal minimum wage or less, whereas only 2% of full-time workers earned this little.

Raising the minimum wage is a divisive issue with economic, political, and philosophical implications. b  Democrats generally favor raising the hourly rate, citing economic benefits as well as the less measurable benefits of a “more stable, productive and satisfied workforce.” c  Republicans counter that the White House is “pandering” to low-paid workers and does not understand the economic consequences of an increase. d

Increasing the minimum wage would raise salary expenses, but it could also reduce employee turnover, saving employers the cost of hiring and training new workers. Paying higher wages may also result in less theft and shrinkage. e  Further, more money in an employee’s pocket means more money to spend on an employer’s goods and services. Critics of raising the minimum wage argue that it would raise employers’ labor costs, forcing them to terminate hundreds of thousands of workers. According to a report issued by the nonpartisan Congressional Budget Office, increasing the minimum wage would result in higher wages and family income for the majority of workers, but a smaller group would lose their jobs and have a much smaller family income. f  Raising the wage to $10.10 per hour would reportedly “lift about 900,000 people out of poverty,” but it could also mean the loss of 500,000 jobs. g  (The report notes that this figure is an estimate and could vary significantly in either direction.)

Other research suggests, however, that raising the minimum wage would not negatively impact employment, because employers would deal with the higher minimum wage by (1) giving smaller wage increases to higher-paid employees, (2) making minor price modifications in their goods or services, and (3) saving money on hiring and training costs. h  Evidence further shows that employers do not, as opponents claim, immediately lay off workers when required to pay higher wages. Indeed, the Economic Policy Institute estimates that increasing the minimum wage to the proposed $10.10 per hour would, in fact, actually result in 85,000 new jobs due to increased gross domestic product. i  Labor statistics released in July 2014 supported this position: the thirteen states that had increased their minimum wages at the start of the year reported an average increase in number of jobs for the first half of 2014 of 0.85%, compared with an increase of 0.61% for those states that did not increase the rate. j

A number of businesses already pay more than the minimum wage. The entry-level wage at Costco is generally about $11.50 per hour. In February 2014, Gap Inc. announced that it would offer a $9 per hour minimum rate, which it would increase to $10 by 2015. k  In addition to giving itself a “public relations edge” compared with some of its competitors, Gap’s decision to raise its pay scale might result in employees with better skills. l

Some economists suggest that policy makers, when deciding whether to raise the minimum wage, take a “social welfare” or “utility” approach, whereby society’s resources are allocated in such a way as to maximize society’s aggregate utility. m  Philosophical concerns arise, however. In particular, is it ethical to sacrifice the utility or “happiness” of one party so that another party will benefit? n  N. Gregory Mankiw, a Harvard economics professor, recommends that decisions that are “complex, hard to evaluate and disruptive of private transactions” be viewed with skepticism and evaluated under the medical maxim “first, do no harm.” o

a. U.S. Dep’t of Labor, Bureau of Labor Statistics,Labor Force Statistics from the Current Population Survey,  http://www.bls.gov/cps/minwage2012.htm#1  (last modified Feb. 26, 2013).

b. Editorial,The Case for aHigher Minimum Wage, N.Y. TIMES, Feb. 9, 2014, at 10.

c. Zachary A. Goldfarb,Minimum-Wage Hike Would Help Alleviate Poverty, But Could Kill Jobs, CBO Reports, WASH. POST.COM (Feb. 18, 2014).

d. Id.

e. Editorial,supra note b.

f. Goldfarb,supra note c.

g. Id.

h. Editorial,supra note b.

i. Editorial,The Campaign for a Bigger Paycheck, N.Y. TIMES, Jan. 2, 2014, at A18.

j. Christopher S. Rugaber,US States with Higher Minimum Wages Gain More Jobs, ABC NEWS (July 19, 2014),  http://abcnews.go.com/Business/wireStory/us-states-higher-minimum-wages-gain-jobs-24630907 .

k. Steven Greenhouse,Gap to Raise Minimum Hourly Pay, N.Y. TIMES, Feb. 20, 2014, at B1.

l. Id.

m. N. Gregory Mankiw,When the Scientist Is Also a Philosopher, N.Y. TIMES, Mar. 23, 2014, (Business), at 4.

n. Id. For different ethical theories, see  Chapter 2 .

o. Mankiw,supra note m.

More than 140 localities, including Baltimore, Detroit, Milwaukee, Minneapolis, Portland (Oregon), and St. Louis, require certain employers to provide wages and employee benefits higher than either federal or state minimum wages. 128  Called  living wage ordinances , these programs require employers to pay wages approximating the real cost of living in the locality, which is often significantly higher than the applicable state or federal minimum wage. Unlike state and federal minimum-wage laws, living wage ordinances often target only certain businesses, such as recipients of city contracts, lessees of city property, or larger businesses with more employees and higher earnings. RUI One Corporation, which owned and operated a restaurant located on an open-space preserve held in public trust by the city of Berkeley, California, unsuccessfully challenged Berkeley’s living wage ordinance under the Equal Protection and Due Process Clauses of the U.S. and California Constitutions. 129

12-10f: Exempt and Nonexempt Employees

Certain types of employees are exempt from the FLSA minimum-wage and overtime requirements, including many executive, administrative, professional, computer, and outside sales employees. 130  To qualify as an  exempt employee , the employee must (1) be paid a minimum salary amount, (2) be paid on a “salary basis,” and (3) meet the “duties test” for the particular exemption. All other employees are  nonexempt employees  and must be paid both the minimum wage and the overtime required by the FLSA. The regulations also provide that certain types of jobs do not qualify for the exemptions from the FLSA minimum-wage and overtime requirements. Nonexempt workers include manual laborers and other blue-collar workers, as well as police officers, firefighters, paramedics, and other public safety “first responders.” 131

Employees who earn less than $455 per week ($23,660 annualized) are automatically considered nonexempt. 132  The Labor Department has also adopted a “bright-line” test whereby highly paid employees—those earning an annual salary of at least $100,000 per year (including commissions and nondiscretionary bonuses)—are considered exempt as long as the employer can show that they regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee. For employees earning between $23,660 and $100,000, the FLSA provides a test based on the types of duties the employee performs to determine whether the employee is exempt.

12-10g: Child Labor

It is illegal to employ anyone under the age of fourteen, except in specified agricultural occupations. Children aged fourteen or fifteen may work in some occupations, but only if the employment occurs outside school hours and does not exceed daily and weekly hour limits. Individuals aged sixteen to eighteen may work in manufacturing occupations, but not in jobs that the secretary of labor has declared to be particularly hazardous, such as jobs entailing exposure to radioactive materials or operation of a power-driven woodworking machine, a hoisting apparatus, a metal-forming machine, or a circular or band saw.

12-10h: Modern-Day Slavery

Human trafficking, which often involves the recruitment and smuggling of foreign nationals into the United States to force them to work in factories, fields, or homes, amounts to “modern-day slavery.” The United States government estimates that every year 600,000 to 800,000 men, women, and children are trafficked across international borders into forced labor or slavery-like conditions, including approximately 17,500 trafficked into the United States. 133  The Victims of Trafficking and Violence Protection Act of 2000 (TVPA) 134  made prosecution of human trafficking in the United States more effective and increased the statutory maximum sentences that traffickers face.

12-11: EMPLOYEE BENEFITS

A variety of federal and state statutes govern employee benefits.

12-11a: Employee Retirement Income Security Act of 1974 (ERISA)

Prior to the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), 135  many employees who had expected to receive pension payments on retirement received either no benefits or far lower benefits than they had anticipated. Plan officials made ill-advised pension investments, employees who quit or were discharged received few or no vested benefits, and employers terminated underfunded plans or left them with insufficient assets to cover their obligations. Congress enacted ERISA to help remedy these problems, but its scope goes far beyond pensions. As discussed below, ERISA preempts many state laws governing pensions and employer-sponsored health plans and other employee benefits.

ERISA governs most retirement plans (referred to as  pension plans ) as well as many other types of employer-sponsored employee benefit plans (referred to as  welfare benefit plans ). With regard to pension plans, ERISA (1) establishes minimum funding requirements and participation and vesting standards; (2) imposes fiduciary obligations on pension plan administrators; (3) requires detailed disclosure and reporting of certain pension plan information; (4) imposes substantial restrictions on the investment of pension plan assets; and (5) requires pension plan administrators to provide annual, audited financial statements to the government and participants. An employer must also maintain records of each employee’s years of service and vesting percentage.

Pension Plans

There are several types of pension plans. In a  defined benefit pension plan , the employer guarantees that the participant will receive an annual benefit for life following retirement (or the actuarial equivalent of such a benefit) based on the formulas in the plan, regardless of the total contributions made to the plan or the plan’s investment performance. Thus, the employer bears the economic risk of poor investment performance (and enjoys the benefits of superior financial performance). The employer is required to fund the defined benefit pension plan on an annual basis based on reasonable actuarial assumptions.

In contrast, in a  defined contribution pension plan , the employer makes no guarantee as to any particular benefit on retirement. Instead, the retirement benefit is whatever can be funded by the balance in the participant’s account at retirement. Thus, the participant bears the economic risk of poor investment performance (and enjoys the benefits of superior investment performance). The employer’s obligation to make contributions to a defined contribution pension plan depends on the terms of the plan. Some defined contribution pension plans provide for a fixed percentage of the participant’s compensation. Other plans are discretionary, with the employer determining contributions on a year-by-year basis.

A  401(k) plan  is a defined contribution pension plan funded with contributions by the participants or a combination of participant and employer contributions. SIMPLE plans, for employers with fewer than one hundred employees, are similar to 401(k) plans but have stricter rules and simpler administration. Both 401(k) plans and SIMPLE plans allow employees to defer a portion of their salaries on a pretax basis into an investment fund set up by the company. By law, participation in 401(k) plans cannot be too heavily weighted in favor of higher-compensated employees, so companies generally offer a partial match to encourage broad participation in these voluntary plans. The match can be in cash or any investment vehicle the company chooses, including company stock. Many employers have abandoned their traditional defined benefit plans in favor of 401(k) plans, thereby shifting more of the investment risk to employees.

An  employee stock ownership plan (ESOP)  can provide numerous tax and other benefits for employees, the company, and shareholders. ESOPs are tax-qualified, however, so they must meet many coverage, nondiscrimination, distribution, and other Internal Revenue Code requirements. Among other things, ESOPs must not discriminate in favor of highly compensated employees, and the Internal Revenue Code’s distribution rules require the employer to repurchase the stock after an employee terminates employment at the election of the employee if a market does not otherwise exist. An ESOP’s assets must be invested primarily in stock of the sponsoring employer.

Fiduciary Duties  ERISA provides that officers and trustees of both defined benefit pension plans and defined contribution pension plans are fiduciaries who are required to act solely in the interests of the plan’s participants and beneficiaries in providing benefits and defraying expenses. 136  In particular, section 409 of ERISA imposes fiduciary duties on plan administrators relating to the proper management, administration, and investment of plan assets in order to ensure that the benefits authorized by the plan are ultimately paid to plan participants.

Trustees of private pension plans must use the “prudent person” investment standard when investing pension funds. This rule requires trustees to employ “the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” 137

Participants in a defined benefit plan are not entitled to receive more than their accrued benefits, however: “Since a decline in the value of a plan’s assets does not alter accrued benefits, members similarly have no entitlement to share in a plan’s surplus—even if it is partially attributable to the investment growth of their contributions.” 138  As a result, Hughes Aircraft Company did not violate its fiduciary duties when it stopped making contributions to a defined benefit plan with a $1 billion surplus, amended the plan to include an early retirement program with additional benefits to certain eligible employees, and then amended the plan again to provide that new participants could not contribute to the plan and would receive fewer benefits.

The Pension Protection Act of 2006

The Pension Protection Act of 2006 139  requires 401(k) plans and other defined contribution pension plans that hold publicly traded employer stock to allow participants and beneficiaries to divest the employer shares. Plans are required to offer at least three different types of investment options, in addition to employer stock, to satisfy a variety of risk tolerances among participants and beneficiaries. The act also requires 401(k) quarterly statements to warn employees that holding more than 20% of their portfolio in any one company or industry could leave them inadequately diversified. To encourage employee participation, the act allows companies to automatically enroll 401(k)-eligible employees in the plan, subject to specific criteria, and to automatically increase worker contributions every year. The act also boosted the portability of 401(k) plans, making it easier for employees to roll over funds.

In an effort to address the deteriorating funding of many defined benefit pension plans and, in some cases, the termination of plans by plan sponsors unable to meet their funding obligations, the act required defined benefit pension plans to meet more stringent funding rules. The act requires contributions to underfunded plans that, in most cases, are sufficient to fully fund the plan within seven years.

401(k) Litigation

As the number of employees with 401(k) plans has grown, the number of lawsuits targeting 401(k) plan fiduciaries, including corporate executives, company directors, and investment committee members, has also grown. A 2002 lawsuit against Enron, on behalf of 224,000 employees, netted a $220 million settlement, according to the law firm that acted as co-lead counsel. A massive lawsuit against Wal-Mart focused on allegedly excessive fees charged to 401(k) participants. 140

Welfare Benefit Plans

Medical, dental, disability, and other welfare benefit plans are also subject to ERISA’s rules on reporting, disclosure, and fiduciary responsibility. For example, employers must provide employees with a summary plan description, a summary annual report, and a summary of any material modifications to the plan. Further, the employer or plan administrator must maintain sufficient records, usually including the employee’s age, hours worked, salary, and contributions, to calculate each employee’s benefits.

Other employee benefits (which may not be part of a formal plan) are also covered by ERISA if a reasonable person could determine, from the surrounding circumstances, the existence of the intended benefits, the beneficiaries, the financing for the benefits, and the procedures for receiving the benefits. Many types of group severance pay plans are deemed either welfare plans or, less commonly, pension plans and are thus regulated by ERISA. Individually negotiated severance agreements generally are not.

Federal Preemption

ERISA was designed “to provide a uniform regulatory regime over employee benefit plans,” and its “expansive pre-emption provisions” are meant to ensure that employee benefit plan regulation is “‘exclusively a federal concern.’” 141  Thus, a state law is preempted if it has a connection with or reference to an employee benefit plan. 142

Judicial Review of Benefit Determinations

Courts apply principles of trust law when reviewing benefit determinations by plan administrators or other fiduciaries under ERISA. 143  When a plan gives the administrator discretionary authority to determine eligibility for benefits or to interpret the plan, a court will not overturn an administrator’s decision unless there has been an abuse of discretion. In contrast, if the plan is silent or does not give the administrator discretionary authority to determine eligibility, then a court will conduct a de novo review of the decision and will not give deference to the administrator’s decision.

If a benefit plan gives discretion to an administrator who is operating under a conflict of interest, then the courts will weigh the conflict as a factor in determining whether there has been an abuse of discretion. For example, an employer that both administers an ERISA plan and determines whether a participant is eligible for benefits is deemed to have a conflict of interest:

In such a circumstance, “every dollar provided in benefits is a dollar spent by … the employer; and every dollar saved … is a dollar in [the employer’s] pocket.” The employer’s fiduciary interest may counsel in favor of granting a borderline claim while its immediate financial interest counsels to the contrary. Thus, the employer has an “interest … conflicting with that of the beneficiaries,” the type of conflict that judges must take into account when they review the discretionary acts of a trustee of a common-law trust. 144

Similarly, an insurance company that both evaluates claims for benefits and pays benefits claims is deemed to have a conflict, which should “be weighed as a ‘factor in determining whether there is an abuse of discretion.’” 145  Even though an insurance company administering a plan for an employer may have a greater incentive than a self-administering employer to process claims accurately, the employer’s own conflict may extend to its selection of an insurance company to administer the plan. In addition, “ERISA imposes higher-than-marketplace standards on insurers.” 146

ERISA Penalties

ERISA imposes various penalties for failure to conform to its requirements. Plan participants or beneficiaries may sue for lost benefits and loss of the plan’s tax benefits. Any plan fiduciary that breaches a duty is personally liable for the losses resulting from the breach. ERISA also provides civil penalties for breach of its prohibited transaction rules, which bar many transactions between an ERISA plan and a fiduciary of that plan, of up to 100% of the amount of the prohibited transaction. 147

To minimize costs and maximize benefit levels, many employers with union employees under collective bargaining agreements belong to multiemployer pension plans. Under the Multiemployer Pension Plan Amendments Act of 1980, withdrawal from such a plan may result in stiff penalties.

12-11b: Consolidated Omnibus Budget Reconciliation Act (COBRA)

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) 148  was enacted in 1986 to allow group health, dental, and vision benefits to continue for employees who are terminated voluntarily or involuntarily (unless the discharge was for gross misconduct) and for employees whose hours are reduced to the point at which coverage would normally cease. COBRA applies to employers of twenty or more workers that sponsor a group health plan. 149  Employers must notify employees of their rights when they begin participation in a group health plan or when coverage has been threatened by an event such as termination or reduced hours. Employers who fail to comply with COBRA’s requirements are subject to adverse tax consequences. 150

Eligible employees must be given at least sixty days from the date their coverage ceases to elect to have the coverage continued for them and their covered spouse and dependents. If coverage continuation is elected, the employer is required to extend, for up to eighteen months, coverage identical to that provided under the plan for similarly situated employees. The eligible employee electing COBRA coverage must pay the entire premium, plus an administrative fee of up to an additional 2% of the cost of coverage. If the employee declines to continue coverage, the employer has no further coverage obligations.

An employer may discontinue coverage for any one of five reasons: (1) the employer ceases to provide group health coverage to any of its employees; (2) the premium for the coverage is not paid; (3) the employee, or former employee, becomes insured under another group plan; (4) the employee, or former employee, becomes eligible for Medicare; or (5) a spouse of the employee, or former employee, is divorced, remarries, and becomes covered under the new spouse’s plan.

12-11c: Health Insurance Portability and Accountability Act (HIPAA)

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) 151  provides special protection for individuals with lifelong illnesses who change jobs and, as discussed in  Chapter 9 , imposes strict patient confidentiality requirements. The act’s principal provisions apply to companies with fifty or more employees.

HIPAA requires that new employees and their dependents be eligible for health insurance coverage by the new employer without an exclusion (or higher premiums) for preexisting conditions if they had health insurance for at least eighteen months provided by the previous employer and joined the new company within sixty-three days of leaving the previous employer. The previous employer must provide a certificate to a leaving employee documenting the previous coverage. HIPAA also provides that the duration of an employee’s previous coverage may be applied to fulfilling a new employer’s waiting period.

The act also extended COBRA for up to twenty-nine months for individuals who leave work as a result of illness or disability, provided that they apply within sixty days of leaving. It also provided greater health-related tax deductions for self-employed individuals.

12-11d: Patient Protection and Affordable Care Act of 2010

The Patient Protection and Affordable Care Act, a sweeping health-care reform act signed into law in 2010, prohibits insurers from denying health-care coverage (or charging higher premiums) due to preexisting conditions. It also requires employers with two hundred or more full-time employees to automatically enroll new employees in health-care coverage. Firms with fifty or more employees that do not offer health insurance to employees must make per-employee shared responsibility payments if the government has to subsidize the employees’ health care. Very small businesses (with twenty-five or fewer full-time employees) may get tax credits to participate in health-care exchanges. 152  As discussed in  Chapter 4 , the Supreme Court upheld the constitutionality of the insurance mandate provision of the act in 2012. 153

12-11e: Defense of Marriage Act

The Defense of Marriage ACT (DOMA) of 1996 defined “marriage” as a “legal union between one man and one woman.” In 2013, the United States Supreme Court held in United States v. Windsor that this definition was an unconstitutional “deprivation of the liberty of the person protected by the Fifth Amendment.” 154  As a result, employers must reassess the eligibility definitions in their employee benefit plans. For example, same-sex spouses in states that recognize same-sex marriage are now entitled to “spousal benefits” under retirement and pension plans; they must be covered under certain medical plans; they are entitled to benefits under health-related flexible spending and savings accounts; and they can elect COBRA coverage. Same-sex spouses (again, in those states recognizing such marriages) are now covered under social security laws and family and medical leave statutes. Employers may also need to amend their benefit plan descriptions to include same-sex spouses.

12-12: WORKER ADJUSTMENT AND RETRAINING NOTIFICATION ACT (WARN ACT)

The Worker Adjustment and Retraining Notification Act (WARN Act) 155  requires an employer to provide timely notice to its employees of a proposal to close a plant or to reduce its workforce permanently. The act applies to employers with one hundred or more employees, either all working full-time or working an aggregate of at least four thousand hours per week.

The WARN Act requires employers to give employees sixty days’ advance notice of any plant closing that will result in a loss of employment during any thirty-day period for fifty or more employees. 156  A shutdown of a product line or operation within a plant is included within the act’s definition of a plant closing. The act also requires sixty days’ notice for a layoff during any thirty-day period that affects at least five hundred employees, or at least fifty employees if they comprise one-third of the workforce. Employers must give written notice of the plant closing or layoff to each representative of the affected employees or, if there is no representative, to each affected employee, as well as to the state and local governments where the layoff or plant closing will occur.

The act permits an employer to order the shutdown of a plant before the conclusion of the sixty-day notice period if (1) at the time notice would have been required, the employer was actively seeking capital or business that would enable it to avoid or postpone the shutdown, and the employer reasonably and in good faith believed that giving the required notice would preclude it from obtaining the needed business or capital; or (2) the plant closing or mass layoff was caused by a natural disaster or by business circumstances that were not reasonably foreseeable at the time notice would have been required.

The WARN Act does not apply to (1) the closing of a temporary facility, (2) a closing or mass layoff that results from the completion of a particular project if the affected employees were hired with the understanding that their employment would not continue beyond the duration of the project, or (3) a closing or layoff that results from a strike or lockout that is not intended to evade the requirements of the act.

Aggrieved employees are entitled to receive back wages and benefits for each day that the employer is in violation of the WARN Act. The court has discretion to award the prevailing party reasonable attorneys’ fees. In addition, an employer who violates the act may be subject to a civil penalty of up to $30,000, to be paid to the affected communities.

12-13: IMMIGRATION LAW

It is estimated that there are almost 12 million undocumented immigrants living in the United States 157  and about 8 million undocumented workers (5.2% of the workforce). 158  Immigration law has thus become an increasingly important concern for employers.

12-13a: Immigration Reform and Control Act of 1986

Under the Immigration Reform and Control Act (IRCA) of 1986, 159  employers may hire only persons eligible to legally work in the United States—that is, U.S. citizens and noncitizen residents (so-called aliens) authorized to work in the United States. An employer can be fined up to $16,000 160  and imprisoned for up to six months for each illegal alien knowingly hired. 161  The U.S. government conducts “silent raids” on businesses suspected of hiring undocumented workers, requiring these employers to submit documentation to be audited for compliance with employment laws. 162

During 2012, the U.S. Immigration and Customs Enforcement (ICE), which is the investigation and enforcement branch of the Department of Homeland Security (DHS), secured immigration-related fines, judgments, judicial forfeitures, and restitutions against employers totaling approximately $14.2 million; the government also convicted 240 owners, managers, supervisors, and human resources personnel of immigration-related crimes. 163

Obtaining Authorization

The primary way aliens gain authorization to work in the United States is by obtaining a work visa. The U.S. government offers a number of visas based on different classifications. A visa may, for example, classify an individual as (1) a student, (2) an educational or cultural exchange visitor, (3) a professional worker from Canada or Mexico authorized to work in the United States under the North American Free Trade Agreement, or (4) a foreign employee of an overseas company who is temporarily transferred to the United States.

Many U.S. employers rely on the employment of foreign workers with an  H-1B visa , which is available only for workers in professional and specialty occupations (generally those requiring a bachelor’s degree or its equivalent), such as computer programmers, engineers, doctors, or fashion models, 164  when the employer can show an inability to recruit qualified workers in the United States. Employers generally apply for the visa on behalf of the foreign worker; it authorizes the worker to work in the United States for up to six years (with some exceptions). During a worker’s tenure, he or she is entitled to the same wages, benefits, and working conditions as other similarly situated employees. The U.S. government caps the number of H-1B visas granted each year at 65,000, with an exemption from the cap for up to 20,000 individuals with master’s and Ph.D. degrees from U.S. universities.

Verifying Authorization to Work

The U.S. government requires all employers to verify the identity and employment eligibility of all persons they hire. 165  This includes completing the Employment Eligibility Verification Form, also called the  Form I-9 , which must be kept on file by the employer for at least three years for purposes of government audits. DHS regulations require all U.S. employers to either fire employees who do not resolve discrepancies related to their Social Security numbers or face liability for employing unauthorized workers. 166

Employers may ask a potential employee questions regarding his or her work status. The questions should not identify a candidate by his or her national origin or citizenship status, however, because doing so could expose the employer to an employment discrimination claim. 167  Questions that may be asked include, “Can you, if hired, show that you are legally authorized to work in the United States?”

12-13b: Legislative Reform: States Rush in Where Congress Fears to Tread

Recent efforts at comprehensive federal immigration reform proposed by both Republican and Democratic presidents and members of Congress had, as of mid-2014, failed. With federal legislation stalled, the states have rushed to fill the void. According to the National Conference of State Legislatures, forty-four states and Puerto Rico enacted 267 immigration laws and resolutions in 2012 alone. 168  Although many of these laws sought to deter illegal immigration by targeting undocumented immigrants, some provided support, such as pregnancy-related health services, to illegal aliens.

Arizona has passed several of the toughest laws. The Supreme Court upheld the Legal Arizona Workers Act of 2007, 169  which provides that any Arizona employer caught more than once knowingly or intentionally hiring unauthorized workers is subject to having its charter revoked, effectively shutting down the firm. 170  The Court held that the Arizona law “fell squarely” within the Immigration Reform and Control Act’s savings clause, which preempts states from imposing civil or criminal sanctions on those employing unauthorized aliens “other than through licensing and similar laws.” Because the Arizona law involves the suspension and revocation of licenses (defined to include articles of incorporation, certificates of partnership, and authorizations for foreign companies to do business in Arizona), it was not expressly preempted. The Arizona law was also not impliedly preempted, because it provides that a state court “shall consider only the federal government’s determination” of whether an employee is an unauthorized alien; thus, there can be no conflict between state and federal law.

Another Arizona law, Support Our Law Enforcement and Safe Neighborhoods Act, 171  fared less well. The U.S. Supreme Court held that each of the following provisions was preempted by the federal immigration scheme: (1) Section 3, which made failure to comply with federal alien-registration requirements a misdemeanor; (2) Section 5(C), which made it a misdemeanor for an illegal alien to look for work or actually work; and (3) Section 6, which authorized state and local officers to make warrantless arrests of aliens suspected of being “removable” from the United States. 172  The Court declined to enjoin enforcement of Section 2(B), which required officers to verify the immigration status of an individual they had stopped, detained, or arrested, because there had been no showing that enforcing that provision actually conflicted with federal immigration law. 173

12-14: LABOR–MANAGEMENT RELATIONS

Before the mid-1930s, attempts by employees to band together and demand better wages and working conditions were largely ineffective. Employers squelched attempts to organize by lawfully discharging union organizers. In addition, organized economic actions, such as strikes and picketing, were enjoined as unlawful conspiracies. Starting in the 1930s, Congress attempted to equitably balance the economic power of employers, individual employees, and unions by comprehensively regulating labor–management relations. The laws are aimed both at providing employees with greater economic bargaining power and at curbing union excess and corruption. 174

The central statute governing labor relations in most private industries is the National Labor Relations Act (NLRA), which is administered by the five-member National Labor Relations Board (NLRB). 175  An earlier, similar law, the Railway Labor Act, 176  was enacted to govern railroads and, later, airlines. Private-sector union membership has been declining, decreasing from 12% of private-sector workers in 1929 to only 6.7% in 2013. 177  But, as explained below, the NLRA provides important rights to both unionized and nonunion employees.

12-14a: Applicability of National Labor Relations Act

Section 7 of the NLRA grants rights only to employees. It does not grant rights to independent contractors or to supervisors. Individuals are  supervisors  if (1) they hold the authority to engage in any one of twelve supervisory functions, including disciplining; (2) their “exercise of such authority is not of a merely routine or clerical nature, but requires the use of independent judgment”; and (3) their authority is held “in the interest of the employer.” The burden of proving supervisory status falls on the party asserting it.

In one case, the U.S. Court of Appeals for the Sixth Circuit held that registered nurses (RNs) in a nursing home were supervisors and therefore not entitled to collectively bargain with their employer. 178  The RNs had authority to discipline, assign, and direct certified nursing assistants (CNAs), all by using independent judgment. The court acknowledged that the National Labor Relations Board “has repeatedly found that authority to send home employees, when limited to flagrant misconduct (for example, behavior that endangers the health or safety of patients), does not require independent judgment and therefore cannot establish supervisory authority.” Yet, in this case, “[w]hen confronted with CNA misconduct, RNs can either do nothing, provide verbal counseling (and decide whether to document the counseling), or draw up a written memorandum. …” Each RN could choose among these alternatives based on the RN’s determination of how severe the violation was. Because the RNs were not required to consult with a superior and obtain approval before issuing a memorandum, their judgment was independent.

12-14b: Union Representation Elections

The NLRB oversees  representation elections —that is, elections among employees to decide whether they want a union to represent them for collective bargaining. The procedure for conducting a representation election is initiated by filing a petition with a regional office of the NLRB. The NLRB will hold an election only in an  appropriate collective bargaining unit  of employees. To form such a unit, the group of employees must share a community of interest, meaning that they have similar compensation, working conditions, and supervision, and work under the same general employer policies.

Under current labor law, the NLRB will certify a union as the employees’ exclusive representative if it is elected by either (1) a majority signature drive or (2) a secret NLRB election, which is held if more than 30% of employees in a bargaining unit sign statements asking for representation by a union. A company can demand a secret ballot election supervised by the NLRB after being presented with the requisite number of employee requests. Many consider a secret ballot election to be the more effective method of determining whether employees desire union representation because it allows their voices to be heard without coercion, intimidation, or peer pressure. In a signature drive, union organizers solicit employees’ signatures on union authorization cards in an unsupervised and public process that may encourage some employees to sign simply to “get the union off their backs.”

After an election is held, the losing party may file objections to it. If the objections are deemed meritless, the NLRB will certify the election. If the objections are meritorious, the NLRB will conduct a new election. Once a union is elected, it is the employees’ exclusive bargaining representative and has a statutory duty under section 8(b) (1) of the NLRA to represent all employees fairly when engaging in collective bargaining (without regard to their union affiliation) and when enforcing the collective bargaining agreement. 179

12-14c: Duty to Bargain in Good Faith

Once a union election is certified, both the employer and the union have a duty to bargain collectively in good faith. Employers must approach negotiations with an honest and serious intent to engage in give-and-take bargaining in an attempt to reach an agreement. This obligation to bargain in good faith does not, however, compel either party to agree to a proposal or make concessions.

12-14d: Unfair Labor Practices by Employers

Section 8(a) of the NLRA prohibits employers from engaging in specified activities against employees or their unions. Such activities, known as  unfair labor practices , are investigated and prosecuted by the general counsel of the NLRB and his or her representatives.

No Interference or Retaliation

It is illegal for an employer to interfere with, restrain, or coerce employees in the exercise of their section 7 rights to organize and bargain collectively and to engage in other protected concerted activities. This prohibition covers a wide range of employer conduct, including (1) threatening employees with any adverse action for organizing or supporting a union, (2) promising employees any benefits if they abandon support for a union, (3) interrogating employees about union sentiment or activity, and (4) engaging in surveillance of employees’ union activities. For example, the U.S. Court of Appeals for the First Circuit held that an employer committed an unfair labor practice when it fired a truck driver after he was seen giving an unidentified person a half-block ride in a company truck. The employer argued that it had fired the truck driver for violating its “one strike and you’re out” policy against letting non-employees ride in company trucks, but the court found that the employer knew that the employee was actively organizing for a union and would not have fired him if he had not been involved in the union activities. 180

In January 2014, the NLRB issued a formal complaint against Wal-Mart alleging that it had “unlawfully threatened, disciplined, and/or terminated employees” who had participated in legally protected strikes and  protests over the past two years. 181  The complaint concerns “mini-strikes,” in which workers engage in the “sporadic, but repeated actions” of walking off their jobs for short periods of time and then returning for their next shift. 182  Wal-Mart had disciplined participating employees under its policies regarding absenteeism and maintained that because the strikes were used to disrupt its business and customer service, the activity was not protected under the NLRA. 183  Employees of McDonald’s and other fast-food restaurants have engaged in similar conduct. McDonald’s position is that the activity is not a strike, but a rally. 184

Protection for Concerted Activities

Section 7 of the NLRA gives union and nonunion employees the right to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection. …” 185  For an activity to be a  concerted activity , it must be “engaged in with or on the authority of other employees, and not solely by and on behalf of the employee himself” 186  and must relate to the terms and conditions of employment. Note that an activity need not be related to the formation of a union and the employees involved need not be members of a union for a concerted activity to be protected.

Section 8(a)(1) of the NLRA prohibits an employer from engaging in conduct that interferes with, restrains, or coerces employees in the exercise of their Section 7 rights. 187  For example, the NLRA prohibits employers from retaliating against a group of employees who complain to management about some aspect of their working conditions, such as poor lighting in the workplace. Policies that would “reasonably tend to chill employees in the exercise of their Section 7 rights” 188  usually violate the NLRA. The NLRA also prohibits an employer from enforcing an overly broad rule against soliciting other employees (perhaps for union support) or distributing literature on company premises.

In 2013, the NLRB concluded that a policy prohibiting employees from wearing certain baseball caps at a printing company was an unlawful interference with rights guaranteed by Section 7 of the NLRA. World Color, a subsidiary of Quad Graphics, had a company safety policy that stated, in pertinent part: “Baseball caps are prohibited except for Quad/Graphics baseball caps worn with the bill facing forward.” 189  The NLRB administrative law judge noted that the NLRB, “with court approval,” had upheld the right to wear union or other insignia pertaining to working conditions for the purpose of mutual aid or protection, unless there are “special circumstances.” The employer maintained that special circumstances were present, but the judge disagreed. The employer argued (1) that the policy was needed to prevent hair from becoming tangled in machinery, but the judge wrote that there was no evidence to show that a cap with a union logo would not secure hair; (2) that the policy was designed to prevent gang activity, but no evidence of gang activity was presented; and (3) that the policy was needed from a “presentation standpoint” to “align” with the uniform policy, but no evidence was presented to show that employees actually interacted with customers or that wearing a cap with a union insignia would “detract from … employee presentation.” 190  The judge concluded: “I find the Company’s hat policy forbids or prohibits employees from displaying union logos, or for that matter other protected messages, on their hats, if they chose to wear hats, thereby restricting employees from engaging in activity protected by the Act”; by having such a policy, the company was “interfering with, restraining, and coercing employees in the exercise” of their Section 7 rights. 191

Employees’ Use of Social Media

As discussed in the “ Inside Story ” in this chapter, protection for concerted activities applies to many employee communications using Facebook, Twitter, and other social media, but only if the employee was acting with or on the authority of other employees. 192  For example, the NLRB determined that a bartender did not engage in protected concerted activity when he posted a complaint on Facebook about his employer’s tipping policy in response to a query from a nonemployee. The employee had never raised the issue with management or his coworkers, and no other employees commented on or responded to his Facebook posts. Because the employee was acting solely on his own behalf, there was no protected concerted activity. 193

No Union Domination or Assistance

An employer may not dominate or assist a labor organization. The employer may not instigate, encourage, or directly participate in the formation of a labor organization, nor may it give financial support to a labor organization. These provisions were enacted to prevent employers from assisting compliant organizations in becoming representatives of their employees and then imposing “sweetheart” collective bargaining contracts—that is, contracts unduly favorable to the employer. They also prevent union representatives from “extorting tribute from employers.” 194

In 2012, the U.S. Court of Appeals for the Eleventh Circuit held that an employer’s offer of intangible organizing assistance to a union could constitute a “thing of value” in violation of the federal labor antibribery provisions of the Labor Management Relations Act, 195  also known as the Taft–Hartley Act, “if demanded or given as payment.” 196  With certain exceptions, it is criminal under section 302 of the act for an employer to “pay, lend or deliver” a “thing of value” to a union. The court also explained that “an employer’s decision to remain neutral or cooperate during an organizing campaign does not constitute a § 302 violation unless the assistance is an improper payment.” 197  One news source characterized the agreement by this employer to provide organizing assistance as a “win-win deal for everyone—except the employees.” 198  The source noted that this particular union utilizes a top-down approach in which it first deals with management, and then gets the workers to join.

No Discrimination or Retaliation

The NLRA prohibits employers from discriminating against any employee to encourage or discourage membership in any labor organization. If an employee has been unlawfully discharged, the NLRB may order that the employee be reinstated and given full back pay. It is also an unfair labor practice for an employer to discharge or otherwise discriminate against an employee because he or she has filed charges with, or given testimony to, the NLRB, either in a representation proceeding or pursuant to an unfair labor practice charge.

Violation of Duty to Bargain in Good Faith

If an employer does not bargain in good faith, a union may seek redress through the NLRB. Remedies may include damages payable to employees or injunctive relief.

12-14e: Lawful and Unlawful Strikes, Lockouts, and Other Economic Action

Labor law permits both employers and labor organizations to engage in certain tactics against each other, known as “economic actions,” to influence the other party to reach agreement in collective bargaining. Strikes and related publicity tactics, such as picketing, form an important part of the economic actions available to labor organizations.

There are two kinds of lawful strikes: economic strikes and unfair labor practice strikes. An  economic strike  occurs when a union is unable to extract acceptable terms and conditions of employment through collective bargaining. An employer subjected to an economic strike may hire permanent replacements for the positions vacated by the striking employees. If it does so, the employer is not required to reinstate striking employees who offer to return to work unless the departure of replacements creates vacancies. An  unfair labor practice strike  occurs when workers strike an employer wholly or partly to protest an unfair labor practice and the employer’s conduct is in fact found to violate the NLRA. Workers who engage in an unfair labor practice strike have a right to be reinstated if they make an unconditional offer to return to work.

Striking employees may have no legal protection or reinstatement rights if they conduct a “wildcat” strike by violating a “no-strike” provision in their collective bargaining agreements. Slowdowns, intermittent strikes, and work stoppages are also unprotected activities. Otherwise lawful strikes may result in liability for striking employees if the workers’ tactics (for example, assault and battery) violate local safety or public peace ordinances or the state penal code.

The NLRA prohibits unduly lengthy  recognitional picketing , which is picketing designed to force the employer to recognize the union as a collective bargaining agent for its employees. It also outlaws  secondary boycotts , in which a union uses certain threats or tactics against an outside company to induce that company to put pressure (usually by withholding business) on the employer with which the union has a dispute. The NLRB permits employers to lock out full-term strikers while allowing nonstrikers and strikers who return to work before the strike is settled (so-called crossovers) to continue working. In July 2011, after the league, the team owners, and the players’ union failed to reach an agreement on salary caps, players’ salaries and benefits, contracts, annual raises, and how to split revenue, the National Basketball Association imposed a lockout. 199

12-14f: Non-Strike-Related Unfair Labor Practices by Unions

Unions may not coerce employees to join the union or support its activities. A union is also prohibited from coercing employees to join, or refrain from abandoning, a strike. Unions are prohibited from discriminating against represented employees on the basis of race, gender, national origin, union membership, or internal union political affiliations. A union may not cause or attempt to cause an employer to discriminate against an employee on the basis of union affiliation or activities.

12-14g: Fair Share Fees

Although no one can be forced to join a union, historically the U.S. Supreme Court permitted unions to assess nonmembers  fair share fees  related to the collective bargaining process; contract administration; and wage, hours, and employment matters. 200  These fees support “legitimate, non-ideological, union activities germane to collective bargaining representation.” 201  Thus, in Abood v. Detroit Board of Education, 202  the Court rejected a First Amendment challenge to such fees. Non–union members cannot, however, be forced to pay for political activities, such as lobbying. 203

In 2014, in Harris v. Quinn, 204  the U.S. Supreme Court held that the state of Illinois could not compel home-care personal assistants chosen by the Medicaid recipients to whom they provided care to pay fair share fees to the collective bargaining representative chosen by a majority of the home-care assistants’ coworkers. Even though the state paid each personal assistant’s salary, the person receiving the care was effectively the employer of the personal assistant. The customer controlled almost all aspects of the employment relationship, including hiring, training, supervising, evaluating, and terminating the assistant. Under Illinois law, personal assistants are “public employees … solely for the purpose of coverage under the Illinois Public Labor Relations Act,” so they have the right to bargain collectively. Personal assistants are not eligible for most state benefits, however, including retirement, health and life insurance, paid vacation, and sick leave. In addition, the state is not responsible for torts they commit while working. The Court reasoned that extending Abood to those who were not full-fledged public employees would result in “a host of workers who receive payments from a governmental entity for some sort of service” to become candidates within Abood’s reach, making it difficult to know “just where to draw the line” as to which employees were included within Abood’s scope and which were not. Because the personal assistants were not full-fledged public employees, Abood did not apply.

The Court also held that requiring the non-union assistants to pay fair share fees violated their First Amendment rights. Because such fees impose a “significant impingement” on free speech rights, they are subject to the most “exacting First Amendment scrutiny.” Here, the fee did not serve a compelling government interest that could not be achieved through less restrictive means. The Court distinguished earlier cases in which it had held that employees may generally be compelled to pay fair share fees on the grounds that such payment ensures “labor peace” and prevents “free riding,” whereby non–union members share in the benefits of the collective bargaining process without having to pay for them. 205  In this case, there was no threat to labor peace, because the assistants did not work together and did not want to form a rival union. The Court had previously determined that free-riding provisions are “generally insufficient” to overcome First Amendment objections. 206  The Court concluded:

If we accepted Illinois’ argument, we would approve an unprecedented violation of the bedrock principle that, except perhaps in the rarest of circumstances, no person in this country may be compelled to subsidize speech by a third party that he or she does not wish to support. 207

Having “confine[d]” Abood’s reach to full-fledged state employees, the Court held that non-union personal assistants could not be required to pay fair share fees.

The Quinn holding will likely affect public unions beyond Illinois. There are reportedly approximately two million home-care workers in the United States and twelve states in which union power has resulted in laws allowing “forced union subsid[ies]” from home-health-care and home-child-care workers. 208  In addition, the majority opinion in Quinn may signal a willingness by the Court to revisit the Abood holding in a future case in which “full-fledged public employees” challenge fair share fees.

12-14h: Public-Sector Employees’ Right to Bargain Collectively Under Siege

The Quinn decision is just one example of the pressures affecting public-sector employees’ right to bargain collectively. State and municipal workers in effect have a monopoly on public service jobs, and some critics assert that they have used this position to extract overly generous wages and pensions from their government employers. (As discussed in the “ Inside Story ” in  Chapter 24 , the city of Detroit’s underfunded pension liabilities contributed to the city’s bankruptcy.) Thus, these critics argue, public-sector workers should have fewer collective bargaining rights than private-sector workers.

For example, the Illinois governor signed a law in 2013 that took away the collective bargaining rights of 3,580 state employees. Because the law amends the Illinois Public Labor Relations Act, which determines which state employees are entitled to collective bargaining, the American Federation of State, County, and Municipal Employees Council 31 (AFSCME31) indicated that there was no basis to challenge the law in court. 209  Wisconsin Act 10, also known as the Budget Repair Bill, effectively eliminated collective bargaining rights for a majority of state employees in 2011. 210  The act reduced the ability of public employee unions to bargain for benefits for their members and undercut the unions’ ability to collect dues, thereby making it more difficult for them to raise money for advertising and lobbying efforts. 211  To blunt opposition from the powerful police and firefighters unions, the Wisconsin legislature exempted them from the bill.

Unions are using their political clout to fight back. In a referendum held in 2011, Ohio voters rejected a measure similar to Wisconsin’s by a vote of 62% to 28%. 212  Richard Trumka, president of the AFL–CIO labor federation, remarked, “Ohio sent a message to every politician out there: Go in and make war on your employees rather than make jobs with your employees, and you do so at your own peril.” 213

GLOBAL VIEW: The Right to Continued Employment

Most foreign countries do not share the U.S. concept of “employment at will” and instead provide employees with greater rights to continued employment.

The European Union

Even though the European Union (EU) has worked on harmonizing many employment laws of its member states, it has not attempted to bring uniformity to the laws related to termination of employment. 214  None of the member states recognizes the U.S. concept of employment at will. Instead, each country has specific laws on unfair dismissal or general civil code provisions that apply to the termination of employment contracts or both. Although the specifics of these laws vary, they all give employees a basis for challenging a dismissal on the grounds that it is unfair and provide a mechanism for adjudicating such claims.

For example, employers in the United Kingdom are generally free to agree with their employees to whatever employment relationship suits them both, subject to certain statutory restrictions. Under English law, an employee has two sets of rights: contractual and statutory. Contractual rights are governed by the employee’s employment contract, whether they are express or implied by custom or law, and they are enforced by a suit for wrongful dismissal. Wrongful dismissal occurs when an employer dismisses an employee in breach of its contractual obligations. An employee’s normal remedy for breach of contract is to sue for damages, which are limited to the amount required to put the employee in the position he or she would have been in had the contract been performed.

Statutory restrictions are set forth in various statutes, the most important of which are the Employee Rights Agreement 1996 (ERA 1996) and the Employment Act 2002 (EA 2002). Statutory rights are enforced by a claim for unfair dismissal. To bring a claim for unfair dismissal, an employee must show that he or she was dismissed for a reason listed in section 95 of the ERA 1996, such as a union-related reason, the assertion of a statutory right, a reason involving health and safety, a reason related to working time or the assertion of rights under the national minimum-wage law, a reason connected with trade union recognition or bargaining arrangements, and, in certain circumstances, taking part in a protected industrial action. The three remedies for unfair dismissal are (1) reinstatement, which treats the employee as if he or she had never been dismissed; (2) reengagement, in which the employee returns to the same or a similar job; and (3) a compensatory award amounting to the lower of a stated statutory amount or fifty-two weeks’ pay.

During 2013, the United Kingdom made various changes to its employment laws. 215  For example, whistleblowers are now protected only if they reasonably believed their disclosures were in the public interest. Employees who are dismissed because of their political beliefs and allege unfair dismissal are no longer required to have a minimum period of service. In addition, employers can execute confidential “pre-termination negotiations” at any time, even if they are not trying to settle a dispute with an employee, and the negotiations generally cannot be admitted as evidence in an unfair dismissal case. 216

French workers are entitled to significantly more benefits and legal protection than their counterparts in the United States or the United Kingdom. During any agreed-on trial period, a French employee may be dismissed without formalities or particular reasons. Once the trial period has elapsed, however, the employer must prove that any dismissal is for legitimate reasons (either for “just cause” or as a result of a reduction in force due to economic factors). 217  “Just cause” includes professional incompetence, insufficient results, professional shortcomings, loss of confidence in the employee, and sexual harassment. Employers that cannot justify an employee’s dismissal are subject to legal sanctions. 218

Unless terminated for gross negligence or willful misconduct, the employee is entitled to (1) a payment or indemnity, set by statute, if he or she has at least two years of uninterrupted seniority; (2) any accrued but unused vacation pay; (3) and an indemnity equal to the salary he or she would have received during the notice period if the employer wants to pay the employee in lieu of providing the required notice. In addition, if the employee is dismissed without legitimate reason, he or she is entitled to receive compensation and damages for abusive breach of the employment contract. An employer’s failure to comply with the statutory dismissal procedure also gives rise to damages even if the dismissal was justified.

In June 2013, France enacted the Labor Law Reform Act in an attempt to bring more flexibility and security to its labor market. 219  Among its provisions, the law allows employers impacted by “serious cyclical economic difficulties” to establish agreements with unions modifying working time and compensation in exchange for continuing the employment of the workers for a stated period of time; alters the procedures for dismissing more than ten employees during a thirty-day period; requires companies with more than one thousand employees to seek a buyer if a collective layoff leads to a proposed site closure; and, effective January 1, 2016, requires private employers to provide health insurance and pay at least 50% of its cost. 220

Japan

Japanese employment laws are also employee-friendly, especially when compared with U.S. law. There is no concept of at-will employment, and employers’ rights to terminate employees are limited by statute, case law, and custom.

The Labor Contracts Law provides that an employer can dismiss an employee only for just cause; the absence of just cause gives rise to a claim of abuse of the right of dismissal. In addition, a fixed-term employment contract cannot be terminated without a compelling reason. Finally, the law restricts an employer’s right to continually renew short-term employment contracts. The Labor Tribunal Law established an industrial tribunal system to quickly and efficiently settle employment disputes, including those related to termination of employment.

Lifetime employment and worker loyalty are ingrained in Japanese culture, with layoffs termed “taboo.” 221  The difficulty in terminating employees has led some employers to use a “chasing-out room”—a room where employees who cannot be fired and do not accept early retirement offers spend their days. In 2013, forty employees at one of Sony’s Japanese factories sat in the chasing-out room; some had been going there for two years. Sony calls the room a “Career Design Room” and maintains that employees are given counseling to find new employment, as well as being offered severance packages amounting to a year’s pay. Critics counter that the rooms are meant to make employees “feel forgotten and worthless—and eventually so bored and shamed that they just quit.” 222  Companies also resort to placing such employees in positions that are more menial than their previous jobs, as well as reassigning workers to locations that are much farther way, all in an effort to get the employees to quit. Although many employers claim that labor changes are needed to maintain competitiveness, others say that the “social fabric” of Japan would be cut if termination policies were changed.

India

India views the employment relationship as a contract that is subject to judicial intervention. Thus, the courts have implemented procedural safeguards shielding employees from indiscriminate termination by employers. 223  Although Indian law starts from the common law premise that an employer can terminate an employee without giving a reason, this position has been modified by legislative intervention and by case law. Some instances of misconduct may justify termination without notice or payment in lieu of notice, but employers are generally required to provide some form of compensation to a terminated employee. In addition, most employers with more than one hundred employees must seek permission from the labor department of the government before dismissing or laying off a worker, or before shutting down, irrespective of financial condition.

 THE RESPONSIBLE MANAGER: AVOIDING WRONGFUL DISCHARGE SUITS AND OTHER EMPLOYEE PROBLEMS

If an employer wants to preserve the traditional legal right to discharge employees at will, it should take steps to ensure that it does not inadvertently limit this right. To illustrate, an employer seeking to establish at-will employment might include the following language above the employee signature line of an application form: “I understand that, if hired, my employment can be terminated at any time, with or without cause, at either my employer’s or my option.” Inclusion of such language reminds the employee that the employment is at will, verifies that he or she was so informed, and lessens the likelihood that the employee will be able to establish an implied contractual right to be discharged only for cause.

Additionally, employers hiring at-will employees should avoid making statements during interviews that could create an impression that the applicant will not be fired without good cause. “Employees are never fired from here without good reason,” “Your job will be secure, as long as you do your work,” and “We treat our employees like family” are examples of such statements.

If an employer chooses to have a policy of progressive discipline, the policy should state that it does not alter at-will employment and that all decisions on progressive discipline—whether to apply it, what steps to take or skip— are within the company’s sole discretion. If specific rules of conduct are listed, the manual should describe them as examples, not an exhaustive list, and inform employees that violation of a stated rule is not required for termination, because employment remains terminable at will. Supervisors and managers, as well as the human resources staff, should be trained to administer the policy, to document performance problems, and to counsel employees about the need to improve, but not to portray the policy as an entitlement.

Conversely, if an employer wants its employees to make firm-specific investments of time, talent, and commitment, then at-will employment may not be suitable. Because an employer’s human resource practices can affect its competitive position, the determination of what practices are most suitable for a given firm should be made by the top management team, not just the lawyers. 224

If a company wants to impose a covenant not to compete on its employees, it should consider which state’s law will apply to the covenant. Given that different states apply different standards for reviewing noncompetes, the company must structure each agreement in a way that courts will recognize and uphold. The company should also clarify the specific roles and responsibilities of a given employee so that the noncompete is not overly restrictive, thereby reducing the risk of judicial invalidation. Finally, the company should provide consideration, such as a bonus or a promotion, before imposing a noncompete covenant on existing employees. 225

The FLSA imposes numerous obligations on employers. Most importantly, an employer must carefully classify its employees as exempt or nonexempt to ensure that it pays overtime to all employees who are not exempt from the FLSA overtime pay obligations. For example, nonexempt employees required to work through lunch must be compensated. Employers cannot dock salary for late arrivals or partial-day absences of exempt employees. Employers should factor bonus payments, prorated to a weekly rate of pay, when calculating overtime payments to nonexempt employees. Although commuting time to and from work is not compensable, employers must consider whether they should compensate for commuting time when a nonexempt employee travels from home directly to a client’s site rather than to the employer’s site. Although outside salespeople are exempt, salespeople who work at the employer’s place of business are not exempt.

Many managers in the United States have a visceral negative reaction to attempts to unionize their workers, believing that unions interfere with management control in the workplace and hinder efforts to achieve competitive levels of costs, quality, and productivity. Nevertheless, some academics, such as Stanford Graduate School of Business professor Jeffrey Pfeffer, argue there is systemic empirical evidence indicating that unions are positively associated with higher training expenditures, successful employee involvement, and successful quality-improvement programs and organizational innovation. 226  Indeed, many of the best-known examples of high-performance production systems occur at unionized plants, such as those at Xerox, Corning, Levi-Strauss, and AT&T. 227  These and other benefits of a well-regulated workforce—and the assistance of a labor organization to achieve that objective—may not always be apparent to management when employees initially discuss unionization.

At a minimum, employers must ensure they do not unlawfully interfere with lawful union organizing efforts or other concerted activity. Managers should review their social media and other policies to reflect the developing law in this area. Perhaps the best defense against a lawsuit and unwanted union activities is to create a corporate culture where employees feel appreciated, which includes (1) compensating them fairly, (2) providing honest feedback about job requirements and performance, and (3) offering multiple outlets where employees can voice complaints and suggest improvements.

Managers in both the public and private sectors should create an atmosphere that encourages employees to report problems without fear of reprisal so that issues can be addressed more effectively. Employees’ fears of retaliation are very real. One survey found that almost 30% of federal workers believed that reporting inappropriate practices would negatively impact them. 228  Whistleblowers have been threatened with or experienced termination, suspension, and job transfers. Areas of particular concern include bribes and kickbacks, price-fixing, health and safety risks, employment discrimination, and insider trading and other forms of securities fraud.

 A MANAGER’S DILEMMA: PUTTING IT INTO PRACTICE: MAKING EMPLOYMENT DECISIONS IN DIFFICULT TIMES

Gita Bhandari joined your social networking start-up in 2013, immediately after graduating from Carnegie Mellon University. She turned down better-paying consulting and investment banking opportunities to get in on the ground floor of a young, fast-growing company. As compensation, Bhandari receives a nominal salary and stock options. Because the company’s product will require three years to bring to market, the options do not vest for three years. This means that Bhandari forfeits all of the stock options if she leaves the company before 2016.

In 2015, the company began having serious problems. Even though the project is on schedule and is anticipated to be a huge success, costs are skyrocketing, and your investors demand a significant reduction in operating expenses.

You are considering firing Bhandari. Although she has performed well, Bhandari was the person most recently hired. She is an at-will employee, but, considering that she has less than one year to go until she can exercise her stock options, you fear a lawsuit, especially given the company’s close-knit character. At this critical stage, the legal fees alone from a wrongful termination lawsuit could bankrupt the company.

Should you fire Bhandari to reduce operating expenses? Can you threaten to fire her if she does not agree to surrender some of her options? If Bhandari is terminated, on what basis could she sue the company? Would she prevail? How could you have structured the relationship to avoid this potential lawsuit?

 INSIDE STORY: Employers’ Policies Regarding Employees’ Use of Social Media

In 2011 and 2012, the acting general counsel of the NLRB issued reports detailing when employees’ use of social media is protected concerted activity under Section 7 of the National Labor Relations Act. 229  The reports included summaries of decisions related to employees’ postings on social media networks, such as Facebook and Twitter; union postings on Facebook and YouTube; and employers’ social media policies and rules. Although the reports are not “binding precedent,” they provide guidance to employers drafting social media policies. In general, policies that are too broad are often deemed unlawful because employees can “reasonably construe” such policies as restricting their Section 7 rights to communicate with each other or with third parties about wages, hours, and working conditions.

For this reason, an employer’s social media policy should include specific examples of what conduct is prohibited and what is permitted. These examples should make it clear that the prohibitions in the policy do not apply to Section 7 activities. Simply including a “disclaimer” informing employees that a social media policy does not apply to or prohibit Section 7 activities will not save an overbroad policy.

The social media policy of one employer, which was found lawful in its entirety in the NLRB’s May 2012 report, offers examples of what to include. 230  To avoid any ambiguity, this policy provided examples and context “to clarify that the rules do not restrict Section 7 rights.” For instance, the policy stated: “Inappropriate postings that may include discriminatory remarks, harassment, and threats of violence or similar inappropriate or unlawful conduct will not be tolerated and may subject you to disciplinary action up to and including termination.” This provision prohibited “plainly egregious conduct,” and there was no evidence that it was used to discipline Section 7 activity.

The policy section entitled “Be respectful” stated: “Always be fair and courteous to fellow associates [and] customers. …” “Nevertheless, if you decide to post complaints or criticism, avoid using statements, photographs, video or audio that reasonably could be viewed as malicious, obscene, threatening or intimidating, that disparage customers, members, associates or suppliers, or that might constitute harassment or bullying.” The section went on to provide examples of harassment and bullying—activities that, according to the NLRB, an employer can legitimately prohibit. “Examples of such conduct might include offensive posts meant to intentionally harm someone’s reputation or posts that could contribute to a hostile work environment on the basis of race, sex, disability, religion or other status protected by law.”

The policy also required employees to maintain the confidentiality of trade secrets and private or confidential information. It defined trade secrets as including “information regarding the development of systems, processes, products, know-how and technology.” Again, because the policy clearly identified examples of what information was prohibited from disclosure, employees could understand that the policy did not extend to “protected communications about working conditions.”

The May 2012 report also provided examples of unlawful provisions in social media policies. For example, a policy that stated, “you must also be sure that your posts are completely accurate and not misleading and that they do not reveal non-public company information on any public site” was overbroad because it could reasonably be interpreted to apply to communications about, or criticism of, the employer’s labor policies and its treatment of its employees, which would be protected by the NLRA if not maliciously false. Here, no examples were provided to limit the policy or to clarify that it did not exclude Section 7 activity. Also considered unlawful was another employer’s policy that included the statement, “Don’t comment on any legal matters including pending litigation or disputes,” because it “specifically restricts” employees from discussing the protected subject of potential claims against its employer. Finally, as suggested earlier, including a clause that reads, “This policy will not be construed or applied in a manner that improperly interferes with employees’ rights under the National Labor Relations Act” does not “cure” unlawful provisions in a social media policy, because employees would not necessarily understand “from this disclaimer that protected activities are in fact permitted.”