Have you been disposing of old personnel or job applicant files by tossing them into the trash can?  Effective June 1, 2005, such a practice could run afoul of a new regulation promulgated by the Federal Trade Commission.  The regulation implements a provision of the Fair and Accurate Credit Transactions Act (“FACTA”) that requires “any person that maintains or otherwise possesses consumer information, or any compilation of consumer information, derived from consumer reports for a business purpose [to] properly dispose of any such information or compilation.”  Under the new regulation, businesses that dispose of records that contain certain types of information about their employees and applicants must take reasonable measures to protect against unauthorized access to that information.

Who must comply with the new regulation?
The new regulation applies to any business, regardless of size, that maintains or possesses consumer information.

What is consumer information?
Consumer information means any record about an individual, whether in paper, electronic or other form, that is a consumer report or is derived from a consumer report.  A consumer report means any communication by a consumer reporting agency that bears on an individual’s character, general reputation, personal characteristics, mode of living, or credit worthiness that is or may be used to establish an individual’s eligibility for employment, insurance, or credit.

In the employment context, the classic example of a consumer report is a background check on a current employee or a job applicant that is prepared by a third party.  Both the background check itself and any record that is derived from the background check are covered by the regulation.  Depending on your business, there may be other types of consumer reports or information that you maintain or possess which would also be covered.

Note that consumer information only includes information that identifies a particular individual; it does not include information that does not identify a particular individual, such as aggregate information or blind data.

What does the new regulation require?
The new regulation requires anybody who maintains or possesses consumer information to properly dispose of such information by taking “reasonable measures” to protect against unauthorized access to or use of the information in connection with its disposal.

What measures are considered reasonable?
Although the new regulation does not actually define “reasonable measures,” it provides several examples, including the following:

•    Implementing and monitoring compliance with procedures that require the burning, pulverizing, or shredding of papers containing consumer information so the information cannot practicably be read or reconstructed.

•    Implementing and monitoring compliance with policies and procedures that require the destruction or erasure of electronic media containing consumer information so that the information cannot practicably be read or reconstructed.

•    Contracting with a third party engaged in the business of record destruction to dispose of consumer information in a manner consistent with the regulation.  Employers who contract with a third party to dispose of their consumer information must take reasonable steps to ensure that the third party complies with the new regulation.  Such steps could include reviewing an independent audit of the disposal company’s compliance with the regulation, obtaining information about the disposal company from several references or reliable sources, requiring that the disposal company be certified by a recognized trade association or similar third party, reviewing and evaluating the disposal company’s information securities policies and procedures, or taking other appropriate measures to determine the competency and integrity of the potential disposal company.

What steps should you take to comply with the new regulation?
•    If you already have document retention and disposal policies in place, carefully review those policies to ensure they comply with the new regulation.

•    If you don’t already have document retention and disposal policies, establish and implement ones that comply with the new regulation.

•    Regularly train your employees on proper disposal procedures.

•    Monitor compliance regularly to ensure your policies are being followed.

•    If you contract with an outside company to handle your document disposal, take reasonable steps to ensure that the outside company is complying with the regulation.

Last December, the California Supreme Court confirmed that California employers have a powerful defense against harassment claims.  Specifically, the Court declared that if an employer has in place appropriate policies and procedures for preventing and correcting sexual harassment and if an employee unreasonably fails to use the procedures provided, the employee may not recover damages which could have been avoided if the employee would have used the company’s policies and procedures.  Known as the “avoidable consequences” doctrine, this defense has long been available in California, but has never specifically been applied to harassment cases.

To avail itself of the “avoidable consequences” defense, an employer first must have in place appropriate policies and procedures for preventing and correcting sexual harassment.  As we have advised numerous times in this newsletter, an employer must have in place a policy prohibiting sexual harassment and discrimination (as well as harassment and discrimination on any other protected basis) and must disseminate that policy to its employees.  Ideally, the employer should obtain written confirmation from the employee that the employee has received and read the policy.

Just as important as having and disseminating an effective policy is responding to complaints made pursuant to the policy.  While most employers have an effective sexual harassment policy in place, many fail to train supervisors regarding prohibited conduct and effective responsiveness to employee complaints.  Failure to provide this training renders the policy ineffective.  In order to meet the requirements of the “avoidable consequences” defense, the employer should train all supervisors at least once a year on the company’s anti-harassment policies and, in particular, on the necessity of reporting all instances of improper conduct to Human Resources.  Many supervisors believe that it is their responsibility to deal with inappropriate conduct themselves.  Unfortunately, most supervisors fail to respond appropriately to complaints when they are made and fail to report the actions taken to Human Resources, leaving the employer open to claims that complaints were not taken seriously.  Supervisors must be made aware that it is their responsibility to report all harassing conduct, whether that conduct is personally witnessed by them or reported to them by another source, to Human Resources.

Once supervisors are trained to appropriately report instances of potential workplace harassment, the ball is then in the court of the Human Resources Department to make sure that the employer’s defense is airtight.  This requires training of the Human Resources professionals on their obligations regarding intake and investigation of complaints.  Ideally, the Human Resources Department should have in place a policy for conducting defensible investigations into all complaints of harassment.  The policy should instruct Human Resources to proceed as follows after receiving a sexual harassment complaint:

• Document all complaints in writing upon receipt.
• Create a written plan for the investigation, including the laws or policies involved, the identification of documents to be reviewed and witnesses to be interviewed, and a timeline for completion of the investigation.
• Strictly follow the written plan for conducting the investigation and, if the written plan is deviated from, document the necessity for the deviation.
• Apprise the complainant, the alleged harasser and all witnesses who are interviewed of the confidentiality of the investigation and remind all parties of the company’s non-retaliation policy.  Document all interviews in writing.

At the conclusion of the investigation, a written report should be produced regarding the conclusions reached by the Human Resources Department.  The report should contain the following information:

• The nature of the complaint.
• The investigatory steps followed.
• The conclusions of the investigation, which may include any of the following:
  • The alleged harassment occurred.
  • The alleged harassment cannot be substantiated.
  • Insufficient information was gathered to enable the investigator to conclude that the harassment either did or did not occur.

Once a conclusion has been reached, remedial or disciplinary action must be taken if it has been determined that the alleged harassment occurred.  The nature of the remedial or disciplinary action will vary depending upon the severity of the misconduct.  However, the disciplinary action must be designed to prevent future instances of misconduct and correct the misconduct that occurred.  Types of remedial and/or disciplinary actions that can be considered include, but are not limited to (1) sexual harassment training; (2) suspension with or without pay; (3) demotion; and (4) termination.

Both the complainant and the alleged harasser must be made aware of the conclusion of the investigation and, if harassment was found, must be advised that remedial or disciplinary action will be taken, although the nature of the remedial or disciplinary action need not be disclosed to the complainant.

Finally, both the accuser and the harasser should be advised that retaliation will not be tolerated and that, if any future instances of harassment or retaliation occur, they should be promptly reported.  It is important to note that the employer may still have a defense even if the conclusion reached by the employer was incorrect, so long as the conclusion was made in good faith.  Certainly, it is unlikely that a jury would punish an employer with punitive damages if the employer acted promptly to investigate a complaint and reached a reasonable conclusion, even if it turned out that that conclusion was wrong.

Clients often ask us what types of documents should, or should not, be kept in employees’ personnel files, and who should be given access to such files.  Below are some general guidelines on these issues.

What types of records should be kept in employee personnel files?
The following types of records should be maintained by the employer in employee personnel files:  applications; offer letters; records of salary changes; forms signed by the employee to secure or change benefits; attendance records; performance evaluations; forms signed by the employee acknowledging his or her understanding of, and agreement to abide by, the employer’s policies; employee awards and commendations; records regarding disciplinary actions; records of employer property issued to the employee; training records, including injury and illness prevention program training records; verification of references; verification of employment provided to subsequent prospective employers; transfer requests; records of leaves of absence; wage attachments/garnishment notices; notice of union membership and dues check-off; and records of termination and reasons therefor.

What kinds of records should not be kept in employee personnel files?
Not all employee records should be kept in personnel files.  Certain records should be segregated because of privacy and confidentiality concerns, and to prevent claims that others’ access to certain information exposed an employee to retaliation.  The following kinds of records should be kept separate from an employee’s personnel file:  verification of the right to work in the United States (Form I-9); EEOC charges and related documents; DFEH charges and related documents; employee grievances and complaints and related documents; workers’ compensation claims and related documents; medical information (discussed in more detail below); any information that may be defamatory; and any information that is not job-related.

What about payroll records? 
Payroll records (i.e., records of hours worked, wages paid and date of payment, amounts earned as straight-time pay and overtime, and deductions) are generally kept separate from personnel files.

What about a supervisor’s notes regarding an employee’s performance or disciplinary issues?
A supervisor’s notes regarding an employee’s performance or disciplinary issues should generally not be kept in an employee’s personnel file.  Instead, a supervisor’s notes regarding these issues should be kept in a separate file maintained by the supervisor.  However, if the supervisor actually gives the employee a performance evaluation, counseling memo, disciplinary memo, or other similar document, these documents should be kept in the employee’s personnel file.

What about records that contain medical information about an employee?
Medical information about an employee is considered extremely confidential, and the Confidentiality of Medical Records Act significantly restricts an employer’s use and disclosure of such information.  Medical information includes any individually identifiable information in possession of or derived from a health care provider or health care service plan regarding a patient’s medical history, mental or physical condition, or treatment.  Any employer who receives medical information regarding an employee must establish appropriate procedures to ensure its confidentiality and protection from unauthorized use and disclosure.  These procedures may include, but are not limited to, instructions regarding confidentiality to employees and agents handling files containing medical information and security systems restricting access to files containing medical information.  Employers should restrict access to employee medical information to supervisors, managers, and others with clear business reasons for the information.  Employers are also advised to keep employee medical information separate from other personnel records, under lock and key if possible.  If the information is stored electronically, special access codes should be required.  A complete discussion of an employer’s obligations under the Confidentiality of Medical Records Act is beyond the scope of this article; please contact us for additional information.

Who should have access to employee personnel files?
Because of concerns about employee privacy and confidentiality, access to employee personnel files should be restricted to those persons with clear business reasons for the information. Employee personnel files should also be stored in a secure place.

Do employees have access to their own personnel files?
Yes; employees (and, in some instances, former employees) have the right to inspect all personnel records that relate to their performance or to any grievance that concerns them.  This inspection right extends to records that contain information on the employee’s qualifications for employment, promotion, additional compensation, termination or other disciplinary action.  It does not, however, extend to the following:  (1) records relating to the investigation of a possible criminal offense; (2) letters of reference; or (3) ratings, reports, or records that were obtained prior to the employee’s employment, prepared by identifiable examination committee members, or obtained in connection with a promotional examination.

In several prior issues of California Veterinarian, we provided information regarding an assortment of legal issues, running the gamut from a veterinarian’s duty of care with respect to dangerous animals to responding to a subpoena to insurance-related matters.  In this issue, we switch gears in order to analyze another issue of interest to California veterinarians—the use of employment agreements between veterinarian employers and their employees (including veterinarian employees).

While veterinary practitioners are not legally required to maintain formal employment agreements with their employees, such agreements can be a useful way to clearly specify pertinent terms of employment and avoid disputes regarding such terms.  As we will detail, employment agreements may include terms relating to such items as terminability, compensation, dispute resolution processes, and many other items.  Employment agreements may contain as little or as much as the parties wish.  Therefore, if an employment agreement is used, it is not necessary that the agreement contain language relating to every single term or condition of employment.  In this regard, employers who are generally comfortable operating without a detailed employment agreement, but want to reduce certain specific items to writing, may do so.  The following is a list of several topics that an employment agreement may address.

Status of Employment
Unless otherwise specified, employment in California is presumed to be “at-will”; that is, either party may terminate the employment relationship at any time, provided that the termination is not in violation of law or public policy (e.g., an employee may not be terminated simply because of the employee’s race).  Where the parties seek to transform the normal at-will relationship into one under which an employee may only be terminated “for cause,” it is important to have a written document memorializing the particular items that may justify termination.  If the employer also has in place an incremental discipline system with steps such as a warning, followed by probation, followed by termination, it is very important to clearly describe this system in writing so that there will be no confusion over whether the designated steps were properly followed.

By the same token, even if the parties wish to maintain the at-will presumption normally attendant to employment, they may still want to reduce this arrangement to writing in order to minimize the chances of there later arising a dispute in which it is contended that the employment relationship was one that was terminable only for cause.  In this vein, certain dealings between the parties during the employment relationship can sometimes serve to alter “at-will” employment to “for cause” employment.  One such example is where the employer, after hiring the employee on an “at-will” basis, is understood to tell the employee that the latter would not be terminated unless he/she engaged in some form of misconduct.  In such a case, while the original understanding may have been that employment was “at-will,” this classification is not etched in stone if the subsequent course of dealing shows an intention to change the classification.

Of course, a written employment agreement memorializing at-will employment status does not act as an absolute insurance policy against future disputes.  However, such an agreement definitely does make it less likely that a dispute will arise, and the burden of establishing a transformation of employment to “for cause” status is more significantly more difficult to meet in the face of a written agreement.  In fact, California courts have held that an implied agreement of “for cause” employment may not exist where there is an express contract to the contrary.  For this reason, an employment agreement setting forth the nature of a particular employee’s employment can be useful in forestalling future disputes about the circumstances under which the employee can be terminated.

Compensation
Although not legally required, a written employment agreement may also be useful for purposes of setting forth an employee’s compensation.  This may be the case even when an employee’s actual compensation may vary from period to period (i.e., when the employee is paid on a commission or piece rate).  For example, it is important to compensate your exempt employees at a rate of no less than two times the state minimum wage for full-time employment.  The current minimum wage in California is $6.75 per hour.  Thus, in order to qualify for exempt status under California wage and hour law, an employee must earn the equivalent of $13.50 per hour based on a 40-hour work week, or $28,080.00 per year ($2,340.00 per month and $540.00 per week).  If the parties wish to ensure that a particular employee’s compensation meets the exemption criteria, it would be best to include a provision in a written employment agreement indicating that the employee will receive a monthly salary equivalent to no less than $540.00 per week (the California Division of Labor Standards Enforcement indicates this figure is derived by multiplying the required monthly salary—at least $2,340.00—by twelve, then dividing by 52).  In this manner, even if this minimum standard never actually comes into play as a factual matter, the parties will have clear documentation indicating that the employee will always be sufficiently compensated to meet the requisite standard.  This, in turn, will ensure that, at least insofar as compensation is concerned, the employee will meet the requirements for exemption.  In order to take into account future increases in the minimum salary required for exemption, you may also put in a “floating” standard in the agreement which indicates that, should the state minimum wage increase, that the employee will always be compensated at a monthly rate equivalent to at least two times the state minimum wage for full time employment (computed on a weekly basis).

Obviously, an employment agreement also may contain provisions regarding other aspects of salary, including time of payment and the like, as well as language regarding additional benefits attendant to the employment.

Arbitration Provisions
Although a thorough discussion of arbitration provisions in employment agreements is well beyond the scope of this article, some employers prefer to include arbitration clauses or other dispute resolution processes in employment agreements. There are a myriad of advantages and disadvantages inherent in such processes, and the propriety of including an arbitration or similar provision in an employment agreement depends on the unique circumstances of each employment relationship.  If you are considering including such provisions in an employment agreement, you should contact a qualified attorney to explain the benefits and detriments of these alternative dispute resolution mechanisms.

Prohibitions on Other Employment
In the veterinary and other professional contexts, it is often understood between the parties that the employee’s employment is to be exclusive.  However, other than legal constraints on competition during employment, there is nothing that formally prohibits an employee from performing work for another business.  If the parties wish to make clear that the employment is exclusive even as against non-competing ventures, they may include a provision in an employment agreement indicating as much.

Parties who wish to enter into an agreement prohibiting or constraining post-termination employment activities, even activities of an employee that are in ostensible competition with the former employer, must be very careful, as such non-competition provisions are usually unenforceable in California.

Conclusion
No matter what provisions parties decide to include in an employment agreement, such provisions should be carefully reviewed before the parties execute the agreement so that both parties are cognizant of their respective rights and obligations.  An employment agreement means little if the parties do not know what is included therein, or if the agreement is ambiguous or confusing in its terms.  The whole reason for entering into an employment agreement is to obtain greater certainty than would attach in the absence of such an agreement.  Pay attention to the terms of the agreement, and make sure you understand what they mean.  If you are uncomfortable with the terms or effect of an agreement, or have other questions or concerns that are not satisfactorily being answered, consider consulting a qualified attorney.

Both the federal Americans with Disabilities Act (“ADA”) and California’s Fair Employment and Housing Act (“FEHA”) affirmatively require employers to make reasonable accommodation for the known physical or mental disability of an applicant or employee, unless the employer can show that doing so would cause an undue hardship.  Reasonable accommodation can include making existing facilities readily accessible to, and usable by, individuals with disabilities.  Reasonable accommodation can also include:  job restructuring; reassignment to a vacant position; part-time or modified work schedules; acquisition or modification of equipment or devices; adjustment or modification of examinations, training materials or policies; the provision of qualified readers or interpreters; and other similar accommodations for individuals with disabilities.  This article discusses the scope of an employer’s obligation to reasonably accommodate an employee’s disability by reassignment to a vacant position.
WHEN SHOULD AN EMPLOYER CONSIDER REASSIGNMENT?

An employer should always consider reassignment when it is not possible to accommodate an employee’s disability in her current job, or when such an accommodation would cause the employer undue hardship.  To take an example from a recent California case, if an operating room nurse develops an allergy to a solution used to sterilize surgical instruments, her employer might not be able to reasonably accommodate her in her current job without undue hardship.  In this circumstance, the employer should consider reassigning the nurse to a vacant position that does not require her to come into contact with the sterilizing solution.
THE EMPLOYEE MUST BE QUALIFIED FOR THE NEW POSITION.

An employer does not have to reassign a disabled employee unless the employee is qualified for the new position.  An employee is considered qualified if he is able to perform the essential functions of the new position with or without accommodation.  In other words, an employer may, in effect, have to accommodate the disabled employee twice — first by reassigning the employee to a vacant position, and then again by making accommodations that will allow the employee to perform the essential functions of that position.

THE EMPLOYER NEED NOT CREATE A NEW POSITION.

An employer does not have to reassign an employee if no vacant position exists for which the employee is qualified.  This means that an employer does not have to create a new position in order to accommodate a disabled employee, or bump another employee out of a position in order to create a vacancy.

THE EMPLOYER MUST TAKE AN ACTIVE ROLE IN LOCATING A VACANT POSITION FOR WHICH THE DISABLED EMPLOYEE IS QUALIFIED.

Several courts have recently held that it is not enough for an employer to merely allow an employee to apply for other jobs within the company.  As one court has explained, all employees have the right to apply for other jobs within a company; reminding an employee of a right she already has is not a reasonable accommodation.  And in the words of another court:  “[T]he word ‘reassign’ must mean more than allowing an employee to apply for a job on the same basis as anyone else.  An employee who on his own initiative applies for and obtains a job elsewhere in the enterprise would not be described as having been ‘reassigned’; the core word ‘assign’ implies some active effort on the part of the employer.”  These cases suggest that it is not enough for an employer merely to give a disabled employee a listing of all available jobs or to tell an employee to keep checking the job board.  Instead, the employer should take an active role in attempting to identify and locate an alternative position for which the employee is qualified.

DISABLED EMPLOYEES MIGHT BE ENTITLED TO PREFERENTIAL CONSIDERATION FOR VACANT POSITIONS.

What if a disabled employee asks to be reassigned to a vacant position, but there is another applicant who is more qualified?  Several courts have recently held that, if the disabled employee is minimally qualified for the position, she must be hired.  In the words of one court, “when reassignment of an existing employee is the issue, the disabled employee is entitled to preferential consideration.”  This means that an employer who decides not to reassign a disabled employee to a vacant position must be prepared to demonstrate that the employee was not qualified (i.e., that the employee could not perform the essential functions of that position, with or without accommodation).

What about disabled job applicants?  Do employers have to give preferential treatment to disabled job applicants as well as disabled employees?  Probably not.  Both the ADA and FEHA specifically provide that reasonable accommodation can include reassignment to a vacant position, and, as several courts have noted, only existing employees can be reassigned.  Moreover, at least one federal court has noted that the legislative history of ADA warns against preferences for disabled applicants, but contains no similar warning for disabled employees.

HOW DO SENIORITY SYSTEMS AFFECT AN EMPLOYER’S OBLIGATION TO CONSIDER REASSIGNMENT?

The existence of a seniority system that was negotiated under a collective bargaining agreement changes the rule that a qualified disabled employee must be given preferential consideration for vacant positions.  An employer is only required to reasonably accommodate its disabled employees, and, as explained by one court, “[A]n accommodation that is contrary to the seniority rights of other employees set forth in a collective bargaining agreement would be unreasonable per se.”  However, if the seniority system is not collectively bargained, but is instead merely imposed by the employer, the rule changes again.  In such a case, an accommodation that is contrary to the seniority rights of other employees is not per se unreasonable.  Instead, the existence of the seniority system is only one factor for the court to consider in analyzing whether the accommodation (i.e., reassignment in derogation of the seniority rights of other employees) would cause the employer undue hardship.

Two recent California cases have sounded the death knell in California for any attempt to use a non-compete clause in an employment or stock option agreement.  In the first, D’Sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, an employee sued his employer for wrongful termination, alleging that the employer had violated California public policy when it fired him after he refused to sign an agreement that contained a covenant not to compete.  The employer attempted to have the case dismissed arguing that, because the employee was an at-will employee, he could be fired for any reason that was not illegal.  While the court agreed with that general proposition, it found that any attempt to condition employment upon an illegal covenant not to compete violated California’s public policy and that terminating the plaintiff for refusing to sign an illegal provision constituted a wrongful termination in violation of public policy.

In coming to its decision, the court focused on a particular statute, which states “[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  (Business & Professions Code section 16600.)  The court then reviewed the non-compete agreement proposed by the employer, which stated “[E]mployee will not render services, directly or indirectly, for a period of one year after separation of employment with Playhut, Inc. to any person or entity in connection with any competing product. . . .”  The court found that this provision violated section 16600 and was void and unenforceable.  Firing an employee for refusing to agree to such an illegal provision, the court held, violated public policy and exposed the employer to liability.

The employer next attempted to argue that the covenant not to compete should be construed narrowly as a restraint only against the disclosure of trade secrets and other confidential information.  While the court acknowledged that a contract provision will not be viewed as a violation of the Business & Professions Code if it is necessary to protect the employer’s trade secrets, the provision at issue in the case was not so narrowly drafted that a typical lay-person reading it would interpret it in such a manner.  Thus, the court concluded that if it were to agree to narrowly construe the provision, it would undermine the protection given to employees since “many, if not most, employees would likely interpret the provision as a covenant not to compete, and might act according to their interpretation rather than consult an attorney to find out if their interpretation is correct.”  The court prophesied a situation where employers would attempt to use illegal covenants not to compete so that, upon leaving employment, uninformed employees would forego legitimate employment rather than assume the risk of expensive and time consuming litigation to challenge the illegal provision.

While many employers are aware that covenants not to compete are illegal and unenforceable in California in some circumstances, a large number erroneously believe that covenants not to compete may be used for high-level management personnel or in conjunction with the grant of stock or stock options.  In Hills Medical Corporation v. Wycoff (2001) 86 Cal.App.4th 895, another California Court of Appeal rejected this notion entirely.  Hills involved a medical corporation that sued one of its former employees and shareholders to prohibit him from competing against it after he severed his relationship with the corporation.  The employee, a doctor, had signed a stock redemption agreement in which he had agreed that, in the event that his employment relationship with the medical corporation was terminated, he was required to sell his stock back to the corporation and not practice medicine within a 7½ mile radius from any medical corporation facility for three years.

After the doctor tendered his resignation, he indicated that he intended to practice medicine within 7½ miles of a medical corporation facility.  He sold his stock back to the corporation for $217,000, and the corporation thereafter sued him to enforce the covenant not to compete based upon an exception to Business & Professions Code section 16600, which provides that any shareholder of a corporation selling or otherwise disposing of all his/her shares in a corporation may agree with the buyer to refrain from carrying on a similar business within a specified area.  (Business & Professions Code section 16601.)

Although section 16601 appeared, by its wording, to support the medical corporation’s position, the court decided to look beyond the wording of the statute and impose a further requirement that a contract for the sale of shares of stock not circumvent California’s deeply rooted public policy favoring open competition.  When a seller’s shares constitute only a fraction of the total corporate shares, the court determined that the sale of the shares must involve so substantial an interest in the corporation that the transfer of the seller’s shares amounts to a transfer of the goodwill of the corporation.  The court then went on to find that, even through the doctor had been paid a substantial amount of money for his shares, the repurchase price did not include any payment for goodwill and that, because the doctor owned only seven percent of the shares, the transfer did not involve a substantial interest such that it could be said that the transfer of goodwill was considered in the agreement.

What This Means For You
Although it is extremely difficult to bind an employee to a non-compete agreement in California (unless the employee sold you the entire business), you can still protect your company’s trade secrets and other confidential information by requiring non-solicitation and confidentiality agreements of your employees.  These provisions should be narrowly drafted to ensure that they are not construed as illegal non-compete provisions.  Moreover, your employees are prohibited by California law from stealing your trade secrets, such as customer lists, even without a confidentiality or non-solicitation agreement.

Last year, the California Supreme Court opened the floodgates to litigation by employees who claim that they have been misclassified as exempt workers when, in fact, they are non-exempt and entitled to overtime pay.  In Cortez v. Purolator Air Filtration Products Company (2000) 23 Cal.4th 163, the California Supreme Court declared that an employee who believes he has been improperly classified as exempt can bring an action on behalf of both himself and all other similarly situated employees under California’s Unfair Business Practices Act.  If successful, the employee and all other similarly situated employees will be entitled to overtime pay for the four-year period prior to the filing of the complaint, as well as to penalties and attorneys’ fees.

Since the Supreme Court’s decision, hundreds of lawsuits have been filed in California state courts in which current and former employees of California employers claim that they were improperly classified and, consequently, are entitled to overtime pay.  While most of those cases have settled before trial, one case against Farmers Insurance Exchange went to trial last July and resulted in an award to the former employees of $90 million, plus interest and attorneys’ fees.  Given the potential dollar amounts involved in these cases, it is anticipated that the use of these suits in California will continue to increase, subjecting you to potentially staggering liability if you are out of compliance with federal or state wage and hour laws.

Federal v. State Wage and Hour Laws
The Fair Labor Standards Act (“FLSA”) provides the framework for determining exemptions from overtime requirements under federal law.  To qualify as an exempt employee under the FLSA, an employee must meet a two-part test.  First, he must be paid on a salary basis.  Second, he must meet the duties test for executive, administrative, or professional employees as set forth in the FLSA.

For California employers, however, the FLSA does not generally provide a definitive answer as to whether an employee is exempt or non-exempt.  California state law imposes different requirements, which are generally more stringent than the federal standard.  Where state and federal law conflict, the employee is entitled to the standard that provides greater protection (or the standard that imposes a higher threshold for determining exempt status – generally California law).  Because the California test will generally be the test that employers should use to determine if their employees are exempt or non-exempt, the remainder of this article focuses on California’s wage and hour laws with respect to exemptions.

California Exemptions
Like federal law, California provides three basic types of exemptions:  executive, administrative and professional.  To apply for any of these exemptions, the employee in question must receive compensation of at least $2,166.66 per month or $26,000 per year.  In addition, the employee must be paid on a salary basis, meaning that the pay received by the employee must be a fixed sum from week to week and may not be subject to reduction because of variations in the quality or quantity of work performed.  An employee will not be considered to be paid on a “salary basis” if deductions are made for absences from work caused by the employer or the operating requirements of the business.  In addition, an exempt employee’s salary may not be reduced due to time missed for sickness or accident.  An employer may reduce an exempt employee’s salary because of the employee’s absences for personal reasons, so long as deductions are made in increments of full work days.

If an employee meets both of these requirements, she may be considered for exempt status using one of the following tests:

Executive Exemption
An executive employee is one who meets the salary test described above and, in addition, meets the following requirements:

•    The employee’s duties and responsibilities involve the management of the enterprise in which he is employed or of a customarily recognized department or subdivision of that enterprise;

•    The employee customarily and regularly directs the work of two or more other employees;

•    The employee has the authority to hire or fire other employees, or his suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of employees is given particular weight;

•    The employee customarily exercises discretionary powers; and

•    The employee is primarily engaged in the duties described above.
“Primarily engaged” means that more than one-half of the employee’s work time is spent performing the duties described above.

Administrative Exemption
An administrative employee is one who meets the salary test described above and, in addition, meets the follows requirements:
•    The employee’s duties and responsibilities involve either (1) the performance of office or non-manual work directly related to management policies or general business operations of the employer or the employer’s customers, or (2) the performance of functions in the administration of a school system or educational establishment or institution, or of a department or subdivision of those, in work directly related to the academic instruction or training carried on in the system, establishment or institution;

•    The employee customarily and regularly exercises discretion and independent judgment;

•    The employee (1) regularly and directly assists a proprietor or employee employed in a bona fide executive or administrative capacity, (2) performs specialized or technical work requiring special training, experience or knowledge under only general supervision, or (3) executes special assignments and tasks under only general supervision; and

•    The employee is primarily engaged in the above duties.

Professional Exemption

A professional employee is one who meets the salary test described above and, in addition, meets the following requirements:

•    The employee is licensed or certified by the State of California and is primarily engaged in the practice of one of the following recognized professions:  law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting; or

•    The employee is primarily engaged in an occupation commonly recognized as a learned or artistic profession; and

•    The employee customarily and regularly exercises discretion and independent judgment in the performance of her duties.
It is important to note that there are exceptions to these tests, including exceptions pertaining to pharmacists, registered nurses, and computer programmers.  It is also important to note that an employee’s job title, job description and employment contract are not determinative as to whether an employee is exempt.  Rather, a court will look at the actual job duties performed by the employee to make that determination.  In addition, it is of no consequence that others in your industry have classified their employees in a particular manner.  Many U.S. employers are out of compliance with wage and hour laws, particularly employers who do business in California.  In order to ensure compliance with California’s tough exemption requirements, you should periodically review your employees’ duties and their classifications to make sure that, in the unfortunate event that an employee brings a lawsuit against you, you can properly defend yourself.

Every employer must deal with a disgruntled employee at one time or another.  However, recent cases demonstrate that the manner in which you deal with these employees can leave you exposed to a variety of legal claims.  We will explore some of the issues which have recently made their way through the court system in the hope of alerting you to potential problem areas.

1. Your employee hires a lawyer to resolve a dispute with you.

In a recent case, an employee told her boss that she was pregnant.  Within a week after her announcement, she claimed that her hours and pay were reduced by half.  The employee retained a lawyer to write a letter to her employer, asserting that she was being discriminated against on the basis of her pregnancy in violation of the Fair Employment & Housing Act.  Within a week, the employee was fired.  She filed a lawsuit, claiming that her employer had retaliated against her, not because she was pregnant, but in retaliation for the letter sent by her lawyer.  The jury found in favor of the employee and the Court of Appeal affirmed the judgment, concluding that the employee’s actions in retaining a lawyer to negotiate with her employer on her behalf were protected by the Labor Code.
The lesson to be drawn here is that, once your employee hires a lawyer to negotiate a dispute with you, you must proceed with extreme caution.  Firing the employee for hiring a lawyer is illegal.

2. Your employee goes on extended workers’ compensation leave and expects you to continue paying his/her benefits indefinitely.

In this case, an employee went out on workers’ compensation leave after she hurt her back.  Her employer had a policy to cover employees’ health insurance benefits for the first 12 weeks of leave, citing the fact that employees are allowed 12 weeks of family leave under the Family Medical Leave Act.  When the 12 weeks was up, the employee was told that her health insurance premium was her responsibility.  The employee filed a complaint with the Workers’ Compensation Appeals Board, claiming that her employer’s actions constituted illegal discrimination against her because she was on leave for a work related injury.  The Workers’ Compensation Appeals Board agreed, finding that it is discriminatory to treat an employee who is injured on the job differently than one who is actively working.  The employer was ordered to pay the employee’s health premiums, plus a 50 percent increase in her weekly benefits up to a maximum of $10,000 as a penalty.

The moral of this story is that you may not treat an employee who is on leave for a work-related injury any differently than you treat an employee who is still on the job, unless you can justify it with a good business reason.  It must be noted that it is very difficult to use the business reason exception and that there is little guidance on what is considered a valid business reason and what is not.

3. Your employee testifies against you in a suit brought by another employee.

In this case, an employee gave deposition and trial testimony against his employer in a lawsuit filed by another employee.  Thereafter, his employment was terminated.  The employee brought a lawsuit, claiming that his termination was in retaliation for his testimony and violated public policy.  The Court of Appeal allowed the case to go forward, finding that there is a public policy embodied in the Labor Code which prohibits retaliation against an employee who has taken time off from work to appear in court as a witness.

This case is similar to earlier cases in which employees were allegedly terminated for testifying at an unemployment or workers’ compensation hearing.  In nearly every case of this type, the court has allowed the employee to proceed with his/her lawsuit, finding that the right to testify is protected by public policy and that an employee cannot be terminated for doing so.  Moreover, if you terminate an employee who has testified within a short period of time after the testimony, even if that termination is based upon a legitimate reason, the employee will likely be able to state a claim for retaliation by arguing that your legitimate reason for termination was a pretext.

The bottom line in each of these cases is that disgruntled employees should be handled carefully to avoid expensive litigation.

Effective October 1, 2000, California’s overtime requirements for veterinarians and certain employees who provide animal care will change yet again.  This article will outline the changes in the law, as well as the requirements for implementing those changes.  The new law affects not only overtime pay obligations, but also alternative work week schedules and meal periods.

APPLICABILITY OF AMENDMENTS TO WAGE ORDER 5
Wage Order 5 has now been expanded to provide special overtime provisions for workers in the health care industry, which has been defined to include licensed veterinarians, registered veterinary technicians and unregistered animal health technicians providing patient care.  However, these special overtime provisions do not extend to persons primarily engaged in providing meals, performing maintenance or cleaning services, or perform business office or other clerical functions in a veterinary office.  Those employees must still be paid according to California’s basic overtime requirements, which include time-and-a-half payment for all hours exceeding eight hours of work in one day, 40 hours of work in one week, and for the first eight hours on the seventh day of work in a single work week.  Double time compensation is required for regular employees for all hours worked in excess of 12 hours in one day and for all hours in excess of eight on the seventh day of work in a single work week.

 ADOPTING AN ALTERNATIVE WORK SCHEDULE
Before using the special overtime provisions in the new Wage Order, the employer must adopt a valid alternative work schedule.  The rules regarding adoption of such a schedule must be strictly followed, or the schedule will be null and void and you will be liable for overtime payments and penalties.  To adopt a valid alternative work schedule, you must do the following:

1. Submit a written proposal for an alternative work week schedule to all affected employees in the work unit.  The proposed alternative schedule must specify the number of days in the work week and the duration of the shift.  The actual days worked within the alternative schedule need not be specified, so long as the employer schedules the actual work days and the starting and ending time of the shift in advance of the work week and provides employees with reasonable notice of any changes.  Either a single work schedule or a menu of work schedule options, from which each employee in the work unit may choose, may be included in the proposal.
2. An alternative schedule may not exceed 12 hours of work in a day or 40 hours of work in a week.  Moreover, the schedule must provide for at least four hours of work in any shift.
3. The proposed alternative schedule must be adopted in a secret ballot election, before the performance of work, by at least a two-thirds vote of the affected employees in the work unit.  The election must be held during regular working hours at the employees’ work site.  A work unit may include a division, a department, a job classification, a shift, a separate physical location, or a recognized subdivision of any such work unit.  A work unit may consist of an individual employee as long as the criteria for an identifiable work unit is met.
4. Prior to the secret ballot vote, the employer must make a disclosure in writing to the affected employees which includes the effects of the proposed arrangement on the employee’s wages, hours and benefits.  Such disclosure shall include a meeting, duly noticed, held at least 14 days prior to voting, for the specific purpose of discussing the effects of the alternative schedule.  Failure to hold such a meeting or provide the written disclosure will make the election null and void.
5. The results of any election conducted to adopt an alternative schedule shall be reported by the employer to the Division of Labor Statistics and Research within 30 days after the results are final and the report of election results shall become a public document.  The report shall include the final tally of the vote, the size of the unit, and the nature of the business of the employer.
6. Employees affected by a change in work hours resulting from the adoption of an alternative schedule may not be required to work those new hours for at least 30 days after the announcement of the final results of the election.  An employer must make a reasonable effort to accommodate employees who are eligible to vote in the election and who cannot work the alternative schedule, as well as employees who cannot work the alternative schedule because of their religious beliefs.

NOTE:  An alternative schedule may be repealed by the affected employees.  Upon a petition of one-third of the affected employees, a new secret ballot election shall be held and a two-thirds vote of the affected employees is required to reverse the alternative work week schedule.  Such an election need not be held more than once every 12 months.

OVERTIME PAY OBLIGATIONS
Once an alternative work week is properly instituted, eligible employees working the alternative schedule may be paid overtime as follows:

1. An employee who works more than 12 hours in a work day shall be paid double time for all hours in excess of 12.
2. An employee who works in excess of 40 hours in a work week shall be paid at one-and-a-half times the employee’s regular rate of pay for all hours over 40 in a work week.
3. Time-and-a-half must be paid for all hours worked in excess of the alternative work week’s scheduled hours.
4.  Double time must be paid after eight hours of work in one day on a day when an employee is not regularly scheduled to work.

MEAL PERIODS
The new Wage Order also makes provisions for meal periods, allowing eligible employees who work shifts in excess of eight hours a day to waive the right to one of their two meal periods.  Those rules are as follows:

1.  A 30-minute meal period must be provided after five hours of work, unless the total hours of work for the day are not more than six hours, in which case the meal period may be waived by the mutual consent of the employee and the employer.
2. Unless an employee is relieved of all duty during the 30-minute meal period, the meal period shall be considered an “on duty” meal period and counted as time worked.  An “on duty” meal period is permitted only when the nature of the work prevents an employee from being relieved of all duty and when the employee and employer agree in writing to an on-the-job paid meal period.
3.  A second meal period must be provided after 10 hours of work, unless the employee’s total hours of work for the day are less than 12 hours, in which case the second meal period may be waived by the mutual consent of the employee and employer, but only if the first meal period was not waived.
4. Veterinarians, registered veterinary technicians and unregistered animal health technicians providing animal care who work shifts in excess of eight hours total in a work day may voluntarily waive their right to one of their two meal periods.  In order to be valid, such a waiver must be documented in a written agreement that is voluntarily signed by both the employee and the employer.  The employee may revoke the waiver at any time by providing the employer with at least one day’s written notice.  The employee shall be fully compensated for all working time, including an on-the-job meal period, while such a waiver is in effect.

Q & A:
Q:    What areas of employee relations will the new Wage Order affect?
A.    Alternative work week schedules, payment of overtime compensation to certain employees and meal periods.

Q:    When does the new Wage Order become effective?
A:    October 1, 2000.

Q:    Will the new Wage Order allow me to put all my employees on 12-hour shifts without payment of overtime?
A:    No.  Only veterinarians, registered veterinary technicians and unregistered animal health technicians providing animal care may adopt an alternative work week that provides for 12-hour shifts without the payment of overtime.  Other workers, such as clerical workers and workers who provide primarily services relating to feeding or cleaning cannot work 12-hour shifts without the payment of overtime.  Those employees must still be paid according to regular overtime rules, which require overtime payment for all hours worked in excess of eight hours in a day or 40 hours in a week.