Employers walk a fine line when it comes to disciplining their employees. On the one hand, employers want to give their employees the opportunity to improve performance problems. On the other, employers want to make sure that they don’t alter the “at-will” employment relationship and create problems if the employee is unable to improve. And straddling this line is the “progressive discipline” policy.
What is a progressive discipline policy?
A progressive disciplinary policy is one based on incremental levels of discipline, which usually includes: (1) oral warnings for the first infraction; (2) written warnings if the misconduct persists; and eventually (3) suspension or termination for subsequent infractions.
When and how should it be used?
Progressive discipline is typically used to correct less serious forms of performance deficiencies or misconduct – e.g., absenteeism, performance deficiencies, tardiness, abusive language, horseplay, sleeping or loafing on the job, personal use of company equipment, and other less severe forms of performance deficiencies or misconduct. Progressive discipline should not be used in instances of severe misconduct – assault, theft, falsification of work records, willful damage to property, or divulging confidential information.
Documentation is a key part of any progressive discipline policy. Supervisors should be required to document each step of the process. The employee's immediate supervisor should discuss each disciplinary step with the employee to assure that the employee understands the basis for discipline and the consequences of subsequent infractions.
What risks does a progressive discipline policy create?
While strict progressive-discipline policies encourage "fairness," many employers believe that a progressive discipline policy should be avoided, because (1) it is inconsistent with a truly "at-will" employment relationship, and (2) it creates too many litigation risks.
In essence, the employer that adopts such a policy establishes a standard for its own conduct. Consequently, any failure to observe the policy could be viewed by a judge or jury as improper.
The more detailed a policy is, the greater the risk that a mistake will be made in the course of dealing with a disciplinary problem. One approach for handling disciplinary matters is to include an at-will disclaimer at the end of the progressive discipline policy, permitting the employer to skip any step in the discipline process.
Eventually, each employer must decide for itself if the risks of a progressive discipline policy outweigh the rewards.
Friday, June 5, 2009
Wednesday, April 29, 2009
Conducting an effective termination meeting
An unfortunate part of doing business is occasionally having to terminate employees. Regardless of the reason for the termination, employers must be careful in how terminations are carried out. A substantial number of lawsuits filed by former employees arise because of how the termination took place, not why it took place. One good practice to ensure that terminations are handled properly is to conduct a termination meeting.
Employers may wish to consider the following steps in planning and carrying out a termination meeting. First, arrange for the meeting with the employee as soon as possible after the termination decision has been made. Waiting too long can allow rumors to spread and misinformation to get out which can make the process more difficult. Second, arrange the meeting at a time and place that will ensure privacy and minimize interruptions. Third, to minimize conflict between the employee and supervisor, consider having someone other than the employee's immediate supervisor conduct the termination meeting, such as the Human Resources manager or the employee's department manager. Fourth, it is a good idea to have a second manager or supervisor attend the termination meeting and serve as a witness to what was said or done at the meeting, but not otherwise actively participate.
The person conducting the termination meeting should briefly state the issues that precipitated the meeting, taking time to review previous discipline that supports the termination. Be sure to give the employee accurate and true reasons for the termination – reasons given to the employee that are later proved incorrect will substantially undermine the employer's defense if the employee sues the employer.
Be matter of fact, yet respectful to the employee. Do not allow the meeting to become argumentative. If the employee becomes argumentative or threatening, terminate the meeting and leave the room. Perhaps most importantly, be brief. Try to finish the meeting in less than 15 minutes. At the conclusion of the meeting, hand the employee a letter of termination, and briefly explain its contents. Be sure to provide the employee with a copy of the Employment Development Department (EDD) "DE 2320" pamphlet entitled "For Your Benefit," which informs employees of unemployment benefit rights.
Finally, unless there is a real fear of theft or destruction of company property, the employee should be allowed to privately gather personal items and leave the premises. Employers who require that the terminated employee be "escorted" from the building or monitored while cleaning out his or her desk could increase their risk of a lawsuit. Remember, it’s often “how” a termination is carried out that causes problems, not “why.”
This article is for education and information purposes only; it should not be construed as legal advice. If you have an employment law question for inclusion in a future article, contact Brett T. Abbott at Gubler, Koch, Degn & Gomez LLP (bta@thecalifornialawyers.com). For specific employment law advice or other legal assistance, contact Gubler, Koch, Degn & Gomez LLP , (559) 625-9600, 1110 N. Chinowith St., Visalia, CA 93291 (www.thecalifornialawyers.com). Read Mr. Abbott’s blog on employment law issues at http://work-law.blogspot.com.
Employers may wish to consider the following steps in planning and carrying out a termination meeting. First, arrange for the meeting with the employee as soon as possible after the termination decision has been made. Waiting too long can allow rumors to spread and misinformation to get out which can make the process more difficult. Second, arrange the meeting at a time and place that will ensure privacy and minimize interruptions. Third, to minimize conflict between the employee and supervisor, consider having someone other than the employee's immediate supervisor conduct the termination meeting, such as the Human Resources manager or the employee's department manager. Fourth, it is a good idea to have a second manager or supervisor attend the termination meeting and serve as a witness to what was said or done at the meeting, but not otherwise actively participate.
The person conducting the termination meeting should briefly state the issues that precipitated the meeting, taking time to review previous discipline that supports the termination. Be sure to give the employee accurate and true reasons for the termination – reasons given to the employee that are later proved incorrect will substantially undermine the employer's defense if the employee sues the employer.
Be matter of fact, yet respectful to the employee. Do not allow the meeting to become argumentative. If the employee becomes argumentative or threatening, terminate the meeting and leave the room. Perhaps most importantly, be brief. Try to finish the meeting in less than 15 minutes. At the conclusion of the meeting, hand the employee a letter of termination, and briefly explain its contents. Be sure to provide the employee with a copy of the Employment Development Department (EDD) "DE 2320" pamphlet entitled "For Your Benefit," which informs employees of unemployment benefit rights.
Finally, unless there is a real fear of theft or destruction of company property, the employee should be allowed to privately gather personal items and leave the premises. Employers who require that the terminated employee be "escorted" from the building or monitored while cleaning out his or her desk could increase their risk of a lawsuit. Remember, it’s often “how” a termination is carried out that causes problems, not “why.”
This article is for education and information purposes only; it should not be construed as legal advice. If you have an employment law question for inclusion in a future article, contact Brett T. Abbott at Gubler, Koch, Degn & Gomez LLP (bta@thecalifornialawyers.com). For specific employment law advice or other legal assistance, contact Gubler, Koch, Degn & Gomez LLP , (559) 625-9600, 1110 N. Chinowith St., Visalia, CA 93291 (www.thecalifornialawyers.com). Read Mr. Abbott’s blog on employment law issues at http://work-law.blogspot.com.
Tuesday, April 28, 2009
Avoiding problems when giving references to prospective employers
In today’s economic climate many employers are left with no option but to let employees go. A natural consequence of severing ties with an employee is having to later provide references to prospective employers. In order to avoid potential liability for defamation or slander, employers should follow certain guidelines in giving references.
First, an employer should give advance notice of the reference. When terminating the employment, the employer should inform the employee in advance of what facts with be given in future references. Avoid simply saying that the reference will be “good” or “favorable.”
Second, be careful to avoid conclusions. Calling a former employee “insubordinate” or “incompetent” can create a potential lawsuit for defamation. Instead, state that the employee refused to follow directions, or did not meet specific standards. Remember that not all questions have to be answered, especially those that call for conclusions – such as “Would you rehire this person?”
Third, disclose only truthful information and make sure that personnel file information is factually correct. Supervisors should be trained to place only accurate, verifiable information in personnel files – a reference is only as truthful as the underlying information on which it is based.
Fourth, it’s almost always a good idea to obtain a signed release from employees regarding specific information that may be disclosed to prospective employers. The release should provide the employee with as much information as possible about information to be disclosed, including dates of employment, job titles held, a statement about the employee’s work performance, and the reason for termination of employment.
Fifth, designate only a limited number of people within the organization to give references. It is wise to notify employees, preferably in the Employee Handbook, that references will be provided by only one or two designated people. This practice will minimize the risk of contradictory references on behalf of the company, and ensure that reference standards are kept.
Sixth, avoid responding to oral references requests. Require all employees asking for references to request the reference in writing, and to provide a signed statement from the employee authorizing the prospective employer to obtain a reference. Also, reply only in writing to reference requests and keep a copy of all documentation.
While most references given to prospective employers will not result in problems down the road, taking some minimal precautions, as outlined above, can save companies substantial amounts of time, money, and stress. Termination of employees is part of doing business, and so is giving references. Make sure you do it right.
First, an employer should give advance notice of the reference. When terminating the employment, the employer should inform the employee in advance of what facts with be given in future references. Avoid simply saying that the reference will be “good” or “favorable.”
Second, be careful to avoid conclusions. Calling a former employee “insubordinate” or “incompetent” can create a potential lawsuit for defamation. Instead, state that the employee refused to follow directions, or did not meet specific standards. Remember that not all questions have to be answered, especially those that call for conclusions – such as “Would you rehire this person?”
Third, disclose only truthful information and make sure that personnel file information is factually correct. Supervisors should be trained to place only accurate, verifiable information in personnel files – a reference is only as truthful as the underlying information on which it is based.
Fourth, it’s almost always a good idea to obtain a signed release from employees regarding specific information that may be disclosed to prospective employers. The release should provide the employee with as much information as possible about information to be disclosed, including dates of employment, job titles held, a statement about the employee’s work performance, and the reason for termination of employment.
Fifth, designate only a limited number of people within the organization to give references. It is wise to notify employees, preferably in the Employee Handbook, that references will be provided by only one or two designated people. This practice will minimize the risk of contradictory references on behalf of the company, and ensure that reference standards are kept.
Sixth, avoid responding to oral references requests. Require all employees asking for references to request the reference in writing, and to provide a signed statement from the employee authorizing the prospective employer to obtain a reference. Also, reply only in writing to reference requests and keep a copy of all documentation.
While most references given to prospective employers will not result in problems down the road, taking some minimal precautions, as outlined above, can save companies substantial amounts of time, money, and stress. Termination of employees is part of doing business, and so is giving references. Make sure you do it right.
Tuesday, March 10, 2009
Drafting an enforceable arbitration agreement
No matter how careful employers are, it is all but certain that at some point disputes will arise between employer and employee. When such situations occur, it is usually in the best interest of the employer to have these disputes resolved in arbitration, rather than in open court.
Arbitration brings numerous advantages to employers. First, arbitration awards are generally confidential. Also, arbitration can resolve disputes quicker than litigation. Arbitration decisions also tend to have more finality than a judge or jury’s decision, as appeals following an arbitrator’s decision rarely occur. Given these benefits, employers often want to require employees to submit employment disputes to arbitration. To do this, employers need an arbitration agreement. Yet to be enforceable, an arbitration agreement must satisfy numerous requirements.
First, an arbitration agreement must provide a mechanism for the selection of a neutral arbitrator. Some arbitration agreements include language that permits the parties to attempt to agree on a neutral arbitrator. Instead of such provisions, the arbitration agreement may provide for an established arbitration service to select the arbitrator, with each party entitled to a veto on disclosure of the arbitrator's past decisions.
Second, the agreement must allow the employee to conduct adequate discovery. At the very least, employees are entitled access to “essential documents and witnesses, as determined by the arbitrator.”
Third, the agreement must allow the employee to recover as much as would be available in a civil trial, such as punitive damages and attorney fees.
Fourth, the agreement must call for a written decision by the arbitrator, which permits a limited form of judicial review.
Fifth, the agreement must limit the share of arbitration costs borne by the employee. If arbitration is offered as a condition of employment, the employer must be prepared to pay all costs "unique" to arbitration, including the arbitrators' fees, meeting room charges, and any other costs that would not have been involved if the case were in court.
Finally, an arbitration agreement must provide “mutuality” between the parties. An arbitration agreement must not be one-sided. For example, an agreement is unfairly one-sided where an employer requires an employee to submit any claims to arbitration, yet the employer is not required to arbitrate when it seeks to prosecute a claim against the employee.
As the previous paragraphs illustrate, arbitration agreements cannot be drafted without some attention to detail. If the above-described requirements are not followed, an employee can have the arbitration agreement invalidated – and the resulting benefits of arbitration are lost. As such, to ensure that employers reap the benefits of their arbitration agreements, it is in their best interest to review them and make sure they comply with the requirements above.
Arbitration brings numerous advantages to employers. First, arbitration awards are generally confidential. Also, arbitration can resolve disputes quicker than litigation. Arbitration decisions also tend to have more finality than a judge or jury’s decision, as appeals following an arbitrator’s decision rarely occur. Given these benefits, employers often want to require employees to submit employment disputes to arbitration. To do this, employers need an arbitration agreement. Yet to be enforceable, an arbitration agreement must satisfy numerous requirements.
First, an arbitration agreement must provide a mechanism for the selection of a neutral arbitrator. Some arbitration agreements include language that permits the parties to attempt to agree on a neutral arbitrator. Instead of such provisions, the arbitration agreement may provide for an established arbitration service to select the arbitrator, with each party entitled to a veto on disclosure of the arbitrator's past decisions.
Second, the agreement must allow the employee to conduct adequate discovery. At the very least, employees are entitled access to “essential documents and witnesses, as determined by the arbitrator.”
Third, the agreement must allow the employee to recover as much as would be available in a civil trial, such as punitive damages and attorney fees.
Fourth, the agreement must call for a written decision by the arbitrator, which permits a limited form of judicial review.
Fifth, the agreement must limit the share of arbitration costs borne by the employee. If arbitration is offered as a condition of employment, the employer must be prepared to pay all costs "unique" to arbitration, including the arbitrators' fees, meeting room charges, and any other costs that would not have been involved if the case were in court.
Finally, an arbitration agreement must provide “mutuality” between the parties. An arbitration agreement must not be one-sided. For example, an agreement is unfairly one-sided where an employer requires an employee to submit any claims to arbitration, yet the employer is not required to arbitrate when it seeks to prosecute a claim against the employee.
As the previous paragraphs illustrate, arbitration agreements cannot be drafted without some attention to detail. If the above-described requirements are not followed, an employee can have the arbitration agreement invalidated – and the resulting benefits of arbitration are lost. As such, to ensure that employers reap the benefits of their arbitration agreements, it is in their best interest to review them and make sure they comply with the requirements above.
Friday, February 13, 2009
The importance of Employee Handbooks
It is not easy being an employer in California. Employment law is always changing. New employees come and go. It is a challenge keeping employees informed of relevant laws and a company’s culture, policies, and procedures. However, a good employee handbook can be invaluable in helping to resolve these problems.
What is an employee handbook?
An employee handbook is a written compilation of a company's policies, procedures, and other important information that is distributed to employees. An employee handbook is different from a personnel policy manual, which is usually addressed to managers and supervisors and provides a more detailed statement of policies and procedures. Typically, smaller companies use only employee handbooks, while larger companies use both employee handbooks and personnel policy manuals.
Companies often find that handbooks become helpful as the number of employees approaches 20. Many companies first implement “informal” handbooks (collections of policies) before publishing an “official handbook.”
Advantages of using an employee handbook
There are numerous benefits to using an employee handbook. Handbooks commit employers to deal with situations in specific ways. They provide for consistency of treatment and reduce the risk of unlawful discrimination claims. Employee handbooks reduce confusion about unstated policies and benefits – less confusion results in fewer lawsuits and morale problems. Handbooks can help eliminate arguments of “arbitrary termination” and can assist in resolving complaints. Perhaps most importantly, employee handbooks aid new employees in understanding a company’s policies and culture.
Concerns regarding the use of employee handbooks
Despite the numerous benefits of implementing an employee handbook, there are some concerns for employers. If an employer fails to abide by its handbook, it may be more likely to be found liable to an aggrieved employee. Employee handbooks are fodder for employee rights attorneys who look for progressive discipline policies that have not been followed or for other deviations from the handbook. There can also be some significant time and expense involved in creating an accurate, thorough employee handbook. Handbooks also require updating as employment laws and the company change.
Preserving the at-will relationship
The biggest concern with employee handbooks is that the handbook will alter the “at-will” nature of employment. California courts have held that policies contained in employee handbooks can create contractual obligations (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 681).
To avoid this unwanted change in the “at-will” status of employees, many employers include disclaimers stating that the handbook does not create a legally enforceable agreement. At-will disclaimers should be prominent – on the cover or first page of the handbook. The language should state clearly that the handbook is not a contract with employees and it expresses only “guidelines” regarding the company's “policies.” Any disclaimer should also expressly state that, with the exception of the at-will policy, all other the policies in the handbook can be modified by the employer at any time without a written revision of the handbook.
Conclusion
This article is not meant to provide an exhaustive analysis of employee handbooks. Rather, the goal of this article is to illustrate the benefits, and potential dangers, associated with them. While a thorough, accurate employee handbook does take time to create and modify, employers will find the benefits far exceed the effort involved.
What is an employee handbook?
An employee handbook is a written compilation of a company's policies, procedures, and other important information that is distributed to employees. An employee handbook is different from a personnel policy manual, which is usually addressed to managers and supervisors and provides a more detailed statement of policies and procedures. Typically, smaller companies use only employee handbooks, while larger companies use both employee handbooks and personnel policy manuals.
Companies often find that handbooks become helpful as the number of employees approaches 20. Many companies first implement “informal” handbooks (collections of policies) before publishing an “official handbook.”
Advantages of using an employee handbook
There are numerous benefits to using an employee handbook. Handbooks commit employers to deal with situations in specific ways. They provide for consistency of treatment and reduce the risk of unlawful discrimination claims. Employee handbooks reduce confusion about unstated policies and benefits – less confusion results in fewer lawsuits and morale problems. Handbooks can help eliminate arguments of “arbitrary termination” and can assist in resolving complaints. Perhaps most importantly, employee handbooks aid new employees in understanding a company’s policies and culture.
Concerns regarding the use of employee handbooks
Despite the numerous benefits of implementing an employee handbook, there are some concerns for employers. If an employer fails to abide by its handbook, it may be more likely to be found liable to an aggrieved employee. Employee handbooks are fodder for employee rights attorneys who look for progressive discipline policies that have not been followed or for other deviations from the handbook. There can also be some significant time and expense involved in creating an accurate, thorough employee handbook. Handbooks also require updating as employment laws and the company change.
Preserving the at-will relationship
The biggest concern with employee handbooks is that the handbook will alter the “at-will” nature of employment. California courts have held that policies contained in employee handbooks can create contractual obligations (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 681).
To avoid this unwanted change in the “at-will” status of employees, many employers include disclaimers stating that the handbook does not create a legally enforceable agreement. At-will disclaimers should be prominent – on the cover or first page of the handbook. The language should state clearly that the handbook is not a contract with employees and it expresses only “guidelines” regarding the company's “policies.” Any disclaimer should also expressly state that, with the exception of the at-will policy, all other the policies in the handbook can be modified by the employer at any time without a written revision of the handbook.
Conclusion
This article is not meant to provide an exhaustive analysis of employee handbooks. Rather, the goal of this article is to illustrate the benefits, and potential dangers, associated with them. While a thorough, accurate employee handbook does take time to create and modify, employers will find the benefits far exceed the effort involved.
Thursday, January 8, 2009
Protecting “trade secrets”
In my previous article, I discussed the unenforceability of non-compete agreements as applied to employees. This article relates to a similar issue – trade secrets.
A trade secret is information, which includes formulas, patterns, programs, customer lists in certain situations, devices, techniques or processes that “(1) Derives independent economic value...from not being generally known to the public or to persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy” (Civil Code section 3426.1)
It is not enough to simply show that the information has value. In order for information to be classified as a trade secret, other businesses must be unaware of the information and must be able to put that information, if it were known to them, to beneficial use (Abba Rubber Co. v. Sequist (1991) 235 Cal.App.3d 1). Courts have outlined additional requirements for information to be considered a trade secret. The information must be (1) closely guarded, (2) an investment of a considerable amount of time and expense by the employer, and (3) not readily available to the public (State Farm v. Dempster (1959) 174 Cal.App.2d 418).
The following are some examples of valid trade secrets:
• Customer lists that have been compiled with significant time and/or money. Such a list would be a trade secret if the employer has refined a general customer list by noting particular products or other preferences for each customer
• Methods or sequences of manufacturing
• A product formula that is closely guarded (i.e. Coca-Cola recipe)
• The identity of a source of raw material not generally known in the industry
• Compensation and other financial data
• Marketing strategies
• Labor relations strategies
• Research into new materials or processes, and
• Pending projects
Trade secrets are of course different from general knowledge and skills. As long as an employee does not use any of the previous employer’s trade secrets, the employee is free to use the general knowledge, skill, and experience acquired from prior employment, and even solicit some of the same clients, in order to better succeed when working for later employers (American Alloy Steel Corp. v. Ross (1957) 149 Cal.App.2d 215). As outlined in last month’s article, non-compete agreements are only enforceable if they relate to the sale of a business or partnership.
As outlined above, the legal standard for properly classifying information as a trade secret is high. Not every “secret” is legally a “trade secret.” Yet given the importance of protecting valuable company information, becoming conversant with the rules regarding trade secrets can reap large rewards.
A trade secret is information, which includes formulas, patterns, programs, customer lists in certain situations, devices, techniques or processes that “(1) Derives independent economic value...from not being generally known to the public or to persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy” (Civil Code section 3426.1)
It is not enough to simply show that the information has value. In order for information to be classified as a trade secret, other businesses must be unaware of the information and must be able to put that information, if it were known to them, to beneficial use (Abba Rubber Co. v. Sequist (1991) 235 Cal.App.3d 1). Courts have outlined additional requirements for information to be considered a trade secret. The information must be (1) closely guarded, (2) an investment of a considerable amount of time and expense by the employer, and (3) not readily available to the public (State Farm v. Dempster (1959) 174 Cal.App.2d 418).
The following are some examples of valid trade secrets:
• Customer lists that have been compiled with significant time and/or money. Such a list would be a trade secret if the employer has refined a general customer list by noting particular products or other preferences for each customer
• Methods or sequences of manufacturing
• A product formula that is closely guarded (i.e. Coca-Cola recipe)
• The identity of a source of raw material not generally known in the industry
• Compensation and other financial data
• Marketing strategies
• Labor relations strategies
• Research into new materials or processes, and
• Pending projects
Trade secrets are of course different from general knowledge and skills. As long as an employee does not use any of the previous employer’s trade secrets, the employee is free to use the general knowledge, skill, and experience acquired from prior employment, and even solicit some of the same clients, in order to better succeed when working for later employers (American Alloy Steel Corp. v. Ross (1957) 149 Cal.App.2d 215). As outlined in last month’s article, non-compete agreements are only enforceable if they relate to the sale of a business or partnership.
As outlined above, the legal standard for properly classifying information as a trade secret is high. Not every “secret” is legally a “trade secret.” Yet given the importance of protecting valuable company information, becoming conversant with the rules regarding trade secrets can reap large rewards.
Wednesday, November 5, 2008
California Supreme Court confirms that non-compete agreements are illegal when applied to employees
Loyal customers are the lifeblood of any business. As such, a business’s customer list may be its most valuable asset. Business owners need to ensure that their customers stay their customers. To do so, many businesses use non-compete agreements. While these agreements can provide very real benefits relating to the sale and purchase of a business, the California Supreme Court recently confirmed that such agreements are unlawful when applied to employees.
Business and Professions Code section 16600 is only thirty words long: “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.” Despite this simple, recent cases have battled for years in an effort to clarify the legal effect of non-compete agreements.
The key case in this arena is Edwards v. Arthur Andersen LLP. In this case, Raymond Edwards worked for Arthur Andersen as an accountant. The company sold part of its business, including the division where Edwards worked. Edwards had previously entered into a non-compete agreement which prohibited him from performing certain professional services for Arthur Andersen clients for 12 months and from soliciting Arthur Andersen personnel for 18 months.
The trial court held that the non-compete agreement was valid under the “narrow restraint” exception followed by some federal courts. This “narrow restraint” exception provides that a non-compete agreement does not violate Section 16600 if it imposes a limited restriction and “leaves a substantial portion of the market available to the employee.” The Court of Appeal disagreed, finding that the “narrow restraint” exception is invalid as applied to non-compete agreements.
The California Supreme Court agreed with the Court of Appeal and rejected the “narrow restraint” doctrine. The court reasoned that “Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect” (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 950).
Employers are now bound by the Edwards decision. This means that non-compete agreements are unenforceable unless they relate to the sale of a business. Employers should review personnel documentation to make sure that their employees are not subjected to unlawful non-compete agreements. Also, businesses must not attempt to enforce illegal agreements, even if an employee has previously agreed.
Next month’s article will discuss the topic of trade secrets, and the steps employers can take to ensure that their trade secrets are protected.
Business and Professions Code section 16600 is only thirty words long: “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.” Despite this simple, recent cases have battled for years in an effort to clarify the legal effect of non-compete agreements.
The key case in this arena is Edwards v. Arthur Andersen LLP. In this case, Raymond Edwards worked for Arthur Andersen as an accountant. The company sold part of its business, including the division where Edwards worked. Edwards had previously entered into a non-compete agreement which prohibited him from performing certain professional services for Arthur Andersen clients for 12 months and from soliciting Arthur Andersen personnel for 18 months.
The trial court held that the non-compete agreement was valid under the “narrow restraint” exception followed by some federal courts. This “narrow restraint” exception provides that a non-compete agreement does not violate Section 16600 if it imposes a limited restriction and “leaves a substantial portion of the market available to the employee.” The Court of Appeal disagreed, finding that the “narrow restraint” exception is invalid as applied to non-compete agreements.
The California Supreme Court agreed with the Court of Appeal and rejected the “narrow restraint” doctrine. The court reasoned that “Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect” (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 950).
Employers are now bound by the Edwards decision. This means that non-compete agreements are unenforceable unless they relate to the sale of a business. Employers should review personnel documentation to make sure that their employees are not subjected to unlawful non-compete agreements. Also, businesses must not attempt to enforce illegal agreements, even if an employee has previously agreed.
Next month’s article will discuss the topic of trade secrets, and the steps employers can take to ensure that their trade secrets are protected.
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