Labor and Employment Update - Fall 2015

BEST PRACTICES FOR HIRING EMPLOYEES WHO MAY HAVE NON-COMPETE AGREEMENTS

If your company’s fiscal year follows the calendar year, you are in the process of preparing the 2016 FY budget and, in connection with that process, anticipating hiring needs. Unsurprisingly, ideal candidates may come from competitors or other companies that have valuable confidential information and customer relationships they want to protect. If these candidates have agreements with their current employer that appear to impose non-competition or non-solicitation restrictions, are you unable to make the hire? Not necessarily. Below are some best practices for hiring talent that have restrictive covenants with their current employer:

1. Determine Whether There is An Agreement. Early in the process, the company should definitively ask the candidate whether they are subject to any employment agreements or restrictions with their current employer. The answer may not be as obvious as it sounds: long-time employees may not recall the documents they signed when they started work and non-compete terms may be tucked away in incentive compensation plans unbeknownst to the candidate. The company representative interacting with the candidate needs to ask probing questions to determine whether any agreement exists. If candidates represent there is no such agreement, have them acknowledge as such in writing and make clear that employment is contingent on the accuracy of that representation (if the candidate would otherwise receive an offer). You don’t want to buy potential six figure litigation because a candidate is lying to you or not doing a thorough search. You also don’t want to become invested in a candidate without knowing the risk that the hire can bring to your company.
2. Assess Whether the Agreement is Enforceable. If the candidate has an agreement with post-employment restrictions, the company MUST ask for a copy of the agreement to review. Ignorance of the actual language will not protect the company and is more likely to get the company in trouble, as judges will not look kindly at a failure to ask for an agreement that the company knows exists. In consultation with legal counsel, the questions you should be asking include:

• Does the agreement have non-competition, non-solicitation, or other restrictions?
• Can the company live with the restrictions as drafted?
• Are those restrictions enforceable under the applicable law based on scope of the restriction, duration, geographic scope, or the consideration the candidate received for entering the agreement?
• How do the restrictions line up with the actual responsibilities performed by the candidate for the prior employer? Remember, unlike most contracts, these agreements will generally not be enforced solely on the contractual terms, but based on whether the restrictions are needed to protect legitimate protectable interests. This means, for example, that an agreement may not be enforced if it seeks to prevent a candidate from working for non-competitors or from calling upon potential customers that the candidate never dealt with at the prior employer.

1. Adjust the Job Duties or Impose Restrictions as Appropriate. If the candidate is attractive, the fact that he or she has post-employment restrictions does not have to be a deal-breaker. These restrictions are only enforceable to the extent necessary to protect the old employer’s legitimate interests. In other words, if the candidate’s employment with you would be in a position where he or she would be performing different job duties than what the candidate did for the old employer and these job duties are not competitive with duties performed for the old employer, the agreement may not be enforceable. Consider scoping out the position so that the candidate would not be performing job duties that should alarm the prior employer. For example, consider restricting a sales representative to a different territory or only to prospects the representative did not service for the prior employer. You can also consider imposing these restrictions on the job duties for a period less than the time provided in the agreement if you conclude the duration of the agreement’s restrictions are too long. The scoping process is a partnership among the business, legal, and HR to determine what restrictions are reasonable that appropriately limit litigation risk but still let the company get value from the hire.
2. Instruct the Candidate on Not Taking the Prior Employer’s Business Information. Under no circumstances should a new hire take or keep the prior employer’s confidential information. Hires should be specifically instructed that they are not to take such information, that in their final days with the old employer they should avoid looking at confidential files that are unrelated to the performance of job duties, and they should make sure to return all documents to the old employer. Employees, whether because of bad intent or temporary panic, are often inclined to take documents out the door for their benefit or as a crutch. A hire’s attaching a thumb drive to the work computer or taking a client list “just in case” often leads courts to enforce agreements they otherwise would not be inclined to enforce because they conclude the employee is a bad actor who cannot be trusted. The result is the company ends up paying legal fees in litigation, loses a desired hire when the restrictions are enforced, and ends up with a black eye in the public. 
3. After Hire/Resignation, Consider Proactively Contacting the Prior Employer. When a key employee leaves for a competitor, there is an inclination to fear the worst and rush into litigation. Under appropriate circumstances where the hire’s duties have been scoped out so that you think you have reasonably addressed the old employer’s legitimate concerns, consider pro-actively contacting the company to lay out the restrictions and the instructions you have provided the new employee regarding the non-disclosure of the former employer’s confidential information. This path may be sufficient to reassure the prior employer and prevent litigation or position the company as the benevolent actor in the event of litigation because you can demonstrate that you have attempted to address whatever legitimate needs the old employer may have. This approach may not work in every hiring decision, depending on the company’s relationship with the prior employer and the nature of the hire.

A candidate’s non-competition agreement does not need to be the end of the recruitment process. With careful planning and proactive consideration of the potential issues, the company may reap the benefit of desirable talent without incurring litigation.

By: Jonathan Krause
jkrause@klehr.com

BACKGROUND CHECKS: WHAT EMPLOYERS NEED TO KNOW

Conducting employment background checks has become a routine, even necessary, part of conducting business. According to the Society for Human Resource Management, approximately 75-80% of employers conduct background checks during pre-employment screening.

Generally, except for medical and genetic information, it is not illegal for employers to ask questions about an applicant’s or an employee’s background, or to require a background check. However, employers must be cognizant of the myriad of local, state, and federal laws regulating the use of background information. Improper use of background checks can result in costly litigation. Recently, for example, Universal Studios Orlando was sued under the Fair Credit Reporting Act (“FCRA”) for alleged violations of Federal Trade Commission (“FTC”) regulations – including not properly disclosing credit report use – when making employment decisions. In order to avoid potentially costly litigation like this, employers must be aware of applicable laws.

When obtaining background information about an applicant or employee from a third-party vendor, employers must follow the procedures mandated by the FCRA:

1. The employer must notify the individual, in a clear stand-alone writing, that it might obtain background information that may be used for decisions about his or her employment.
2. The employer must get the individual’s written permission to obtain the background check.
3. If the background investigation will involve personal interviews, then the employer must inform the individual of his or her right to a description of the investigation.
4. The employer must certify to the reporting company that it has complied with the FCRA, obtained the individual’s permission, and will not misuse the information in violation of law.
5. Prior to taking an adverse employment action based on information in the background check, the employer must give the individual notice that includes a copy of the consumer report relied on and a copy of the FTC Summary of Rights form. The notice’s purpose is to provide the individual with an opportunity to review and explain any negative information contained in the report.
6. If the report results in an adverse employment action, the employer must inform the individual: a.) that the employer’s action was taken because of information in the report; b.) of the reporting company’s contact information; and c.) that the individual has the right to receive a free report from the reporting company within 60 days and to dispute the information in the report.

While adverse actions based on criminal history are not prohibited by federal statute, individuals have brought suits claiming that the use of criminal histories has a disparate impact on protected classes. The EEOC has found that using an arrest or conviction as an absolute bar to employment is unlawful under Title VII. The Pennsylvania Human Relations Commission has held that disqualifying applicants based on criminal histories may have a disparate impact on protected classes.

Further, the Pennsylvania Criminal History Record Information Act (“PCHRIA”) prohibits consideration of arrests during pre-employment screening, and allows employers to only consider felony and misdemeanor convictions if they relate to the applicant’s suitability for the position. The PCHRIA also requires employers to notify applicants in writing if the decision not to hire was based in whole or in part on an applicant’s criminal history. Additionally, New Jersey and the City of Philadelphia (as well as other states and cities across the U.S.) have enacted “Ban the Box” laws, which forbid employers from inquiring about an applicant’s criminal history prior to the first interview, including on the employment application.

Employers should review their policies and procedures to guarantee compliance with relevant laws. At a minimum, employers must comply with the EEOC and the FCRA, but employers also should strive to maintain some best practices, such as refraining from inquiring about arrests not resulting in conviction, tailoring background checks to only gather the information needed to make a sound decision, and avoiding absolute disqualifiers. As always, employers who have doubts about what they can consider should consult legal counsel.

IS BEAUTY IN THE EYE OF YOUR EMPLOYER?

The “BorgataBabes”

An appellate court in New Jersey recently affirmed the dismissal of claims against the Borgata Casino Hotel & Spa alleging that its adoption and application of personal appearance standards (“PAS”) violated Title VII of the Civil Rights Act of 1964 (“Title VII”) and the New Jersey Law Against Discrimination (“LAD”). Specifically, twenty-one women who were employed as “BorgataBabes” had filed claims challenging the PAS which prohibited employees from increasing their baseline weight, as established when hired, by more than 7%. They also alleged that other grooming and appearance requirements, such as the BorgataBabes costume, were discriminatory. The appellate court affirmed the trial court’s dismissal of the majority of the claims, concluding that “the LAD does not encompass allegations of discrimination based on weight, appearance or sex appeal.” The appellate court did, however, find that certain plaintiffs whose lack of compliance with the PAS resulted from documented medical conditions or post-pregnancy conditions had presented a material dispute of facts regarding whether the Borgata’s application of the PAS weight standard resulted in harassment based on gender, and accordingly, the dismissal of those specific claims was reversed.

While it may be tempting to conclude that the Borgata case results in all employers now having authority to discipline and terminate employees based on personal appearance standards, the appellate court’s decision is very fact-specific and narrowly tailored to the industry in which the Borgata operates. The court noted that the Borgata’s recruiting brochure described the BorgataBabes position as: “part fashion model, part beverage server, part charming host and hostess;” “ambassadors of hospitality;” “eyes, hair smile, costumes as close to absolute perfection as perfection gets.” BorgataBabes were required not only to serve drinks to customers on the casino floor, but also, on an as needed basis: appear at marketing events; be photographed in advertising materials; perform at player promotions; make media appearances including television and radio; and attend designated charity and community events on behalf of the company. Unlike other casino employees, BorgataBabes were given an extra 45 minutes of paid time to change into costume and complete personal grooming, had access to a spa and fitness center, and were reimbursed for gym memberships, nutritionists and personal trainers. The court also noted that applicants for a BorgataBabes position underwent an in-costume audition, and that audition notices made clear that “personal appearance in costume” was one of the evaluation criteria. Chosen candidates were advised of the PAS requirements including maintaining physical fitness and weight proportionate to height, and they executed contracts agreeing to adhere to those standards. Upon the company’s revision of the PAS in 2005 to allow more objective enforcement (limiting weight gain, barring medical reasons, to no more than 7% of baseline weight) all BorgataBabes were weighed to establish their baseline weight, and each individual executed a copy of the amended PAS, again agreeing to comply with the new weight standard and acknowledging that any failure to do so could result in termination.

In light of the above facts surrounding the industry in general and the job duties of the BorgataBabes position, the appellate court found that the Borgata’s business was to provide entertainment to its customers and that the BorgataBabes position, from its inception, included an element of performance and public appearance. Accordingly, the “entertainment nature” of the casino and the BorgataBabes position distinguishes it from other types of employment, and thereby, distinguishes the BorgataBabes case from other cases. The court found that under these circumstances, a policy requiring an employee who represents the casino business to the public to remain fit and within a stated weight range does not violate the LAD. Moreover, while the Borgata’s PAS reflects an “overemphasis on appearance, including weight,” such fact alone is not actionable as illegal discrimination.

The appellate court also noted that while the LAD is construed liberally due to its remedial purpose, the law also acknowledges the authority of all employers to manage their own business. The LAD specifically authorizes employers to require employees to adhere to “reasonable workplace appearance, grooming and dress standards” which are not otherwise precluded by State or Federal Law. See N.J.S.A. 10:5-12(p), emphasis added. When examining the Borgata’s PAS under this standard, the appellate court noted that the policy was applied to both male and female employees. The weight standard imposed the same 7% weight gain restriction on men and women, and the policy recognized pregnancy (a gender specific condition) in the category of bona fide medical conditions providing for an exception to enforcement of the restriction. As there is no protected class based solely on weight under the LAD or Title VII, and pregnancy was identified as an exception to enforcement of the standard, the weight restriction was not facially discriminatory under either law.

With regard to the other dress and grooming standards, the court noted that all employees, whether male or female, were required to wear a costume as a condition of their employment as a BorgataBabe. And while the costumes for men were different from the costumes for female employees, the court held that an employer does not unlawfully discriminate when it establishes a reasonable dress code or grooming policy that differentiates between male and female employees (as compared to a policy that requires women to wear uniforms while men are not required to do so). The evidence also showed that the hiring of BorgataBabes was not gender restricted, and female BorgataBabes’ assignments and earning capacity were not compromised because of their gender.

Finally, when evaluating if the policy was “reasonable,” the trial court found that a common sense definition of the term contemplated that which is “to be expected,” and “ordinary or usual in a given set of circumstances.” Based on the circumstances here (a job title literally including the word “Babe;” full pre-hire disclosure of the required costume, performance-related job duties, and weight restrictions; etc.), one could hardly argue that Borgata’s application and enforcement of its PAS to the BorgataBabes was not reasonable.

The right to implement appearance standards is not limited to New Jersey
Prior to the BorgataBabes decision, courts have routinely recognized that the appearance of a company’s employees may contribute greatly to the company’s image and success with the public and thus a reasonable dress or grooming code is a proper management prerogative. In Bellissimo v. Westinghouse Elec. Corp., the Third Circuit held that employer dress codes are permissible under Title VII as long as they are enforced even-handedly between men and women, even if the specific requirements for each gender may differ. In Delta Air Lines v New York State Div. of Human Rights, the Supreme Court of New York, Appellate Division, held that the airline’s use of weight standards when hiring flight attendants was not actionable as sex discrimination as there was no evidence that Delta intended to deprive one sex of equal opportunity or treatment, or that weight requirements were somehow applied in a discriminatory manner. In Jespersen v. Harrah’s Operating Co., the Ninth Circuit held that a casino’s comprehensive uniform, appearance and grooming standards for all bartenders, which differentiated between men and women by prohibiting men from, but requiring women to, wear make-up was not discriminatory on its face.

So what is the take-away from these cases? Generally, where an employer’s “reasonable” workplace appearance, grooming and dress standards comply with State and Federal law prohibiting discrimination, such policy will not violate Title VII (or LAD in New Jersey) even if it contains sex-specific language. Title VII (and most state anti-discrimination laws) does not directly protect against weight discrimination. It is only where weight standards are set or applied unevenly between men and women that they can be challenged as unlawful sex discrimination. Employers should evaluate their current personal appearance standards and/or dress and grooming codes to ensure that the policies are applicable to both men and women, and that the enforcement of such policies is done so evenly between the genders. Furthermore, as was the case with the BorgataBabes, employers should always document the full disclosure of the policies to, and acceptance by, their employees. Finally, when in doubt, employers should consult with their labor and employment counsel to ensure that their policies are valid and enforceable under the Federal and State anti-discrimination laws.

A RECENT DELAWARE BANKRUPTCY COURT DECISION FINDS THAT INDIVIDUALS MAY BE PERSONALLY LIABLE FOR WARN DAMAGES

As we have explained before, under certain circumstances, the federal Worker Adjustment and Retraining Notification Act (WARN) requires “employers” (as that term is defined by WARN) to provide notice in advance of employee layoffs and terminations or the employer could be liable for significant damages in unpaid wages and benefits. Because WARN does not include individual officers, directors or agents in the definition of “employer,” however, WARN does not provide for individual liability for these wages and benefits. Many state WARN statutes, including the Wisconsin WARN Act, are the same in that regard. While this may be so, a recent Delaware Bankruptcy Court decision – Stanziale v. MILK072011, et al., – establishes that a claim other than one brought under WARN may allow for individual liability for WARN Act damages.

By way of background, Golden Guernsey Dairy, LLC (“Golden”) terminated its employees, ceased operating business, and filed for Chapter 7 bankruptcy protection in the Delaware Bankruptcy Court (Golden is a Delaware Limited Liability Company). The Wisconsin Department of Workforce Development (the “Department”) filed a claim on behalf of Golden’s terminated employees seeking damages under WARN in the amount of over $1.5 million. In turn, the Trustee of Golden’s estate filed a Complaint against, among others, two individuals who managed Golden (collectively, the “Insider Defendants”). The Trustee alleged that the Insider Defendants were liable for the WARN damages because they violated their fiduciary duties to Golden and its creditors when they caused Golden to violate the statute. According to the Trustee, this violation “saddled” Golden with the Department’s $1.5 million priority claim to the detriment of unsecured creditors. The Insider Defendants moved to dismiss the claims against them, arguing, among other things, that such a claim was not recognized under Delaware law.

In his opinion, Judge Kevin Gross for the bankruptcy court explained:

Here, the Trustee alleges that [the Insider Defendants] ignored their responsibility to give an appropriate notice or notices to [Golden’s] employees and thereby exposed [Golden] to the WARN claim. Delaware law has long recognized that directors – or in the case of a limited liability company, its controlling owner, manager and President – owe a fiduciary duty to the company they serve. A breach of the duty of loyalty may be found when the fiduciary has failed to act in good faith.

Because the Complaint alleged facts that support a finding that the Insider Defendants breached their fiduciary duties to Golden, Judge Gross denied the motion to dismiss and allowed the claims against the individuals to proceed.

Notably, Judge Gross’ decision turned on his application of Delaware law and it is unclear at this time whether other bankruptcy courts in Delaware (or elsewhere with a similar law) will agree with Judge Gross’ conclusions. That said, however, because proven WARN violations can result in substantial damages and attorney’s fees, it is important for any individual director, officer, or manager of a company involved in decisions concerning WARN to be mindful of Judge Gross’ decision.

By: Lee D. Moylan
lmoylan@klehr.com