Labor and Employment Update - Fall 2006

EXECUTIVE EMPLOYMENT AGREEMENTS

Why go through the trouble of drafting and executing employment agreements? Would it not be simpler to just have an engagement letter? There are no laws that require an employment agreement, but it would be shortsighted, especially when it comes to executive employment. In the euphoria of entering into a relationship, a lot of important legal issues related to hiring, retaining or terminating cannot be overlooked. A written agreement can clarify these potential issues.

For the executive, a written agreement memorializes the company’s promise regarding compensation, bonuses and severance, and a host of other things. For the company, it can secure confidentiality of its trademarks and processes, assure the company that the executive will not compete with the company, and paves the path for a smooth separation if the executive is eventually terminated.

Negotiation is the first step to every written agreement. Good executives are difficult to find, so when a company finds the right candidate, the temptation to make tall promises is great. A company should describe the job accurately, make promises about job growth that are achievable; and make financial commitments that the company can see through.

Whether, executives are hired for a definite term or are “at – will” they typically can be fired for reasons specified in the employment agreement. If the company fires an executive for reasons other those stated in the employment agreement, the company may have to pay the executive severance, as most executive employment agreements have a severance clause. The executive generally can be terminated only “for cause” or for “good cause.” “Cause” typically includes: conviction of felony or embezzlement; violation of the employment agreement; fraud by misrepresentation or non-disclosure by executive to board of directors in connection with the executive’s performance of his duties; commission of a crime of moral turpitude; and failure of the executive to comply with the company’s policies or directions of the board of directors.

Other than to address the issues at termination, a company could use the written executive employment agreement as a tool to protect the company’s property through restrictive covenants. The most significant restrictive covenant is the non-compete covenant that typically goes hand in hand with non-disclosure and/or non-solicitation covenants.

A non-compete covenant could be just a clause in an agreement, or it could be a separate agreement. Either way, it prevents the executive from competing with the company during the course of the executive’s employment, or after the termination of the executive’s services. Non-compete clauses can restrict an executive’s ability to work with a competitor, work in the same field, or work within a geographical limit. Whether or not the scope (length, breadth, and geography) of a non-compete agreement is legal and binding depends on its reasonableness and state law.

Other factors may affect the enforceability. If the contract is at-will, and the termination is for a legitimate cause, the non-compete clause typically will be binding. However, under my executive contracts, the non-compete clause may be binding only if the executive is terminated “for cause,” or the executive quits of his/her own free will.

Non-disclosure clauses typically include a restriction on disclosure of proprietary information that belongs to the company and generally requires that the executive does not disclose the company’s confidential information, trade secrets or customer lists or, anything the executive invents, discovers or improves. The disclosure restriction is based on a theory that such information belongs to the company if the information, in any way, is related to the existing or planned scope of the company’s business. Non-disclosure clauses are legal if they are executed for a legitimate business reason.

Non-solicitation clauses can restrict an executive’s ability to court clients/customers of the company or to pirate its employees during the restricted period.

To conclude, an executive employment agreement should be drafted, keeping in mind that there is always a possibility that the termination may not be as friendly as the hiring. The executive employment agreement should attempt to cover all possible legal issues that could crop up at termination.

THE EEOC HAS CHANGED REPORTING REQUIREMENTS FOR EEO-1 REPORTS IN 2007

The following employers are required to file EEO-1 Reports with the Equal Employment Opportunity Commission (“EEOC”): (1) employers that are party to federal government contracts of at least $50,000 and have 50 or more employees; and (2) employers that are not party to a federal government contract but have 100 or more employees. The deadline for EEO-1 Reports is September 30 and, therefore, employers that are obligated to file EEO-1 Reports for 2006 should have done so by now.

The EEOC has revised the requirements for the information to be included in the EEO-1 Report for 2007.

• The revised report includes a new category titled “Two or More Races;” divides “Asia or Pacific Islander” into two separate categories; renames “Black” as “Black or African-American;” renames “Hispanic” as “Hispanic or Latino;” and strongly endorses self-identification of race and ethnic categories as oppose to visual identification by employers.
• The category of “Officials and Managers” is divided into two levels based on responsibility and influence within the organization: Executive/Senior Level Officials and Managers and First/Mid-Levels Officials and Managers. The revised EEO-1 also provides that business and financial occupations should be moved from the Officials and Managers category to the Professionals category.

The revised EEO-1 report has been posted on the EEOC’s website (www.eeoc.gov) along with an instruction booklet. To the extent you require clarification of the filing requirements, please feel free to contact us.

EEOC SUCCESSFULLY CHALLENGES SEVERANCE AGREEMENTS THAT REQUIRE EMPLOYEES TO WAIVE/WITHDRAW CHARGES FILED WITH THE COMMISSION

On August 8, 2006, the United States District Court for the District of Maryland ruled in favor of the Equal Employment Opportunity Commission (“EEOC”) on its challenge to a Lockheed Martin Corporation (“Lockheed”) severance agreement.

The case involved claims brought by the EEOC on behalf of Denise Isaac, a former employee of a company that had merged with a Lockheed subsidiary in mid-2000. On October 16, 2000, Lockheed had sent a letter to Ms. Isaac informing her that her position would be eliminated effected October 30, 2000, as a result of the merger. The letter indicated that Ms. Isaac would be eligible to receive severance benefits in accordance with the company’s severance plan, provided she signed a “Release of Claims” that was included with the letter.

The Lockheed Release of Claims stated, in relevant part, that the employee would “waive and fully release any and all claims of any nature whatsoever …… [ including ] any claims for other personal remedies or damages sought in any legal proceeding or charge filed with any court, federal, state or local agency either by [him/her] or by a person claiming to act on [his/her] behalf or in [his/her] interest.” The Release also included an acknowledgement that the Release “prohibits [the employee’s] ability to pursue any Claims or charges against the Released Parties seeking monetary relief or other remedies for [his/her]self and/or as a representative on behalf of others. This agreement does not affect [the employee’s] ability to cooperate with any future ethics, legal or other investigations, whether conducted by the Corporation or any governmental agencies.”

Ms. Isaac did not sign the Release and proceeded to file a charge of discrimination with the EEOC on October 27, 2000, alleging discrimination based on race, age and sex. On November 2, 2000, an attorney for Ms. Isaac wrote to Lockheed, informing them of the EEOC charge and asserting a right to severance benefits notwithstanding Ms. Isaac’s filing of the charge. Lockheed disputed Ms. Isaac’s claim for severance, stating in a November 20, 2000 letter, that if Ms. Isaac wanted to receive severance benefits, she would have to sign the release “as is” and would “have to dismiss her EEOC charge against the company.”

The EEOC filed an action against Lockheed, on Ms. Isaac’s behalf, on January 31, 2005, asserting that Lockheed’s action in conditioning severance benefits on Ms. Isaac’s withdrawal of her EEOC charge was per se retaliatory. The Court agreed with the Commission, holding that – although Lockheed was not legally required to offer its employees any severance benefits in the first instance, once it decided to make severance benefits available, it could not condition receipt of such benefits on the employees’ withdrawal of a charge filed with the EEOC.

The Court went even further, holding that the form release, as written, was facially invalid and retaliatory. Lockheed tried to argue that its form of release only required an employee to waive his/her right to recover monetary damages against the Company – and did not actually prohibit employees who signed the Release from filing a charge with the EEOC. In considering this argument, the Court opined that “[i]f the scope of the release were only what Lockheed alleges it was, it would probably not be facially retaliatory.” The Court found, however, that the Lockheed form of release went further than that. In particular, the Court noted the breadth of the language regarding claims (“claims of any nature whatsoever”), which encompassed claims for monetary and other personal rights, as well as the specific reference to “charges . . . seeking monetary relief or other remedies for [his/her]self and/or as a representative on behalf of others.” The court opined that the latter language clearly and impermissibly included charges filed with the EEOC within its scope; as such, the release was facially retaliatory.

In light of this recent opinion, employers are advised to review their severance agreement and release language carefully to ensure that the provisions contained therein are not overly broad and cannot be construed as impermissibly interfering with an employee’s right to file or maintain a charge of discrimination with the EEOC. Indeed, this issue merits particular attention, as it appears to be the subject of recent and intense focus by the EEOC. (See, e.g., EEOC v. Ventura Foods, D. Minn., consent decree signed 9/1/2006, in which Ventura Foods agreed to eliminate a provision in its severance agreement that required employees not to pursue discrimination charges with the Commission and agreed further to provide written notice to all employees who had previously signed the agreements, indicating that they were entitled to file a charge of discrimination with the EEOC without losing their severance benefits).

EMPLOYER OBLIGATIONS TO EMPLOYEES ON MILITARY LEAVE

On December 19, 2005, the Department of Labor issued its final regulations on employers’ obligations under the Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA” or “the Act”). The new regulations were primarily intended to clarify potential areas of confusion relating to employers’ obligations under the Act; the regulations did not appear to announce any significant changes to the DOL’s implementation or interpretation of the Act.

With some 100,000 troops expected to return from military service this year, employers should review their policies and practices with respect to military leaves to ensure compliance with the new regulations. Among other things, the new regulations provide as follows:

· All employers are covered by USERRA. Unlike many labor statutes which contain exemptions for small (e.g., less than 20, 50 or 100 employees), USERRA applies to all employers (no matter what size) that have “control over employment opportunities;” this includes governmental employers, foreign employers operating in the US, and US employers with US personnel working overseas.

· Employers are required to notify employees of their USERRA rights. Employers must notify employees of their military leave rights. In order to meet this requirement, the DOL put out a new poster last January that satisfies the notification requirement.

· USERRA covers all job applicants, as well as current and/or former employees. The new regulations clarify that job applicants are also protected by the anti-discrimination provisions in USERRA. Thus, an employer may not discriminate against job applicants based on past or predicted future military service.

· USERRA violations can give rise to individual liability. Supervisors and HR managers that violate or aid in violations of USERRA may be held personally liable under the Act.

· USERRA provides military personnel returning from active duty with strong reemployment rights. USERRA includes some of the strongest reemployment protections found in labor law. In most circumstances, employers not only are required to reemploy employees who are returning from military leave (even if their leave has extended for as many as five years), employers must also give employees the position they would have held under natural job progression if they had remained working for the employer for the period of the leave. In other words, if individuals working in a position that normally has a two-to-three year promotion track go out on military leave and return in two to three years, they will need to be placed in the higher position upon their return. It does not matter, for these purposes, if the original or elevated position is currently filled; employees must be reemployed in the appropriate position. The only exceptions to the reemployment requirement are where the employer can establish that its circumstances are so changed as to make reemployment impossible or unreasonable (for example, a reduction-in-force has occurred and the entire department where the employee previously worked has been eliminated) and/or where reemployment would cause an “undue hardship” on the employer.

· Employees returning from military leave are no longer considered “at will” employees for a period of time following the leave. If employees have been out on military leave for a period of more than 180 days and return to work, an employer may not terminate their employment (except for cause) for a period of one year. For leaves that are greater than 30 days but less than 180 days, employers may not terminate returning employees (except for cause) for a period of 180 days.

· Employees are entitled to certain benefits-related rights both during and upon return from leave. Under USERRA, an employer is required to continue an employee’s health insurance for a period of up to twenty-four months while the employee is on military leave, at COBRA rates. Upon reemployment, no exclusions or waiting periods may be imposed on the employee for reinstatement of health coverage; in addition, an employee’s period of military leave must be taken into account for purposes of eligibility and vesting service under defined contribution plans and for eligibility, accrual and vesting under defined benefit plans. Employees returning from leave also may be permitted to “make-up” missed contributions to their 401Ks.

The Labor and Employment Group represents and counsels employers in all aspects of the employment relationship, including EEO litigation, union avoidance, negotiations, arbitrations, executive compensation, corporate transactions, and non-competition/non-solicitation agreements, as well as compliance with federal and state laws such as the Family and Medical Leave Act, the Americans with Disabilities Act, the Health Insurance Portability and Accountability Act, the Fair Labor Standards Act and the Occupational Safety and Health Act. This document is published for the purpose of informing clients and friends of Klehr Harrison about developments in the areas of labor, employment and benefits, and should not be construed as providing legal advice on any specific matter. For more information about this publication or Klehr Harrison, contact Charles A. Ercole, Chair of the Labor and Employment Group, at (215) 569-4282.