Knockout.jpegThe Equal Employment Opportunity Commission (EEOC) was recently smacked down by the Sixth Circuit Court of Appeals in EEOC v Peoplemark, Inc. In that appeal, the Court agreed with a decision from the federal district court out of Western Michigan that awarded an employer its attorney’s fees and expert fees in defending against a discrimination claim brought by the EEOC. The amount awarded to the employer totaled $751,942.48.

This case arose out of Peoplemark’s employment application, which asked applicants whether they have a felony record. Peoplemark also conducted an independent investigation into the criminal records of all applicants.

The reason Peoplemark’s policy was an issue is because the EEOC has taken the position that a blanket policy of using criminal history, including convictions for denying applicants employment may, in some instances, violate the prohibition against employment discrimination under Title VII of the Civil Rights Act of 1964. This is a policy that has had “teeth” in the past as this blog previously reported that in 2012 Pepsi reached a $3.13 million settlement with the EEOC in relation to its use of pre-employment criminal background checks.  

Returning to the Peoplemark case, in 2005 a female African-American with a felony conviction submitted an application to Peoplemark’s Grand Rapids office. Peoplemark did not refer the job applicant for employment and because of this refusal, the applicant filed a charge of discrimination with the EEOC. The applicant alleged that Peoplemark denied her application because of her race and felony record.

It was interesting and for reasons not disclosed in the Court’s opinion, early in the EEOC’s investigation a person having the title of Vice President and Associate General Counsel for Peoplemark represented to the EEOC that Peoplemark had a companywide policy of rejecting felon applicants. However, Peoplemark later denied that such a policy existed and produced information from a database and other documentary evidence showing that it had referred felons to job opportunities in the past.

In light of this evidence, the trial court determined that the statements of the employer’s vice president and general counsel were not supported by the facts. And in light of the facts and documents produced, the EEOC should have reassessed its claim: “From that point forward, it was unreasonable to continue to litigate [plaintiff’s] pleaded claim because the claim was based on a companywide policy that did not exist.” 

Take-Aways for Employers

I’ve never agreed with this particular EEOC initiative and it was good to see a court thoughtfully address the EEOC’s  pursuit of this policy under the circumstances presented. But two issues should stand out for employers:

  • First, while under 42 U.S.C. § 2000e-5(k), a court may award the prevailing party in a Title VII action “a reasonable attorney’s fee (including expert fees)” such awards are generally not routine and certainly not in the amount in question. Accordingly employers should not expect to be so fortunate (if being sued could ever be considered “fortunate”) if their hiring practices involve blanket policies against hiring felons. Follow this link for more information about using criminal background checks in your employee application process. 
  • Second, Peoplemark handled the EEOC investigation internally. And during the investigation, Peoplemark initially advised the EEOC that it had a companywide policy of rejecting applicants with felonies. This representation came from Peoplemark’s vice-president. But after the EEOC filed suit, the company denied that representation. This should be a wake-up call for organizations and their management to make certain they understand the inner workings of the business organization before communicating with outside governmental agencies. Such communications should, at a minimum, first be screened by in-house counsel before being provided outside of the organization. Ideally, however, the organization should consider bringing in an experienced employment attorney who is well-versed with the nuances of federal or Michigan employment law.       

Also, for an insightful perspective on the shortcomings with the EEOC’s policy initiatives regarding criminal background investigations in employment decisions and what Congress should do about it, see Jon Hyman’s The High Price of EEOC Background Check Litigation. 

For more information about responding to an Equal Employment Opportunity investigation or charge of discrimination, contact Jason Shinn. Mr. Shinn works with business owners and companies to comply with federal and Michigan employment laws and, if necessary, represent those clients in employment discrimination and related lawsuits in state and federal court. 

Jim_Leyland_pregame_at_Dodger_Stadium (1).jpgJim Leyland, the now former manager for the Detroit Tigers, officially announced his resignation today. Under his tenure, which lasted eight seasons, Mr. Leyland took the Tigers to two World Series and had an overall record of 700-597.

An example in “what not to do” in managing a company’s human resources.

Mr. Leyland’s tenure with the Tigers can offer human resource professionals a few important insights on how to make decisions when it comes to terminating employees. And while I like Mr. Leyland and despite his success, his management style is a lesson in “what not to do” when it comes to managing your company’s human resource department. 

Again, I like Mr. Leyland and I have every reason to believe he knows as much or more about baseball than the cumulative insight of all of the past and current t-ball coaches, former high-school baseball players, writers, other “experts,” etc. that made up the loud and consistent constituency who previously called for Mr. Leyland’s job. 

The truth is, however, Mr. Leyland’s decision-making process in managing a baseball team is not something your company should follow when it comes to terminating an employee. This is because when it came to managing Mr. Leyland was known for managing on “instinct” rather than metrics. For example, in explaining major revisions to the starting line-up of the Tigers going into Game 4 of the American League Championship Series against the Red Sox, Mr. Leyland explained: 

I was laying on my couch at home last night watching the Dodgers and the Cardinals. And I just got to thinking … I think something had to be done … I did what I thought was the right thing to do … You can say I’m crazy, you can say I’m nuts, you can say I’m dumb, you can say whatever the hell you want. 

(If you read the full context of this quote, Mr. Leyland was making the point that his decision would mean pundits would be talking about it and him instead of his player Austin Jackson who had been struggling as the lead-off hitter for the Tigers. In other words, Mr. Leyland did what he routinely did – make decisions with an eye towards protecting his players – not a bad example to follow for any organization).

In assessing Mr. Leyland’s decision-making process, one critic described him as,

a relic of days gone by, where you managed by instinct and feel. Then, smart people realized that you can base decisions on the situation and cold, hard numbers, and “go by the gut” managers like Leyland became increasingly obsolete.

Regardless of whether you agree with this (I don’t), applying this sort of decision-making process to employment decisions is almost always going to set your company up for striking out when it comes to federal and Michigan employment law matters.

How Leyland’s Management Style Can Play out in Employment Discrimination Claims.

Consider for example a recent wrongful employment termination and discrimination lawsuit in which I represented the terminated employee.

In that lawsuit, the manager responsible for terminating the employee eagerly testified that her decision was made based on a “careful” and “deliberate” assessment of objective documentation that she had specifically asked the employee’s direct supervisor to prepare. In other words, this appeared to be an “anti-Leyland” decision to terminate an employee.

The problem with the manager’s story, however, was that the decision-making process she testified to going through did not happen. Instead, the manager confirmed that the information she used to “carefully” and “deliberately” terminate the employee was sent by email as several attachments. When shown this email, the manager admitted it was sent on a Wednesday at 7:42 PM.

However, another manager, the human resource manager, had already advised the employee that morning he was terminated. In other words, there was over (at least) an 11 hour discrepency between the termination and when the manager could have even opened the email containing the documents she purportedly relied upon in terminating the employee.    

Confronted with this undisputed timeline, the manager’s testimony changed to assurances that the managers had “probably” talked prior to terminating the employee and that the manager “could have reviewed” some documents prior to terminating the employee. But when pressed about the significant discrepancies and what actually happened (as opposed to what “could have” happened), the defendant company’s manager was unable to recall a single conversation or reviewing a single document before making the decision to terminate this employee.

The manager eventually admitted, taking a page from Mr. Leyland’s management book, that she relied only on her “belief” that the terminated employee was not a “team player.” It doesn’t take a MLB manager to tell you that subjective “belief” is not even in the ballpark of “careful” and “deliberate” decision-making process when it comes to terminating an employee, especially when your company tries to substantiate that “belief” after the fact.

Closing Thoughts on Managing an Employee Termination. 

Again, I like Mr. Leyland and I appreciate what he has done for Michigan and the Tigers. But using “guts,” instinct, or beliefs for managing your company’s human resources is no way to run a successful company. This is especially true – as the above deposition testimony shows – where there is almost always a paper trail to create a documented timeline of events. And if your company’s human resource professional or managers’ beliefs or instincts don’t match up with that timeline, it is that much easier to attack the termination decision vis-a-vis the process that went into making that decision.

Once a company’s decision-making process is called into question, employers should expect any close calls, i.e., factual determinations, will no longer be resolved as a matter of law, which means a jury is going to decide those issues. And similar to an umpire, sometimes juries make the wrong call, which can change the outcome of a game. For this reason alone, it is important to not only make the right call when it comes to terminating an employee, but to be able to back up the decision with objective, documented reasons.  

For more information about eliminating and managing employment law risks, including investigating employee misconduct or properly terminating the employment relationship, contact Jason Shinn. Mr. Shinn is a Michigan employment law attorney who has represented employers and individuals since 2001. Photograph is from the Wikimedia Commons.

No in Red.jpgWhile maybe not quite as exciting as last night’s fantastic win by the Detroit Tigers, Michigan employers got a great win this week from the Michigan Court of Appeals involving a claim for wrongful termination in violation of a public policy.

Specifically, in Irwin v Ciena Health Care Management, Inc. (PDF), a nurse was employed in an at-will position. After she was terminated, she filed suit urging the Court to recognize a cause of action for the wrongful termination of a health care professional for refusing to provide care that allegedly violated the standard of care applicable to medical professionals.

The Michigan Supreme Court has recognized a cause of action for wrongful termination in violation of public policy when the plaintiff is terminated “for failure or refusal to violate the law in the course of employment.” Such claims are recognized even where the employment was relationship is “at-will.” But as explained below, the Court declined to expand the public policy exception. 

Michigan’s Public Policy Exception to At-Will Employment 

The Michigan Supreme Court has recognized only three situations when public policy will preclude an employer from terminating an at-will employee:

  1. The employee is discharged in violation of an explicit legislative statement prohibiting discharge of employees who act in accordance with a statutory right or duty;
  2. The employee is discharged for the failure or refusal to violate the law in the course of employment, which may extend to principles derived from authoritative sources other than statutes, such as principles promulgated in constitutional provisions, common law, and regulations; and
  3. The employee is discharged for exercising a right conferred by a well-established legislative enactment.

Returning to the plaintiff’s claim for wrongful termination in violation of public policy, the Court reasoned that the standard of care applicable to medical malpractice claims is not based on an objective legal source. Instead, it must be established through expert testimony on a case-by-case basis. And then, the fact-finder can choose to accept or reject that testimony. Accordingly, in contrast to the three public policy examples above, the determination of the standard of care owed to a patient is a fact-driven, subjective inquiry.

Further, the Court also expressed its reluctance to make a “significant departure” from Michigan employment law in recognizing what it considered a new cause of action. Accordingly, it noted that any new public policy basis for a wrongful termination claim should come from the Michigan Legislature or Supreme Court. 

The Take-Away for Employers

First, this decision is a good reminder that even when your company has an at-will employment relationship, there are important limitations for when an employee can be terminated. And the above case is a fine example of a smart employment attorney coming up with a creative strategy to argue around the at-will employment relationship. While this legal strategy ultimately failed, it still exposed the employer to liability and the expense of defending the wrongful termination lawsuit. 

Second and building on the preceding point, any time your company is terminating an employee it is a good idea to first consult with an employment attorney or, at least, an exhaustive employment termination checklist. In doing so your company or HR professional will be in a better position to identify red-flags in otherwise “low risk” terminations and separate out “high-risk” terminations that may require additional attention in order to eliminate or reduce the chance of an employment lawsuit later being filed.     

For more information about Michigan employment law or wrongful termination claims, contact Jason Shinn. Since 2001, he has worked with employers and employees to address federal and Michigan employment law compliance and, if necessary, litigated such matters in state and federal courts. He also comments on employment and HR related issues on Twitter as well as moderating the Michigan HR Toolbox, a LinkedIn group for HR professionals. 

Rainbow Flag.jpgSexual orientation discrimination can be described as being treated differently or harassed because of a person’s actual or perceived sexual orientation, which includes gay, lesbian, bisexual, or heterosexual orientation.

Unlike federal laws that protect people from workplace discrimination on the basis of race, national origin, religion, sex, age, and disability, there is no federal law that specifically prohibits workplace discrimination on the basis of sexual orientation.

Instead, in 1998, the United States Supreme Court confirmed that the main federal anti-discrimination law (Title VII, 42 U.S.C. § 2000e et seq.) that prohibits sex discrimination also extended to same-sex harassment. Prior to this ruling federal courts were sharply divided on this issue and under what circumstances, sexual harassment of an employee by a supervisor or colleague of the same sex as the employee was actionable under the Title VII. But even with this extension, discrimination based on one’s sexual orientation is not prohibited – only discrimination based on sex.

Examples of situations that can establish a hostile-work-environment claim based on same gender harassment include where the harasser making the sexual advances is acting out of sexual desire, where the harasser is motivated by a general hostility to the presence of men or women in the workplace, or where there is comparative evidence regarding how the harasser treated members of both sexes in a mixed-sex workplace. Each of these examples is a mechanism for ascertaining an intent to discriminate based upon sex. 

If same-sex harassment “because of sex” sounds confusing, you’re not alone. Court’s continue to struggle to apply the current law to same-sex harassment claims. A prime example of this struggle is the recent en banc decision of the Fifth Circuit Court of Appeals in EEOC v. Boh Brothers. 

Ten of the sixteen judges on the panel ultimately reversed a prior ruling that had found no liability against the employer under Title VII where a supervisor found a subordinate insufficiently manly resulting in a daily routine of name calling (e.g., f*ggot, queer, princess, p*ssy, etc.) simulating sex acts whenever the employee bent over, and exposing himself on multiple occasions.

The remainder of the judges offered their own views in multiple dissenting opinions. Of particular note was the dissent by Judge Jerry E. Smith and joined by Judge Harold R. DeMoss, Jr. These judges expressed their concern that finding the employer liabile would result in the   

… American workplace [becoming] more like a prison than a place for personal achievement, individual initiative, and positive human interaction; one’s speech is chilled as a condition of keeping one’s job … [and] ‘portends a government-compelled workplace speech code’ — ‘a code of civility’ [imposed] on the American workplace.’ The hypersensitivity that is blessed unintentionally by the majority nudges the law in a direction that hastens cultural decay and undermines — if even just a little bit — an important part of what is good about private employment in the United States. 

The dissenting judges did not specify if they believed the routine use of homosexual epithets against an employee, the punctuated simulated homosexual acts in the workplace, the occasional exposure of the supervisor’s genitals, or something else were examples of what they believe made private employment so “good”, but their perspective that banning such conduct would “hasten” the cultural decay of the U.S. workforce is an interesting one; To each their own. 

In contrast to federal law, state law prohibiting discrimination based on sexual orientation is a dynamic patchwork with 21 states and the District of Columbia prohibiting sexual orientation discrimination. Michigan is not one of these states.

Michigan Courts, however, have followed federal law and concluded that the Michigan Civil Rights Act (the Elliott-Larsen Civil Rights Act) also extended to same-gender harassment claims. Thus, a plaintiff may bring a hostile-work environment claim even though the harasser may be the same gender. But again, sexual orientation discrimination is not prohibited under Michigan law. 

The Dismal Economics of Sexual Orientation Discrimination

The Detroit Free Press recently ran an editorial; The High cost Michigan Pays for Excluding Gay People, advocating to repeal the “mean-spirited” ban adopted in 2004 by Michigan against gay marriage. The editorial notes: 

In sanctioning discrimination on account of sexual orientation, Michigan sends a noxious message, not just to gay citizens, but also to a new generation of college-educated heterosexuals that finds exclusionary policies regressive and morally repugnant …  there is a strong case to be made that perpetuating the hostility codified in Michigan’s 9-year-old ban could slow or even derail the economic recovery that GOP legislators insist is their highest priority.

The same reasons and rationale offered in the editorial by the Detroit Free Press for repealing Michigan’s ban on gay marriage certainly apply to Michigan workplaces and public accommodations or services.

In this regard and as noted above, while the Michigan Civil Rights Act (ELCRA) prohibits employment, public accommodations, public services, education, and housing discrimination based on race, religion, color, national origin, sex, age, marital status, height, weight, and arrest record, it does not currently prohibit discrimination based on sexual orientation or gender identity/expression. This means that employers can fire or refuse to hire people, landlords can deny housing, and business owners can refuse restaurant service based on an individual’s actual or perceived sexual orientation or gender identity/expression and those individuals would have no means of legal redress.

A 2013 study by the Michigan Department of Civil Rights found that there were numerous ways that the lack of nondiscrimination protections for sexual orientation and gender identity/expression impact Michigan’s economy and Michigan business’ profits. For example, the report noted:

  • Employee productivity is particularly hard hit when an employer openly discriminates. Discriminatory environments for LG BT employees have also been shown to negatively impact the performance of heterosexual employees.
  • Businesses that support and promote inclusive business policies reported a high level of employee satisfaction, lower turnover rates, and increased consumer confidence.
  • Leaving Michigan was perhaps the most substantial effect of Michigan’s lack of LGBT inclusive policies. Approximately 1/5 of the testimony the department heard referenced people leaving Michigan for reasons related to discrimination: “Professionals and college students, including students who identified as heterosexual, said that they plan to lead the state because they did not feel that Michigan values all of its citizens … and stated that they would not stay unless the state became a “community for all people.”

Conclusion

Certainly opinions and moral judgments about sexual orientation and its role in society have long dominated political and legal culture. But if you want to avoid passing judgment on judging the morals and opinions involved in judging sexual orientation, there are enough economical and pro-business reasons to provide compelling reasons for why Michigan’s economy would likely benefit from restricting discrimination based on sexual orientation.

And such a restriction would certainly be consistent with Michigan’s long-standing tradition of taking the lead in protecting individuals’ civil rights. In fact, going back to 1955 – almost a decade before the federal government passed the federal civil rights act – the Michigan legislature passed the Fair Employment Practices Act, which guaranteed the opportunity of Michiganders to gain employment regardless of race, color, religion, or national origin. Also, as early as 1983 the Michigan Department Rights Commission issued a statement that the state’s Civil Rights Act should be amended to prohibit discrimination based on sexual orientation.

I’m not one to normally advocate for more regulations when it comes to employers; My experience is that most companies want to do right by their employees and customers while making a profit. However, Michigan and its companies, like many states, are battling to attract and retain talented individuals. While it has lost the chance to be a leader in attracting such talent – at least in comparison to the 21 states that have already prohibited sexual orientation discrimination – it doesn’t have to be weighed down by a policy that is detrimental to economic growth or that has no future under the current legal trends surrounding sexual orientation. 

I felt like I was watching a New Year’s Eve special last night with all the countdowns to midnight. Unfortunately (or fortunately) there was no Ryan Secrest,no ball dropping, and no confetti. Instead, the count down was for when the government would “officially” shutdown. 

Regardless of who you believe should be blamed (I’ll start with the politicians), there is no dispute that employers and employees will need to be aware of what the government shut down means for their respective interests. Here is an overview of what they can expect:  
The U.S. e-Verify program will be shutdown. The e-Verify system allows employers to voluntarily check the legal work status of its employees. For context purposes, more than 21 million requests were filed through the system during FY2012. 
Enforcement of Wage and Hour laws. The Department of Labor’s (“DOL”) Wage and Hour Division is responsible for enforcing federal wage and hour laws. While these laws will remain in effect, the DOL will likely suspend operations during the government shutdown. 
Unemployment benefits will likely continue. It has been reported by the Department of Labor that the Federal Employment and Training Administration “will continue to provide essential functions, as occurred during the shutdown of 1995.” 
Workplace dispute cases would not be resolved until after the shutdown, as the National Labor Relations Board would halt all case handling.
Federal Courts will probably be open for the next ten days before shutting down. According to a statement released Thursday t federal courts will remain open for about 10 business days after a shutdown begins and would reassess its situation around Oct. 15, 2013. All proceedings and deadlines would remain as scheduled, and the electronic filing system for documents with courts would remain operational. In case you are worried, Supreme Court Justices, U.S. magistrate judges, and U.S. bankruptcy judges would continue to be paid in the absence of funding.
National labor Relations Board will shut down. The NLRB oversees union-organizing elections and under certain circumstances, resolves workplace disputes. But with the shutdown, the NLRB’s case handling will be suspended during the government shutdown. Outreach and public affairs would also cease. Also, all but 11 of the agency’s  1,611 employees would be furloughed. Those 11 would be retained to protect life and property.
The Equal Employment Opportunity Commission. According to the EEOC’s website, “only activities involving the safety of human life or the protection of property will continue.” Perhaps more informative is the EEOC’s explanation of what it will not be doing during the shutdown; According to the webiste, the EEOC: 
Staff will not be available to answer questions from the public, or to respond to correspondence from the public.
While we will accept charges that must be filed in order to preserve the rights of a claimant during a shutdown, these charges will not be investigated.
Insofar as the courts grant EEOC’s requests for extensions of time, EEOC will not litigate in the federal courts.
Mediations will be cancelled.
Federal sector hearings will be cancelled, and federal employees’ appeals of discrimination complaints will not be decided.
Outreach and education events will be cancelled.
No FOIA requests will be processed
While employers and employees will in large part be negatively impacted to some degree during the government shutdown, we can at least take comfort in the knowledge that our politicians will still get paid. The 27th Amendment to the Constitution, ratified in 1992, holds that “No law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of representatives shall have intervened.” The amendment protects members from a pay cut. But given the body of work for most of our politicians, I think we all agree we should be talking about a pay raise – probably something politicians on both sides of the political divide can agree on. 
This includes preserving the rights of aggrieved individuals under the federal employment discrimination statutes by docketing new charges and federal sector appeals; continue to litigate lawsuits where a continuance has not been granted; examine new charges to determine whether prompt judicial action is necessary to protect life or property and, if appropriate, file such action to obtain preliminary relief; maintain the integrity and viability of EEOC’s information systems; maintain the security of our offices and property; and perform necessary administrative support to carry out those excepted functions. 

American Flag.jpg

Regardless of where you place blame for this shutdown (I’ll start with the politicians), the fact remains that both employers and employees will need to deal with the consequences of this government shutdown. Here is an overview of what they can initially expect:

  1. The U.S. e-Verify program will be shutdown. The e-Verify system allows employers to voluntarily check the legal immigration status of its employees. This program will not be available during the shutdown. Employers need to be aware that they may not take any adverse action against an employee because of an E-Verify interim case status, including while the employee’s case is in an extended interim case status due to a federal government shutdown.
  2. Enforcement of Wage and Hour laws. The Department of Labor’s (“DOL”) Wage and Hour Division is responsible for enforcing federal wage and hour laws. While these laws will remain in effect, the DOL will suspend operations during the government shutdown. Here is a complete contingency plan put out by the DOL.
  3. Unemployment benefits will continue. It has been reported by NPR that unemployment benefits will still be distributed. 
  4. Federal Courts will operate for approximately 10 days and then a “wait and see” approach. The federal courts will probably be open for the next ten days before shutting down according to a statement from the United States Court’s webpage. All proceedings and deadlines would remain as scheduled, and the electronic filing system for documents with courts would remain operational. In case you are worried, Supreme Court Justices, U.S. magistrate judges, and U.S. bankruptcy judges would continue to be paid in the absence of funding.
  5. National labor Relations Board will mostly shut down. The NLRB oversees union-organizing elections and under certain circumstances, resolves workplace disputes. The NLRB’s case handling will be suspended during the government shutdown. Outreach and public affairs will also cease. In fact, all but 11 of the agency’s 1,611 employees would be furloughed. Those 11 would be retained to protect life and property.
  6. The Equal Employment Opportunity Commission will mostly shut down. According to the EEOC’s website, “only activities involving the safety of human life or the protection of property will continue.” Perhaps more informative is the EEOC’s explanation of what it will not be doing during the shutdown; According to the website:
  • EEOC staff will not be available to answer questions from the public, or to respond to correspondence from the public.
  • While the EEOC will accept charges that must be filed in order to preserve the rights of a claimant during a shutdown, these charges will not be investigated.
  • To the extent that courts grant requests for extensions of time, the EEOC will not litigate such cases in the federal courts.
  • EEOC Mediations will be cancelled.
  • Federal sector hearings will be cancelled, and federal employees’ appeals of discrimination complaints will not be decided.
  • Outreach and education events will be cancelled.
  • No FOIA requests will be processed

Not All Doom and Gloom …. for Politicians  

While employers and employees will in large part be negatively impacted to some degree during the government shutdown, we can at least take comfort in the knowledge that our politicians will still get paid. The 27th Amendment to the Constitution, ratified in 1992, holds that “No law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of representatives shall have intervened.” The amendment protects members from a pay cut.

Given the body of work for most of our politicians, I think we all agree we should be talking about a pay raise – probably something politicians on both sides of the political divide can agree on.

Please contact Jason Shinn directly with any questions about how your employment law matters and services will be affected during the government shutdown or with any other federal or Michigan employment law questions.

Stone Balanced.jpg

In a previous post (Noncompete Agreements – A Hurdle to Employment and Innovation?), we discussed research that suggested noncompete agreements hinder innovation.

Expanding on why innovation is hindered, in any context in which a noncompete agreement is entered into e.g., an employment relationship, a founder whose start-up is being acquired, or an owner selling his or her business, such an agreement will universally restrict an individual from competing against the other party in a particular geographic area and market.

Geographical restrictions under a noncompete agreement, however, may become an even more significant impediment to innovation than originally contemplated by either party to the agreement for two reasons: Noncompete agreements are always broadly drafted to begin with and after entering into such agreements companies frequently expand business operations (think of acquisitions, joint ventures, or obtaining new customers) or enter into new business markets. 

For example, a typical noncompete agreement will provide some description of the business and geographical area in which the individual may not compete. Consider the following example:   

Employee shall not directly or indirectly engage in any geographical area where the Company is doing business or is making preparations to do business in any line of business that is similar to or competitive with that conducted by the Company … 

The problem for those creating innovation, i.e., employees, entrepreneurs, founders, etc., is that the day the individual signs the noncompete agreement, the geographical and business restrictions may be relatively limited. But as time passes, those restrictions may significantly expand as the company grows. 

Assume for example that the noncompete restriction only applies to Michigan where the company is located and doing business. But after entering into the noncompete restriction that Michigan company acquires a California company. Or it enters into a joint venture with a Chinese company. And what if a Texas based customer is landed? Or consider what happens if the company is in the business of “X” when the noncompete agreement is entered into but later expands into “Y” and “Z” business? Now the noncompete restrictions arguably expand to reflect these changed circumstances in terms of geography and lines of business.  

Expanding Business Under Noncompete Agreement Should be Shared Concern for Individuals and Companies  

A court addressing a dispute under a noncompete agreement will generally require that geographic limitations be tailored so that the scope of the agreement is no greater than is reasonably necessary to protect the legitimate business interests of the party seeking to enforce the noncompete agreement. Both companies and individuals need to be mindful of this issue, but for different reasons. 

For companies who use noncompete agreements to protect their competitive business interests, nailing down the geographical scope of a noncompete agreement is a critical element for making sure it will be enforced. This is because, Michigan courts have refused to enforce and otherwise modify an overly broad noncompete agreement that lacked a geographic scope and blocked a former employee from performing “any services” for clients. A Complete Home Care Agency, Inc v Gutierrez, (2004).

So from the company’s perspective, it is critical to balance the need for having a noncompete agreement that is specific enough to withstand the Monday-morning quarterbacking of a judge tasked with determining what is “reasonable” but broad enough to account for business growth from the time the noncompete agreement is signed.

Conversely, an immediate red-flag for any entrepreneur or employee entering into a noncompete agreement is what happens if/when the company expands its operations, lines of business, or customer base. The tradeoff of restricting your options for future employment or starting a business may make sense if you are taking a position with a company only doing business in Southeast Michigan in one area of business. But the same may not be true if those restrictions now expand outside of Michigan or the original market.

Conclusion

For more information about noncompete restrictions and agreements, as well as strategies for drafting and enforcing noncompete agreements, contact Jason M. Shinn. Since 2001, Mr. Shinn’s legal practice has focused on drafting noncompete agreements and litigating noncompete disputes involving business and individuals.

Noncompete Hurdle to Innovation.jpgNoncompete agreements and other restrictive covenants are customarily found in employment agreements and provided for in the sale of a business.

In the employment context, companies simply do not want a former employee to take its business and set up shop or to go work for a competitor. In connection with the sale of a business, the buyer does not want the seller competing with the buyer who has paid for the business.

In each situation, there are certainly legitimate business interests to be protected and justifications for enforcing a noncompete agreement. But outside these immediate stakeholders – employees and employers – does society benefit from having noncompete agreements enforced?

The answer to this question probably depends upon your perspective. And having the benefit of representing both companies and individuals in noncompete disputes, I can certainly appreciate the diverging views on both sides of the question. But there is scholarly evidence that outside of these immediate stakeholders, enforcement of noncompete agreements hinders innovation.

Specifically, a 2011 report (Non-Compete Covenants: Incentives to Innovate or Impediments to Growth (May 28, 2009)) by a management professors Olav Sorenson and Sampsa Samila found evidence that the enforcement of noncompete agreements impeded innovation. The authors noted: 

… [T]he enforcement of non-compete clauses significantly impedes entrepreneurship and regional growth. Based on a panel of metropolitan areas in the United States from 1993 to 2002, our results indicate that, relative to regions in states that enforce non-compete covenants, an increase in the local supply of venture capital in states that restrict them has significantly stronger positive effects on (i) the number of patents, (ii) the number of firm starts, and (iii) employment.

Perhaps in response to such findings, Michigan legislation has been introduced in the last couple of years that restricted the use of “afterthought” non-compete agreements, i.e., noncompete agreements entered into after an individual begins employment. However, that legislation stalled and there is no indication on the legislative horizon that it will be revived.   

Old Controversy, Same Contention 

Controversy and contention over the use and enforcement of noncompete agreements dates back to the early eighteenth century. Bishara, Norman and Martin, Kenneth J. and Thomas, Randall S., When Do CEOs Have Covenants Not to Compete in Their Employment Contracts? (October 18, 2012) (citing the 1711 case of Mitchel v. Reynolds, (1711) 24 Eng. Rep. 347 (Q.B.); I P. Wms. 181).

While under current Michigan law there is no controversy as to whether noncompete agreements can be enforced, the use and enforcement of noncompete agreements is no less contentious. And when it comes to contention, a multitude of issues can and often will be at issue in a dispute over a noncompete agreement. But enforcing or challenging the enforceability of a noncompete agreement under Michigan law invariably boils down to four issues: 

  1. Does the agreement protect a legitimate business interest?
  2. Is the duration reasonable?
  3. Is the geographical restriction reasonable?
  4. Is the type of employment or line of work restriction reasonable?

The challenge for both employers and individuals, however, is identifying and organizing the facts within the framework of these issues to build a defensible position. And similar to Mr. Shakespeare’s observation that “the devil can cite Scripture for his purpose,” individuals and employers will often find support for their respective positions within the noncompete agreement and the employment relationship when it comes to the enforceability of a noncompete agreement.  

For more information about Michigan noncompete law or to speak with a noncompete attorney, contact Jason M. Shinn. He has drafted and negotiated noncompete agreements on behalf of employers and individuals since 2001. Mr. Shinn has also negotiated pre-lawsuit resolutions to noncompete disputes and, when necessary litigated the enforceability of noncompete agreements in Ohio, Michigan, and federal courts.

Signing Contract.jpgOn August 6, 2013, the Sixth Circuit Court of Appeals (the federal jurisdiction that includes Michigan) ruled that provisions in employment agreements that shorten the statute of limitations period in which employees are permitted to file claims under the Fair Labor Standards Act (FLSA) and Equal Pay Act (EPA) are invalid.

Specifically, in Boaz v FedEx Customer Information Services, Inc. (PDF), the employee claimed that she was paid less for performing the same duties as a male employee and that FedEx failed to pay her overtime.

In response to the complaint, FedEx sought to rely on its employment agreement in defending the claims, which provided, “To the extent the law allows an employee to bring legal action against Federal Express Corporation, I agree to bring that complaint within the time prescribed by law or 6 months from the date of the event forming the basis of my lawsuit, whichever expires first.” Based on this provision, the district court dismissed the employee’s claims because the last alleged illegal activity occurred more than six months prior to the filing of the lawsuit.

On appeal, the Court reversed the decision to dismiss the employment lawsuit. It reasoned that U.S. Supreme Court decisions provide that employees may not prospectively or retrospectively waive their FLSA rights to minimum wages, overtime or liquidated damages. While the express terms of FedEx’s contract only limited the time period in which an employee could bring such claims, the Court made the jump that as applied to the employee’s claim, the six-month limitation period acted as a waiver of her FLSA rights and was therefore invalid. 

The Sixth Circuit also reinstated the EPA claim applying the same reasoning it used to reinstate the FLSA claim.  

The Take Away For Employers

Michigan employers should take the Boaz v FedEx decision as a sign to review their current employment agreements to assess their current contractual limitation periods and update them as may be required or to otherwise improve contractual protections that may be available to the employer.

But the bottom line is that Michigan employers cannot rely on employment agreements to shorten the statute of limitations provisions provided for in the FLSA and EPA. The FedEx decision, however, should not affect decisions enforcing limitation periods in employment agreements as applied to other claims.

For more information about federal and Michigan employment law compliance and employment agreements, contact Jason M. Shinn. Mr. Shinn is an employment attorney who has been addressing state and federal employment legal issues since 2001.

Grade A +Noncompete agreements have become a staple of the employment relationship. These agreements are intended to give employers the ability to protect their business against unreasonable and unfair competition. Such competition usually takes the form of a former employee directly competing against the employer either by starting a similar business or jumping ship for competitor.  

But what happens if that former employee is not likely to be a threat to your business either directly or indirectly? After all, if an individual didn’t make the grade at your company, what are the chances he or she will be successful in competing against your company?

Certainly this is a great simplification, but it does capture a frequent fact pattern: An individual employee who would have been given, at best, a C- on a generous curve, goes onto violate his or her noncompete agreement. But does this now mean you must expend A+ resources in the form of management’s time and legal fees to enforce a noncompete agreement and guard against unfair competition?

The Dangers and Risks of Selective Noncompete Enforcement

Not necessarily, but it is critical for a company’s management to commit to expending some degree of resources on the legal enforcement of its noncompete agreements.

In support of this position, consider the following points: 

  1. Noncompete lawsuits often include other issues that damage a company’s bottom line, including misappropriation of trade secret information, unfair competition claims, or claims under the Computer Fraud and Abuse Act. This sort of theft can cripple the continued profitability of a company either by losing its competitive edge or giving a competitor a significant shortcut to catching up to your business. Accordingly, ignoring such threats is simply not an option in an ultra-competitive market place.  
  2. Selective enforcement of noncompete agreements can create multiple downstream issues. For example, I defended against a noncompete and trade secret misappropriation lawsuit filed against a former executive and that executive’s new employer. One of the arguments we were able to make to defeat the plaintiff company’s request for a preliminary injunction and related relief was by showing that on multiple occasions the plaintiff had failed to seek enforcement of the same noncompete agreement and protection of trade secrets.      

Cost-Containment Strategies for Enforcing a Noncompete Agreement 

So with some foundation laid for enforcing a noncompete agreement across the board, we can now get back to the original issue, that being how to balance the expenditure of A+ resources to enforce a noncompete agreement against a former C- employee.   

One strategy that my law firm will offer to business clients are flat-fee packages that management can choose from tailored to common fact patterns. These packages offer varying scopes of services to fit most noncompete enforcement situations while providing cost-certainty to the business. 

A second strategy is to make sure your company has a well-drafted employee exit procedure in place. Such a procedure, if done properly, can preempt would-be noncompete enforcement issues or streamline the investigation of supporting facts relevant to enforcing your company’s noncompete agreement if necessary. See Employee Exit Interviews – What’s On Your Checklist? In both instances, however, substantial cost-savings can be realized through eliminating or reducing the time and effort for investigating the facts to support a potential claim for a breach of a noncompete agreement and related issues that usually follow, such as trade secret misappropriation. 

Conclusion

At the end of the day, noncompete enforcement is like any other business decision in that the expenditure of resources, e.g., time and money, must be tailored to the situation. And not every noncompete situation is going to require a “scorched earth” litigation strategy. But for most businesses taking the long view, it will require some attention and strategy. 

For more information about noncompete enforcement issues in Michigan or strategies for cost-effectively enforcing a noncompete agreement, contact Jason Shinn. Mr. Shinn has consulted with business and individuals about Michigan noncompete law and issues since 2001. He has also litigated noncompete disputes, including obtaining and defending against preliminary injunctions involving the breach of noncompete agreements and trade secret misappropriation claims.

Business Devil.jpgIt’s gettin’ so a businessman can’t expect no return from a fixed fight. Now, if you can’t trust a fix, what can you trust? For a good return, you gotta go bettin’ on chance – and then you’re back with anarchy, right back in the jungle.

Johnny Caspar, played by Jon Polito, Miller’s Crossing

The above quote is from Miller’s Crossing (a phenomenal movie) and is delivered by Jon Polito’s character Johnny Caspar, a ruthless gangster, who is offering his take on the ethics that should be expected when it comes to Mr. Caspar fixing fights.

As Mr. Caspar’s dialogue shows, ethics can be a matter of flexibility. In the context of the employment relationship, most employers and employees probably would agree that the employment relationship is flexibile enough to tolerate a certain amount of puffery, resume exagerration, and even white-lies.

But some companies offer services for employees who are willing to take “ethical flexibility” to levels reserved only for contortionist. 

Take for example this description from Paladin Deception Services: 

Paladin Deception Services is here to assist you in obtaining the fictitious reference, the little white lie, or the alibi that you need. Our agency can provide you with either male or female testimonials​ over the phone in the local area code that you require … Get the verification that you need!

Paladin’s website further explains that it provides a “case manager who will walk you through the entire process from start to finish, developing an operational plan of disinformation best suited to your needs.” 

Combating Disinformation with Employment Background Checks  

Even without employment disinformation services like the above, employers routinely conduct some degree of due diligence when it comes to job applicants and prospective employees. The scope of your company’s background checks will depend upon its particular goals and circumstances. Ideally, that scope should be determined by the company’s management, its human resource professionals, and its employment attorney. At a minumum, these stakeholders should include the following areas in that determination when it comes to implementing an employee background check procedure:    

  1. Credit Scores. Job applicants need to be given proper notice and give their written consent if your company intends to review their credit score. Reviewing an applicant’s credit rating brings into play the Fair Credit Reporting Act (FCRA), a federal statute that permits employers to request a credit report for employment purposes.
  2. Pre-Adverse Notice and Credit Scores. Your company may need to provide a “pre-adverse” disclosure if it uses a credit report to make certain adverse employment decisions such as hiring, firing, or promoting. Under the FCRA, an employer must give the individual what is often called a pre–adverse action disclosure that includes a copy of the individual’s consumer report and a specific document titled “A Summary of Your Rights Under the Fair Credit Reporting Act.” And after an employer has taken an adverse action, the individual must be given additional information, including (i) the name, address, and phone number of the consumer reporting agency that supplied the report; (ii) a statement that the agency that supplied the report did not make the decision to take the adverse action and cannot give specific reasons for it; and (iii) a notice of the individual’s right to dispute the accuracy or completeness of any information the agency furnished; and (iv) a written or electronic disclosure of the numerical credit score used in taking any adverse action. 
  3. Criminal Background Checks. If criminal background checks are used to screen applicants or employees, employers should obtain the individual’s written authorization and a signed release.
  4. Criminal Background Checks and Consistency. Conducting criminal background checks should be used in a consistent manner. Inconsistent investigation may result in an inference of discrimination against a certain racial or ethnic group. It is also important to know what can and cannot be asked when it comes to criminal background checks. For instance, under Michigan’s main employment statute, the Elliott-Larsen Civil Rights Act (ELCRA), an employer cannot request arrest records, except that it may request records of pending felony charges and past felony arrests when a conviction did not occur.
  5. Driving Records. If your company needs to review an applicant’s driving record, complete a Michigan Department of State Commercial Record Request and submit it to the Michigan Department of State Record Lookup Unit. Under certain circumstances, this request does not require the applicant’s consent or authorization, but you should dicuss this topic with an employment attorney.

Conclusion

For more information about preemployment background checks and compliance with federal or Michigan employment laws, contact Jason M. Shinn. He is an experienced Michigan employment attorney who works with businesses and individuals to address employment law issues, and, if necessary, litigate employment law disputes in Michigan and federal courts.