California Rejects Enforcement of Restrictive Covenant in Employment Agreement

By: Elena S. Min

A California Court of Appeal recently rejected a covenant not to compete included in an employment agreement, although it was related to a transaction for the sale of goodwill of a business – one of the well-recognized exceptions to the general rule in California that limits restrictive covenants.

In Fillpoint, LLC v. Maas, No. G045057 (Cal. Ct. App. Aug. 24, 2012), Michael Maas, a shareholder in Crave Entertainment Group, Inc., sold his shares in the company when it was acquired by Handleman Company.  That transaction was executed through a stock purchase agreement which contained a three year covenant not to compete.  A month later, Maas entered into an employment agreement, which contained a one year covenant not to compete that became effective as of the date of the termination of his employment with Crave.  Three years after the sales transaction, Maas resigned from Crave and began working for a competing company.  Handleman’s successor, Fillpoint, LLC, sued Maas for breaching his employment agreement (as well as his new employer for interference with contract).

Fillmore argued that the restrictive covenant in Maas’ employment agreement was enforceable because it fell within the sale of goodwill exception contained in California Business and Professional Code section 16600.  The Court of Appeal rejected that argument and found that, although the stock purchase agreement and employment agreement constitute a single transaction and each agreement referenced the other, only the purchase agreement was focused on protecting the acquired goodwill.  In contrast, the Court of Appeal stated that the covenant contained in the employment agreement impermissibly targeted an employee’s fundamental right to pursue his or her profession and was therefore unenforceable.

This recent decision reaffirms the limited scope of the exceptions to the general rule in California that covenants not to compete are unenforceable.  Therefore, employers must be mindful when drafting such covenants to ensure that they fall squarely within one or more of the recognized exceptions.

Article by Cheryl Orr on New Trends in Misclassification Cases Featured on InsideCounsel.com

Cheryl Orr’s article, “New Trends in Misclassification Cases”, is featured today on InsideCounsel.com.  The article looks at where courts stand on employee misclassification, noting that in 2012 misclassification lawsuits burgeoned in new states, new industries and new areas of focus.  To read the full article click here.

Illinois Becomes Second State to Prohibit Employers from Requiring Access to Employees’ and Prospective Employees’ Social Media Web Sites

By: Mark E. Furlane

On August 1, 2012, Illinois joined Maryland (law passed in March 2012) in prohibiting employer access to social media web sites of their employees and prospective employees.  There are a number of other states that are also considering such prohibitory legislation (California, Delaware, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, Ohio, South Carolina and Washington), as is the United States Congress.  In April 2012, Representatives Eliot Engel and Jan Schakowsky introduced the Social Networking Online Protection Act (2012 H.R. 5050), and the Password Protection Act of 2012 (2012 S. 3074) was introduced in the Senate in May 2012, which prohibit employers from requiring access to their employees’ social media web sites.  In July, Delaware passed a law prohibiting public and private academic institutions from requiring that a student or applicant disclose password or account information granting the academic institution access to the student’s or applicant’s social networking profile or account.  A companion bill dealing with employers is still being considered by the Delaware legislature.

The new Illinois law amends Section 10 of the Right to Privacy in the Workplace Act.  It prohibits an employer from requesting or requiring any employee or prospective employee to provide any password or other related account information in order to gain access to the employee’s or prospective employee’s account or profile on a social networking website or to demand access in any manner to an employee’s or prospective employee’s account or profile on a social networking website.  This Act goes into effect January 1, 2013.

The Illinois law defines “social networking website” as an Internet-based service that allows individuals to construct a public or semi-public profile within a bounded system, created by the service; or to create a list of other users with whom they share a connection within the system; or to view and navigate the employee’s or prospective employee’s list of connections and those made by others within the system.  It does not include electronic mail.

The new Illinois law is not intended to nor does it prohibit an employer from obtaining information about a prospective employee or an employee’s information that is in the public domain or that is otherwise obtained in compliance with the new law.

Under the new Illinois law, an employee may file a complaint with the Director of Labor or, failing timely resolution, may bring a civil action for injunctive relief and to recover actual damages plus costs.  For a willful and knowing violation of this Act, the employee may recover $200 plus costs, reasonable attorney’s fees, and actual damages.  Any employer or prospective employer or his agent who violates the provisions of this Act is guilty of a petty offense and subject to a $1,000 fine.  The new law also prohibits retaliation for opposing employer’s conduct reasonably believed to violate the new law.

Employers are advised to ensure compliance with these laws in both Illinois and Maryland and to keep their eyes on the other states.

William Horwitz Authors Articles for New Jersey Law Journal and BNA’s Corporate Counsel Weekly

William Horwtiz, counsel in the Labor & Employment practice group, recently authored articles for both the New Jersey Law Journal and BNA’s Corporate Counsel Weekly.

William’s article for the New Jersey Law Journal titled, “Third Circuit Rides the Class-Action Arbitration Waive”, discusses the case of Quilloin v. Tenet HealthSystem Philadelphia, in which the Third Circuit, following the U.S. Supreme Court’s lead and its own precedent, endorsed the validity of class-action waivers in predispute employment arbitration agreements.  Bill outlines the facts of the case and the court’s reasoning and says that the case offers helpful guidance for employers rolling out new arbitration agreements and employers with existing agreements.  He also notes that Quilloin holds that class-action waivers are en­forceable and employers should consider including them in arbitration agree­ments, adding that employers should also “include a provision requiring the parties to submit arbitrability issues to the arbitrator.”

William’s article for BNA’s Corporate Counsel Weekly, “In Case Involving Employer’s Poor Handling of Sexual Harassment Allegation, Second Circuit Resolves Two Novel Issues”, William discusses the case of Townsend v. Benjamin Enterprises, Inc., in which the U.S. Court of Appeals for the Second Circuit resolved two issues of first impression.  In outlining the facts of the case and the court’s observations, William notes that the most important takeaway from the decision may be the important guidance for employers of how not to address sexual harassment in the workplace.

To read the complete article, “Third Circuit Rides the Class-Action Arbitration Waive”, click here.

To read the complete article,  “In Case Involving Employer’s Poor Handling of Sexual Harassment Allegation, Second Circuit Resolves Two Novel Issues”, click here.

New Jersey Appellate Court “Renews” Recommendation that Model Jury Charge For Failure-to-Accommodate Cases Is Needed

By:  Lawrence J. Del Rossi

In Whalen v. New Jersey Manufacturers Insurance Company, Docket No. A-3155-09T4 (N.J. App. Div. August 6, 2012), the Appellate Division, in an unpublished per curiam decision (click here to read), found no reversible error in a jury charge that did not differentiate between the two distinct theories of disparate treatment and failure to accommodate.  The plaintiff, a former project coordinator in NJM’s information technology department, claimed the trial judge had failed to separately charge her disparate treatment and failure-to-accommodate claims.   Plaintiff had Lyme’s disease, and flare ups with her disease required her to go on short-term disability, reducing her schedule from full-time (five days a week/40 hours) to less than full-time (four days a week/32 hours).  Plaintiff did not qualify for long-term disability, and there was a dispute as to whether Plaintiff had requested to work on a permanent basis on a reduced work schedule of four days per week or whether working full-time was an essential function of her job.  Based on an examination of both the responsibilities of the position itself and the plaintiff’s performance, NJM concluded that the plaintiff’s job required 40 hours of work per week, that she could not perform the essential functions of her job working less than 40 hours per week, and thus terminated her for this reason.

Ms. Whalen sued NJM for disability discrimination and unlawful termination in violation of the New Jersey Law Against Discrimination (LAD), N.J.S.A. 10:5-1 to -49.  The case went to trial.  At the close of all the evidence, the parties “engaged in an extensive discussion regarding the jury charge.”  Although the plaintiff did not voice any objections after the charge was given (per Rule 1:7-2), she claimed plain error on appeal after the jury returned a defense verdict, contending the trial judge had failed to instruct the jury about the impact of the interactive process on the failure to accommodate theory of liability.

The jury was instructed on the three elements of a disability discrimination claim under LAD, the definition of the term “essential function of the job,” the four elements to consider in determining whether NJM had engaged in the interactive process, and the meaning of a “reasonable accommodation.”  The panel concluded that although “the better practice” would have been to charge separately the disparate treatment and failure-to-accommodate claims, the jury had more than sufficient facts to assess the issue of the interactive process as well as the ultimate issue – whether the plaintiff could perform the essential functions of her job.  Nevertheless, the panel “renewed” its recommendation that the Committee on Civil Jury Charges develop a separate failure-to-accommodate charge, stating that “[t]he addition of such a charge would be consistent with federal practice” (citing the Third Circuit’s model charge Section 9.1.2 and 9.1.3 for disparate treatment and failure-to-accommodate claims under the ADA).

Take away:  until New Jersey’s Committee on Civil Jury Charges develops a separate failure-to-accommodate jury instruction, when faced with crafting jury charges in failure-to-accommodate disability discrimination cases, practioners should be guided by the courts’ direction and holdings in Whalen v. NJM (attached); Victor v. State, 401 N.J. Super. 516 (App. Div. 2008), aff’d in part and modified in part, 203 N.J. 383 (2010); Tynan v. Vicinage 13 of the Superior Court of N.J., 351 N.J. Super. 385 (App. Div. 2002); and Viscik v. Fowler Equip. Co., 173 N.J. 1 (2002).

EEOC Issues Guidelines Addressing the Use of Background Checks in Employment

By: Heather M. Sager

The EEOC (the “Commission”) recently issued guidelines addressing the use of background checks in employment.  Generally speaking, a “background check” or “consumer report” is something that is obtained from a reporting agency and reflects a consumer’s credit, character, reputation, standing, lifestyle, or the like, and is used (in this context) for the purpose of determining employment eligibility (whether for hire, promotion, eligibility to work at a particular job site, etc.).  While the Commission had been focused on this issue to some extent since 2007, the new guidelines suggest that the EEOC plans to launch an aggressive enforcement campaign aimed at preventing perceived inherent disparate impact discrimination via the most common background check scenarios.

At the heart of the Commission’s guidelines and, indeed, currently the subject of legislative debates in many states, are “Ban the Box” recommendations.  The “Box” being referenced typically appears on an employment application as a Yes/No choice, seeking disclosure of any prior convictions or pending criminal charges.  The disclosure, if any, acts as a de facto bar to employment. The EEOC has now publicly expressed the presumption that any policy that mandates an adverse employment decision for any criminal history is inherently discriminatory.

EEOC guidance mandates what should be logical — any disclosure or “hit” on a background check should be considered on an individualized basis.  Factors the EEOC recommends considering include the nature and gravity of the offense, the age of the offense, and the nature of the job at issue.  Where an employer can point to a rational relationship between the job and the offense so as to justify disqualification from employment, the Commission will not likely find discrimination occurred.  The clearest example is disqualifying an applicant with a fraud conviction from work as a bank teller — a position in which the person would handle funds with little supervision and be responsible for reporting balances and the like.  Where businesses run in to trouble is in disqualifying applicants or employees based on a “zero tolerance” policy, or because the individual is guilty of crimes the employer finds inherently offensive, though they lack a rational relationship to the job duties at issue.  One of the most common examples is an employer’s policy of refusal to hire anyone found guilty of a “sex offense,” without further clarifying the meaning of that term.  That phrase can mean many things, including potentially having consensual sexual relations with someone just a few years younger than majority age (e.g., an 18-year old boy and a 17-year old girl in California).  Absent individualized inquiry and analysis, a blanket policy could result in unjust actions, whether putatively race-based or otherwise.

The federal Fair Credit Reporting Act (“FCRA”) further requires that detailed disclosures be given to employees before background checks are done, when any adverse action is contemplated, and again when an adverse action decision is finalized.  Separate disclosures are required if the background check will also include “interviews” (e.g., discussions with prior employers) in additional to database research.  The FCRA is very specific about the format of each of these notices. And nearly half of the United States have requirements that are stricter and even more specific than those set forth in the federal FCRA. Some even mandate particular type fonts. As with any procedural violation, class certification is often virtually guaranteed (given the absence of individualized treatment). Violations of the FCRA requirements, for example, can multiply at the rate of $100-$1000 per violation (e.g., per applicant or employee, for the entire statutory period).  It is common that businesses seldom complete all steps of the process correctly.

So, how does all this play out in the workplace?  Fixing the paperwork might be the easy part.  Most employers don’t want to spend the time or money going through individualized analyses, which the Commission says should include discussions with the subject individual to explore circumstances surrounding the offense at issue before a final decision is made.  “Zero tolerance” policies are certainly much easier (and more expedient) from an employer perspective, and companies often bank on the fact that applicants or employees with “dirty laundry” may be less likely to raise complaints about potentially unfair policies.  However, the Commission is empowered to pursue violations on behalf of an absent class — there does not have to be a proactive complainant.  At present, the EEOC is actively engaged in hundreds of claims involving alleged violations of applicant/employee rights associated with background check procedures, and we anticipate the recent Commission guidelines to encourage the plaintiffs’ bar to focus on this area of the law in the context of class actions.  In sum, this is a good time for businesses to take a fresh look at not just their paperwork, but in how they utilize the results of any consumer investigative report.

Editor’s note – Please see our other coverage of the EEOC’s guidance on use of background check’s here.