Employment Law

      Executive Summary
      Businesses are facing a very different employment law environment in 2007, including understanding recent court decisions involving releases, responding to wage and hour class actions and workplace retaliation, and finding ways to retain valued employees in a state that does not enforce noncompete agreements except in limited circumstances. Even the standard packet of paperwork presented to incoming or departing employees in 2006 may now be out of date. On the other hand, employers face a diminished likelihood of class action certification in certain types of labor law complaints.
      Our panel of California employment law experts outlined the new landscape in a recent roundtable discussion, dissecting the relevant court decisions and offering practical suggestions for businesses. They are William Claster of Gibson Dunn & Crutcher, Andrew Livingston Heller Ehrman, Melinda Riechert of Morgan Lewis & Bockius and Lynne Hermle of Orrick Herrington & Sutcliffe. The panel was moderated by Chuleenan Svetvilas and reported for Barkley Court Reporters by Krishanna DeRita.
     
      Moderator: What are the implications of the recent decision in Edwards v. Arthur Andersen [142 Cal. App. 4th 603 (2006)]?
     
      Claster: Edwards worked for Arthur Andersen's tax group and signed a noncompete covenant there. When Andersen went out of business, it sold its tax practice to HSBC. A condition for Edwards going to HSBC and being released from the covenant was that he sign a general release of any claims against Andersen. Edwards refused to sign the release, wasn't hired by HSBC and sued Andersen for intentional interference with prospective economic advantage.
      Andersen argued that the noncompete was valid because it merely restricted Edwards from doing business with former clients of Andersen but didn't restrict him from competing in general. Refusing to go along with a number of federal court decisions, the court held that even limited covenants are impermissible unless necessary to protect trade secrets, or in connection with the sale of a business or dissolution of a partnership.
      When you consider Edwards?now pending before the California Supreme Court?along with earlier decisions that invalidated a covenant regarding solicitation of clients and disapproved the inevitable disclosure doctrine, it essentially means employers will not be able to enforce any sort of noncompete covenants in California.
     
      Riechert: Many employers do not realize that California interprets an agreement that prohibits employees from soliciting clients with whom they've worked at one company when they go to the next as a potentially unenforceable noncompete agreement. Edwards explains that such a nonsolicitation- of-clients' provision can be construed as a covenant not to compete, because it can inhibit an employee's ability to conduct his or her trade.
      We still have this overriding case law exception for trade secrets. The California Supreme Court has granted review of Edwards, and at least until the California Supreme Court issues its opinion on Edwards, employers need to be sure to review employment agreements and make sure if they do have a prohibition, that it is tied to trade secrets.
     
      Claster: That exception is of little value because most employers already have confidentiality agreements that say, in so many words, "You won't use our trade secrets at any time in the future," and that's enforceable by itself.
     
      Livingston: After Impaxx [Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425 (2003)], it is appropriate to add language to contracts saying an employee may not use confidential information to solicit clients. One could argue, though, that such a provision actually limits the reach of a trade secrets or confidentiality agreement already in place.
     
      Hermle: It's interesting how different the law is from a few years ago when we were getting TROs under inevitable misappropriation theories and telling our clients that nonsolicitation clauses were lawful even though noncompetes might not be. If you think about how many avenues have been shut off, it really is a very quick development of law in a short period of time.
      It's helpful having a vehicle to explain to a client why you don't want a noncompete provision in your agreements. That's been answered very clearly by the cases: Having it may be a violation of Business and Professions Code 17200 and seeking to enforce it in any way is going to subject you to serious ramifications.
     
      Riechert: California employers are at a real disadvantage competitively because of the strictness by which the courts have construed 16600 and prohibited noncompete covenants. If you are a California company trying to recruit from an out-of-state competitor, you almost certainly can't recruit their senior people because they are bound by a noncompete. But that out-of-state competitor is free to come and recruit from California employers because those people cannot be subject to non-competes, except in very limited circumstances
      Why is it that the law says an employee cannot enter into a noncompete covenant even though the employer is compensating the employee for it? An employer should be able to write an agreement that, in effect, states: "We'll pay you severance so long as you don't compete, but if you start competing, we'll stop paying severance." That's very different from actually prohibiting people from competing and is really no different than cutting off severance when an employee gets a new job.
     
      Claster: I think where employers get off track is that they try to include in a single agreement both the noncompete covenant and a release of claims. What this does is potentially invalidate the general release because it is combined with an illegal covenant. That's one of the points from Edwards and some other cases. You risk invalidating a release if you combine it with an illegal provision.
     
      Riechert: Edwards also held that releases should exclude claims for indemnity under section 2802 of the Labor Code. The message to clients from the new cases on releases is review your release agreements, because what was legal last year is potentially not legal this year. The biggest change is the emphasis on understandability. The language needs to be understood by the person who is going to be reading the release.
     
      Livingston: And as the cases point out, it really doesn't matter if the employee is represented by able counsel. The release still needs to be understandable from the employee's standpoint.
     
      Claster: There's also a recent case involving age discrimination under the Older Workers Benefit Protection Act [OWBPA]. It makes clear what a lot of lawyers have taken for granted with respect to the requirement under the law of providing information regarding the ages of employees affected by large layoffs, namely, that the employer is supposed to provide this information as it applies to the precise decisional unit affected by the layoff as well as the factors used to decide who was going to be laid off. If you don't get that exactly right, it potentially invalidates the age discrimination release, which will be a great disappointment to the employer that paid hundreds of thousands of dollars in exchange for that release.
     
      Riechert: If you do a group layoff you have to provide the job titles and ages of people who were considered for termination, the people who were terminated, and the people who were not terminated in the same decisional unit. If your decisional unit is too broad or your decisional unit is too narrow, you may fail the test. Counsel have to work with management to really understand the decision-making process.
     
      Hermle: There are times when employers choose not to comply with the OWBPA "provide the ages" requirement because it's more likely to give rise to claims. You still may be sued because you don't have a full waiver, but you may be less likely to get those suits if you don't provide statistics suggesting that the people who were laid off actually were your older employees.
     
      Livingston: Between the Older Workers Benefit Protection Act, the Edwards case, and then the IBM cases, our clients have really become concerned. It used to be that everyone took releases for granted. There wasn't much law on the topic for years and years. But now, all of us are sitting down with our clients and looking at how everything fits together, and making sure that release will be enforced in court if necessary.
     
      Moderator: Moving on, what are the current trends in wage and hour class actions?
     
      Hermle: Obviously, the big trend is wage and hour class actions hitting Silicon Valley. We've got the software engineer case, inside sales cases, trainer cases, and customer service cases all in the past few years. Before, the cases really were focused on the retail arena. It makes sense because Silicon Valley is thriving and the plaintiffs bar is coming in with no holds barred. Another trend is joint employer cases, which have just started to come up both in the retail setting and in the Valley. That's when the plaintiffs bar alleges that one company is a joint employer with its subcontractor or its temporary employment agency. We'll see a lot more of those, and they are going to be interesting and difficult cases.
     
      Livingston: Numerous people have predicted the demise of the wage and hour class action, but every day more lawsuits are being filed, and on new and different topics. The creativity of the plaintiffs bar is quite impressive.
      We've worked through retail managers and into assistant managers. Silicon Valley computer professionals are now targets, as well as every level of employee at financial institutions. And it's not just overtime anymore or meal/rest periods. It's Labor Code 226 and a variety of other issues. I don't know that there's any end in sight for California employers.
     
      Hermle: And the California Supreme Court just refused a request by the plaintiffs bar to depublish the Dunbar v. Albertson's decision. [141 Cal. App. 4th 1422 (2006).] That means the wage and hour bar will have both Sav-On [Sav-On Drug Stores, Inc. v. Superior Court, 34 Cal. 4th 319 (2004)] and Dunbar to think about.
     
      Riechert: Before Dunbar, the plaintiffs lawyers felt that all they had to show was that the company classified everybody in the same job as exempt. They had the same title, they had the same job description, therefore we can bring a class action. Dunbar did an excellent job of showing that you have to actually look at what the employee is doing every day and whether every employee, notwithstanding the fact that they have the same job title, is doing something different every day or from week to week.
      The key in the Dunbar case was that the managers at Albertson's were spending time on the cash register one week, and another week they were spending more time supervising. Even if Albertson's had misclassified some of these people, that doesn't mean a class action is appropriate.
     
      Livingston: Dunbar is really a great example of the benefit of substantial preparation if you are an employer opposing class certification. There, they carefully investigated what managers were doing. They found the nuances, the variances, the different ways in which people did their job on a week-to-week basis, a store-to-store basis, and then a person-to-person basis. And by putting this mix of facts before the court, they convinced the court that it wasn't appropriate to grant class certification.
     
      Claster: Dunbar also confirmed that Sav-On has been misinterpreted by many lawyers as essentially creating a blanket approval for class certification in some of these misclassification cases. The key point in Dunbar is that the trial court's decision on class certification will not be overturned unless there is a clear abuse of discretion.
     
      Hermle: It really reaffirms the importance of the trial court in these cases, and the reason in class cases we usually ask for a special assignment to a complex case department or single assignment judge. The trial judge in Dunbar spent a tremendous amount of time becoming prepared, understanding the facts, giving the parties significant opportunity to argue. That really is the only time that you are going to have a chance at challenging certification, in my experience.
     
      Riechert: The good news from Dunbar for employers is that it's easier to defeat class certification. The bad news is that when you are trying to decide how to classify your employees initially, you should not just look at the job description and the job title. Most employers are now doing audits to understand whether their employees are properly classified.
     
      Claster: Are you recommending that your clients do written audits, asking the affected employees to describe what they do and assigning percentages to that?
     
      Riechert: It really depends on the client, and we generally recommend that the audits be privileged?done by the attorneys so that they are not going to be used by the plaintiffs bar against the client.
     
      Hermle: The audits are troubling in many ways. The first problem is that employers are doing them and then not taking action when they find that employees have been misclassified. That's a tremendous waste of time, energy and company resources, and could give rise to penalty claims.
      The second problem is that consultants springing up to do these audits don't always get them right. They misunderstand, for example, the judgment and discretion elements, so it's troubling to think we have clients relying on bad audit results.
     
      Claster: The other concern some employers have expressed is that even the act of doing the audit will perhaps trigger some interest in a class action, where otherwise the employees might not be thinking along those lines.
     
      Livingston: Employees in California are so cognizant of their rights that an employer really can't manage its operations because they are worried that they are going to find out about something like this. I believe the employer needs to take a look, whether or not it's through a formal audit, and ensure that it's paying its employees the right way.
     
      Hermle: But in many cases you can do a very good audit without talking to the employees and talking instead to their supervisors. A great source of information is employee-drafted performance reviews, and the supervisor's responses. The employee is saying, "Here is how I'm spending my time," and the supervisor is saying, "Here is how we really want you to spend your time."
     
      Riechert: The employees themselves do not want to be classified as nonexempt. These are high-level, highly paid people, some of them earning $150,000 a year, and you are going to tell them that they have to clock in, have to take a 10-minute break, must take a half-hour lunch, can't come in late one day, can't stay late another day.
      These employees don't want that. As professionals, they want to be able to be paid to do the job in whatever hours are convenient to them. This is a huge issue for companies to have to reclassify employees who don't want to be reclassified.
     
      Moderator: What about the recent appellate decision on retaliation in Taylor v. City of Los Angeles Dept. of Water and Power [144 Cal. App. 4th 1216 (2006)]?
     
      Livingston: Taylor is an interesting case for several reasons. It followed the materiality test for retaliation set forth in Yanowitz [Yanowitz v. L'Oreal USA, Inc., 106 Cal. App. 4th 1036 (2003)], but it also did an analysis under the Burlington [Burlington Northern & Santa Fe Rwy. Co. v. White, 126 S. Ct. 2405 (2006)] deterrence test. In doing both analyses, it made it clear that there really doesn't appear to be much distinction between the two of them.
      Another side note in Taylor is it clearly states that an individual may be liable for retaliation. It also created a claim for failure to prevent retaliation that really can't be found if you search carefully through the government code.
     
      Riechert: If giving someone a job that's more arduous and dirtier is retaliation, then almost anything is. It makes it a real problem for employers. Often the employee who complains is someone who's already having performance issues. If you try now to transfer that employee, it's going to create risk for the employer. It could be perceived as retaliatory. If you put the employee on a performance improvement plan, that could be perceived as retaliatory. If you talk to the employee's co-workers about the employee, maybe that's considered retaliatory. The standard has gotten so broad that employers need to be more careful than ever to manage employees who have made complaints.
     
      Hermle: The court in this case also discusses the totality of the circumstances test, and uses that to make clear that they believe the plaintiffs side of the case. But the totality of the circumstances test can be very helpful to an employer in any retaliation case where there's been some positive action by the employer, and I don't think employers use it enough.
      Sometimes an employee, after a protected complaint, may have something bad happen. Let's say they are denied a promotion. But there are other positive things happening-a bonus, getting into a great training program, positive performance reviews. Employers need to look beyond that totality test as a negative and litigating it as a positive where it's helpful.
     
      Riechert: The lesson for employers here is to continue training managers on the risk of retaliation cases. It's hard when a manager has to continue supervising an employee who has complained to HR as if the complaint hadn't been made. But the law says that managers have to do it. It also highlights how important ongoing performance-management is so that issues are documented before the complaint it made.
     
      Livingston: Trainings help, and there are obviously sexual harassment regulations that point out that discussing retaliation is an important aspect of training. The questions managers raise in this area are fascinating and show that they are truly puzzled about how to deal with employees who have complained.
     
      Hermle: I continue to believe it is fundamentally wrong to have supervisors and managers individually liable for retaliation arising out of the performance of supervisory tasks like promoting, hiring, terminating and evaluating. I understand the analysis the court used here, but it puts managers in the conflicts position we saw the courts refuse to buy into with respect to the individual claims of discrimination against supervisors in earlier cases.
     
      Claster: In those circumstances, don't you think that the employer, as a matter of law, has a duty to defend and indemnify if it's in the course and scope of employment?
     
      Hermle: The employer may well have that duty, but that doesn't reduce the emotional impact on the supervisor. Managers make some of their biggest mistakes out of fear of these claims. They don't criticize employees in performance reviews. They hold back, and they'll explain to you they didn't want either the confrontation or the claim arising out of the criticism. It's really hard to do these things when you supervise people. You don't want to make it any harder than it should be.
     
      William Claster is a partner in the Irvine office of Gibson, Dunn & Crutcher LLP. He represents employers in all aspects of labor and employment law, including employment discrimination and wrongful termination litigation, wage and hour class actions, unfair competition, trade secrets, investigations, and negotiations and arbitrations under collective bargaining agreements. During his 30 years of practice, he has been a frequent speaker and author on various labor and employment issues.
      wclaster@gibsondunn.com
     
      Andrew Livingston is a shareholder in the San Francisco office of Heller Ehrman LLP. He litigates disputes on behalf of employers in the areas of wrongful termination, stock options, discrimination and harassment, unfair trade practices, trade secrets and confidentiality, and related matters. Mr. Livingston also advises clients on issues related to the entire spectrum of employer/employee relations, including employee hiring and termination, trade secrets, wage and hour, and stock option issues. He is a frequent speaker at employment seminars and programs.
      andrew.livingston@hellerehrman.com
     
      Melinda Riechert is a partner at Morgan, Lewis & Bockius. She specializes in litigation and arbitration of employment disputes for major high-technology and other companies, including defending companies in wrongful termination, discrimination, and sexual harassment disputes. She also counsels employers on how to avoid litigation. In addition to obtaining several summary judgments, she has tried to judgment or arbitrated 14 cases since November 1996 and prevailed on all employment issues in each case. The San Francisco Business Times named her one of the 2006 "Top 10 Rainmakers."
      mriechert@morganlewis.com
     
      Lynne C. Hermle, a partner at Orrick, Herrington & Sutcliffe, is head of the firm's Silicon Valley Employment Group. She represents established and emerging companies in many industries. Ms. Hermle has substantial trial experience in employment matters with uniformly good results, including several jury trials in state and federal court. She has special expertise in the area of complex class actions, including those involving wage-and-hour issues.
      lchermle@orrick.com
     
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