Beware: Attorney-Client Privilege is not Without Bounds (Especially in the Employment Law Arena)

February 2015

By: James B. Sherman, Esq

Many attorneys provide advice to their clients, assuming that their conversations will be protected by the attorney-client privilege and/or work product doctrine.  However, not all communications between attorneys and their clients are protected.  Depending on the substance or timing of the communication, and the reason for making the communication, it may or may not be protected as privileged or attorney work product.  Additionally, these protections may inadvertently be waived regarding a communication that otherwise would have been protected.  These risks are unquestionably greater for lawyers counseling employers about workplace and human resource issues.

Communications that are more akin to general business advice, as opposed to communications made in anticipation of litigation, may not be protected.  Where communications contain a combination of legal and business advice (as is often the case), the presence of some legal discussion will not necessarily render the entire communication privileged.  Some courts have gone so far as to say that even communications addressing how to avoid litigation will not be protected. 

A common area of communication employment lawyers engage in with business clients involves internal investigations of harassment, discrimination, misconduct, etc.  Some courts have held that internal investigations are generally more of a human resources function than a legal function, and employers have a duty to investigate employee complaints, regardless of whether litigation is pending or anticipated.  Furthermore, even if an investigation would otherwise be privileged if the fact that a matter was investigated and addressed is used as a defense to a lawsuit, then any privilege will necessarily be waived in the course of asserting the defense.

There are, however, several things attorneys can do to strengthen their position that communications with their business clients on employment-related matters are privileged:

• Label written communications as confidential, attorney-client privileged, and/or attorney work product.  This shows that the intention at the time of making the communication was for it to be confidential, and makes it less likely that the communication will be shared with others, thus waiving any privilege.
• Be explicit about a conversation’s connection to any current or anticipated litigation.
• Separate legal advice from general business advice.
• Keep any legal discussions on a need-to-know basis, excluding non-managerial employees since their involvement generally waives privilege.

Contrary to Popular Belief, Non-Compete Agreements Are Alive and Well in Minnesota, Wisconsin and Elsewhere

February 2015

By: James B. Sherman, Esq.

I often hear sales and other business persons say that non-compete agreements and other restrictions on solicitation, etc. “are not worth the paper they are written on.” As an attorney who has drafted as well as enforced these agreements in courts in many states, I beg to differ. Although it is true that non-compete, non-solicitation and other restrictive covenants face greater scrutiny by the courts in Minnesota and elsewhere, when reasonably drafted and properly executed they are readily enforced. Even in Wisconsin, which has a statute specifically disfavoring agreements that lack reasonable geographic and temporal limitations, a well drafted agreement will be upheld in court. Ultimately, winning or losing when it comes to enforcing or undermining the enforceability of a non-compete usually comes down to one or more of the following factors: How the agreement was executed; the reasonableness of its restrictions; or certain factors that are relatively overlooked by employers and lawyers alike. 

1. Proper Execution. In Minnesota, conditioning a job offer on an offeree’s agreement to a covenant not to compete provides the required “consideration” (i.e. value exchanged for the employee’s agreement).  However, once an employee already is employed an employer must offer more than mere continued employment as consideration for a restrictive employment agreement to make it enforceable. As a result, allowing a new employee to work for even a day/hour/minute before requiring her or him to sign a non-compete, can ruin its enforceability years down the road.

A raise, promotion, or lump sum payment may suffice as consideration in return for a current employee’s agreement to a non-compete, non-solicitation or other restrictive agreement, so long as it was not something to which the employee was already entitled. There are many creative ways to supply the necessary consideration for a non-compete with an existing employee.  Minnesota courts generally do not scrutinize the sufficiency of consideration other than to ensure that it is at the very least not “unconscionable.”

2. Reasonableness. Restrictive employment agreements – non-competition, non-solicitation, confidentiality, no-poaching and similar provisions must be narrowly designed to protect the employer’s “legitimate business interests” to be enforceable in Minnesota and most states. This is not a terribly difficult standard to meet, although it is a legally technical concept. Where employers usually have problems is when they get too greedy, or try to ban fair competition through their arguments.

Besides being narrowly tailored to protecting legitimate business interests, an agreement must not restrict activities for too long a time following an employee’s departure, or restrict competition over an excessive or unreasonable geographic area. For example, a non-compete agreement for a salesperson that bars competition for three years after employment ends, throughout an entire state,  would not be enforced in a Minnesota court if the employee’s sales territory was much smaller or if customer relations are proven to change in fewer than three years.

3. Miscellaneous Additional Facts. As an attorney who drafts/enforces non-compete and similar agreements for his business clients in many states, but who also works to destroy the enforceability of such agreements on behalf of employers who may be hiring someone with an agreement drafted by a former employer, my experience has taught me that there definitely are numerous tricks to this area of the law not found in the law books. Here are just a few that are worth considering:

a. Don’t use restrictive employment agreements unless you are prepared to enforce them. I used an employer’s past failures to enforce their agreements as evidence that the agreements clearly were not designed to protect a legitimate business interest (otherwise, why would the employer have allowed past employees to violate their provisions?). In one case, I actually used a company’s decision to sue a former salesperson as evidence to support a counter-claim of FMLA retaliation, where the salesperson was the only one of five former employees who were sued when they all had gone to work for my competitor client.

b.   Don’t rush to court. While this point may seem to contradict the above rule about enforcing your agreement, “enforcement” does not always require litigation. Court proceedings on non-compete agreements can be expensive, with injunctive proceedings essentially requiring that the majority of a case be litigated up front, in the first month or so of the case. Going after a former employee, but coming to reasonable terms with the employee and/or her or his new employer, often serves a client’s interests as well as any court decision, and for a lot less money.

c. Other laws may come into play. In addition to any contract or employment agreements, most states have a host of additional statutes and common law principles that govern what employees do both during and following their employment. In Minnesota, employees who take or retain company property when they leave may be sued for “conversion.” If information or property meets the statutory definition of a “trade secret” a claim for “misappropriation” may be pursued for injunctive relief, punitive damages, and attorney’s fees. Claims for breach of duty of loyalty, fiduciary duties, and unfair competition are just some of many other claims that may exist absent any contract. Having said this a well drafted, reasonable agreement with employees is always preferred in court. 

d.   Who has the most money and stomach for litigation. It may not sound pretty but the truth of the matter is that the outcome of litigation over non-compete, non-solicitation and other restrictive employment agreements and unfair competition, often is less dependent on the legal merits of the parties’ respective cases as it is on which party is willing to fight the hardest and spend the most money.  Knowing this before fighting in court can avoid disappointment down the road. 

e.  Hiring employers need to be aware that hiring someone who has a non-compete agreement with a former employer, could expose them to claims for “tortious interference.” In Minnesota the state supreme court, in Kallok v. Medtronic, ruled that when a hiring employer causes the previous employer to expend legal fees to defend the enforceability of its employment agreement, it may be held liable for the legal fees reasonably expended by that former employer if the court finds the agreement enforceable.  Although not yet adopted in the courts of most states, this legal principle likely would apply in Wisconsin, Illinois and other neighboring states. As a result, employers who hire applicants who have restrictive agreements with their former employers should think twice before they try to challenge the enforceability of the agreement in court.  

February 2015: Ask Your Labor Lawyer

February 2015
By Richard H. Wessels, Esq.

Question:  We are selling a facility where some of the employees are covered by a union contract. What are our obligations to the union?

Answer:  We really would have to sit down to carefully go over details. The best we can do here is cover general principles only. Perhaps more than any other area of labor law, slight changes in the fact pattern could dramatically change the legal consequences and thus the strategy to be used.

In today's rapidly changing business environment, close attention must be paid to labor relations implications. We are seeing any number of scenarios wherein one employer replaces another. Typically this can be the result of a merger, acquisition, sale of assets, third party outsourcing, etc.

Here are the fundamental principles.

1.               Obligations of the predecessor employer. The issues here would involve whether or not "decision bargaining" is required and also the issues of "effects bargaining." The particular facts of the situation are exceedingly important. For example, is the change occurring during the collective bargaining agreement or after contract expiration? Specific contract language could have substantial impact. "Decision bargaining" is often necessary, especially if labor costs are a factor. "Effects bargaining" involves such issues as severance pay, etc. and is almost always required. Keep in mind that only "bargaining" is required, not agreement.

2.               Effect of "successors and assigns" clauses. Despite the frequently clear wording of successorship clauses, the case law is that such clauses do not bind a successor employer. The simple reason is that there is no privity of contract. However, a successorship clause could have impact on the duties of the predecessor employer. For example, there have been cases based on specific contract language wherein a union has successfully enjoined sales or transfers of a business. Further, today’s pro-union NLRB has been over-turning earlier case law, so we need to be careful. 

3.               Is the new employer a "successor at law?" There are several variations on this theme. Of course, if the transaction is a stock deal, the new employer merely steps into the shoes of the predecessor employer and would inherit the contract. If it is another form of transaction, however, the general principle is that a successor inherits not the contract but only the obligation to "bargain in good faith." The Board and the reviewing courts have focused on the following inquiries in determining whether there is a successorship:

·   Continuity of the workforce

·   Continuity of identity of the business enterprise

·   Continuity of the appropriate bargaining unit.

By far, the most important factor is continuity of the workforce. Must reading for anyone developing a strategy of this type is the U.S. Supreme Court's decision in Fall River Dyeing & Finishing Corp. v. NLRB, 482 US 27 (1987).

4.               A successor can set initial terms and conditions. The general rule is that if there is a successorship (usually majority status is the key issue here), the new employer can set initial terms and conditions. There are exceptions to this such as the "perfectly clear" principle, but in the majority of situations, it is appropriate for the successor to set initial terms and conditions. In other words, it would not be bound by the precise terms of the underlying collective bargaining agreement. If there is a successorship, the company's obligation after setting initial terms and conditions would be to "bargain in good faith" with the union in an effort to reach a collective bargaining agreement.

5.               Practical considerations. In a high percentage of the situations, where the new employer is continuing the enterprise with essentially the same workforce, that new employer will find it in its best interest to continue the relationship in an uninterrupted manner. Sometimes this will involve no more than assuming the existing agreement. Often an employer will engage in discussions with the union to negotiate changes. Many times this occurs prior to the completion of the transaction and, on occasion, this has been a condition upon which the entire transaction is based. It has been our experience that a new employer that is willing to continue uninterrupted the relationship with the union will find it relatively easy to achieve a new agreement with the union which might well contain substantial changes from the prior agreement.

Again, keep in mind that this commentary covers general principles only. Slight changes in the fact pattern could substantially change the recommended strategy.

Questions? Call Attorney Dick Wessels of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email him at riwessels@wesselssherman.com.

Readers are invited to submit their labor law questions for possible use in this column. Just email your questions to Dick Wessels at riwessels@wesselssherman.com. Your identity (and your company's identity) will not be revealed if your question is selected by Dick Wessels for this column.
"Ask Your Labor Lawyer" is our very popular column written by Dick Wessels who is Founder and Senior Shareholder of Wessels Sherman Joerg Liszka Laverty Seneczko P.C. Dick handles a wide variety of labor and employment law cases. His primary focus is dealing with labor unions, either on behalf of union-free companies or where unions already have representation rights. Dick has handled cases involving nearly all international unions for companies throughout the United States.

EPLI Coverage: Do You “Like” Your Representation?

February 2015

By: Alan E. Seneczko, Esq.

2015 is a new year. A time for reflection. A time for renewal. It is also a time when many businesses renew their insurance policies and reflect on their coverages, including their Employment Practice Liability Insurance (“EPLI”). This is also why it is important to understand exactly what you are purchasing.

EPLI is a policy that covers an employer against liability stemming from employment practices, such as damages (e.g., back pay, front pay, compensatory damages, attorney fees, etc.) for unlawful discrimination, wrongful discharge, whistleblowing, etc. Most policies include a deductible or retention level of several thousand dollars, which the employer must pay from its own coffers before any amounts are paid under the policy. The retention covers not only damages, but any attorney fees incurred in defending the claim. For example, if the policy has a $10,000 retention limit, the first $10,000 paid on a claim comes out of the employer’s pocket.

EPLI policies also commonly contain a reservation of counsel clause, under which the carrier reserves the right to assign the attorney who will represent you in the matter. This means that if you have been working with your existing counsel for years and have developed a good, trusted relationship, he or she may not be able to represent you when it matters most – like when you are being sued! Instead, you will be assigned the panel counsel selected by the insurance carrier.

What employers do not realize is that they can have a say in the matter. Many carriers offer a “choice of counsel” option, under which the employer is afforded the ability to select counsel in a matter. Other carriers may allow discussion of counsel in connection with renewal, agreeing upon the use of specified counsel in defense of matters under the policy.

The lesson:  If you like your attorneys and the quality of representation they have been providing, (including those of us here at Wessels Sherman), then it is important that you reserve your right to continue that representation when it matters most – during the heat of litigation. 

Questions? Please contact WS Attorney Alan E. Seneczko at (262) 560-9696, or email alseneczko@wesselssherman.com.

When Can an Employer Make Deductions from an Employee’s Salary without Destroying the Employee’s Exempt Status?

January 2015

By: James B. Sherman, Esq.

We frequently are asked whether and under what circumstances an employer may make deductions from an employee’s salary without impacting the employee’s exempt status for purposes of overtime under wage and hour law.  HR professionals know that in order to be exempt from paying overtime, an employee first must be paid on a salaried basis and that making deductions from an employee’s salary can sometimes destroy the exemption.  At the same time salaried employees frequently do things (or fail to do things) that may cause their employers to want to make deductions from their pay.  Consequently, knowing which deductions do not destroy an exempt employee’s required salaried basis of compensation and those deductions that do ruin the exemption, is extremely important to employers.

The following is a “cheat sheet” employers may use as a quick reference addressing some of the more common circumstances where deductions may legally be taken from an exempt employee’s salary and where deductions are not allowed.

            DEDUCTIONS ALLOWED

• Full day absences taken for personal reasons. Example: An exempt employee who misses 1 ½ days of work for personal reasons, such as golfing or helping a family member move, could be docked 1 full day of salary because the absence was for personal reasons, but could not deduct for the additional half day.
• Full day absences occasioned by sickness or disability, if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability. Example:  An employer that maintains a bona fide policy or practice which pays all or a portion of an employee’s salary during absences for sickness or disability, can deduct from an employee’s salary for any related absence occurring before, during and after such payments are exhausted, for any period of full day absences covered by this policy.
• Infractions imposed in good faith for violation of safety rules that are of major significance. Example: An employer may legally make a deduction from an exempt employee’s pay as a penalty for a serious safety rule violation such as smoking in a coal mine.
• Disciplinary suspensions imposed in good faith for infractions of “workplace conduct rules” – must be pursuant to a written policy applicable to all employees.  Example: An employer may legally impose a three-day unpaid suspension for violating a written policy applicable to all employees prohibiting sexual harassment.
• Exempt employees who are on unpaid FMLA leave need not be paid under that law.

            DEDUCTIONS NOT ALLOWED

• Less than full day absences regardless of reason.
• Full day absences occasioned by sickness or disability, where there is no bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability.
• Infractions of safety rules that are not of major significance.
• Infractions of unwritten workplace conduct rules or rules that address things other than workplace conduct (e.g. attendance infractions for tardiness).

Another question we frequently hear from employers is how to discipline an exempt employee for not working enough hours as may be expected of them.  An example would be a salaried exempt employee who does not miss full days of work but shows up late, leaves early, or worse, comes late/leaves early.  Although this appears to present employers with a dilemma based on the above summary of Department of Labor (D.O.L.) regulations, the short list of answers is: (1) fire the employee; (2) demote the employee; or (3) if it is apparent the employee is never going to work a 40 hour week, much less a week exceeding 40 hours (i.e. where there is no risk of incurring overtime) change the employee’s method of pay from salary to hourly – this will make the individual non-exempt, regardless of their job duties, but if there is no risk of incurring overtime liability it is better to pay only for the work an employer is getting, right?

Wage and hour law can be tricky and any of the above rules can be impacted by any number of nuances.  Accordingly, for questions regarding exempt employee status, salary deductions, or related issues please contact attorney James Sherman at 952-746-1700 or jasherman@wesselssherman.com.