California law generally holds that an employer may not pass the ordinary costs of doing business on to employees.  However, this general rule has a multitude of nuances once one examines all the different costs that arise in the employment context and the various Labor Code and Wage Order provisions that apply.  This article addresses five types of costs that arise in the employment context and the various regulations that apply to those scenarios:

1. Physical examinations

Employers are prohibited from requiring an applicant or employee to pay for a physical examination required by the employer.  Likewise, the employer cannot require an employee to pay for a medical or physical examination required by any federal, state or local law or regulation.  However, costs for pre-employment examinations that are required by law do not have to be reimbursed to the applicant.  See Labor Code section 222.5.

If an employer requires as a condition of employment a driver’s license, the employer is responsible to pay the costs for any physical examination that may be required for issuance of the license.  However, the employer is not responsible for costs for physical examinations taken prior to when the employee applied for employment.  See Labor Code section 231.

2. Cost of cashing checks and lost paychecks

California law prohibits employers from deducting the costs of cashing a paycheck from the employee’s wages.  The Division of Labor Standards Enforcement (DLSE) has issued an opinion letter stating that this prohibition also applies to the cost of reissuing a lost or misplaced paycheck. See Opinion Letter 1994.01.27.

3. Tools and equipment

Employers are responsible for paying for and providing the tools and equipment required to perform the job.  One exemption to this rule is for employees who earn at least two times the state minimum wage may be required to provide and maintain hand tools and equipment customarily required by the trade or craft.  See Wage Orders Nos. 1-2001 to 16-2001, section 8. Protective and safety equipment governed by the Occupational Safety and Health Standards Board requires that employers provide all equipment required under those regulations.

4. Mileage

Labor Code section 2802 requires an employer to reimburse employees for expenses they necessarily incur while discharging their duties.  If employees are required to drive their personal car for work, the employer must reimburse the employee for the costs attributed to the use of the employee’s car.  In Gattuso v. Harte-Hanks Shoppers, Inc., the California Supreme Court clarified the parameters of mileage reimbursement under California law, as well as the three different methods available for employers to reimburse employees for their mileage reimbursement. Click here for a detailed examination of the California Supreme Court’s ruling in Gattuso v. Harte-Hanks.

5. Uniforms

California law allows employers to require employees to wear particular types of clothing or uniforms to work. If an employer requires a non-exempt employee to wear a uniform, the employer must pay for and maintain it for the employee. What constitutes a “uniform” is not always clear.  Click here for more information regarding other considerations that arise with uniforms.

Here are five employment law and non-employment law issues that had my attention this week:

1. Will the future workforce be paid daily?

The Wall Street Journal’s article, “The Wait for Payday Doesn’t Have to Be So Long” raises some interesting issues about efforts to lower the time it takes for employees to receive paychecks.  The article noted that there are a variety of fronts that can speed up paycheck processing.  On one front, there is proposed legislation from Sen. Elizabeth Warren, among other representatives, to require a faster banking network for payments to consumers.  On another front, startup companies, such as DailyPay, Inc., work with companies to offer instant pay to their employees.  The article also notes that drivers for Uber can chose to be paid as often as five times a day.  The article raises interesting issues, and with the prevalence of technology making faster payments easier, is this something that employees and employers will move to?

2. California Supreme Court holds that plaintiffs cannot allege conversion claim for recovery of unpaid wages

In Voris v. Lampert, the California Supreme Court held that plaintiffs seeking recovery of unpaid wages cannot assert the tort claim of conversion to recover the unpaid wages.  The plaintiff in this case attempted to plead conversion to recover unpaid wages he was owed from a series of start-up companies he worked for.  The plaintiff attempted to plead a conversion claim against the defendants in order to hold the individual corporate officers personally liable, as the start-up company that plaintiff worked for had no assets.  In addition to the personal liability for corporate officers, a conversion claim would also allow the plaintiff to seek punitive damages.  The California Supreme Court’s refusal to permit the conversion claim provides some additional protection to corporate officers and prohibits punitive damages in standard wage claim cases.

3. NLRB issues first decision on mandatory arbitration case after Epic Systems

The National Labor Relations Board (NLRB) issued a decision on arbitration agreements in the workplace.  This decision was the first decision on arbitration agreements after the Supreme Court’s decision in Epic Systems v. Lewis.  The NLRB’s decision in Cordua Restaurants, Inc. 368 NLRB No. 43 (2019) held:

  • Employers are not prohibited under the National Labor Relations Act (NLRA) from informing employees that failing or refusing to sign a mandatory arbitration agreement will result in their discharge.
  • Employers are not prohibited under the NLRA from promulgating mandatory arbitration agreements in response to employees opting into a collective action under the Fair Labor Standards Act or state wage-and-hour laws.
  • Employers are prohibited from taking adverse action against employees for engaging in concerted activity by filing a class or collective action, consistent with the Board’s long-standing precedent.

4. California Court upholds arbitration of Unfair Competition Law claims

The California Court of Appeal held in Clifford v. Quest Software that claims against an employer brought under Business and Professions Code section 17200 (UCL) are subject to arbitration.  The Court held that UCL claims for private injunctive relief or restitution must be arbitrated, and a prior case, Cruz v. PacificCare Health Systems, Inc. (2003), to the extent it is still good law, only prohibits the arbitration on UCL claims for “public” injunctive relief.

5. The War of Art – a quote I’m pondering

After reading The War of Art by Steven Pressfield a few years ago, I still re-read it every so often.  It has nothing to do with employment law, but it is an excellent road-map to keep leaders, artists, entrepreneurs, writers or any other person trying to accomplish a great task on course and working in their profession.  Here is a quote I particularly like from the book:

Are you paralyzed with fear?  That’s a good sign.  Fear is good.  Like self-doubt, fear is an indicator.  Fear tells us what we have to do.  Remember our rule of thumb: The more scared we are of a work or calling, the more sure we can be that we have to do it.

Hope you are enjoying the summer so far.  As many employees take vacation during August, employers in California must be aware of unique rules that apply to vacation time. This Friday’s Five reviews five issues on vacation policies that can create traps for employers operating in California:

1. No use-it-or-lose-it policies permitted.
Under California law, vacation is treated the same as earned wages and vest as the employee performs work. Because vacation is earned proportionally as the employee works, any type of policy requiring employees to lose vacation that has already been earned is illegal under California law.

2. Reasonable caps are allowed.
While employers cannot implement “use-it-or-lose-it” policies, they can place a reasonable cap, or ceiling, on vacation accrual. The DLSE explains:

Unlike “use it or lose it” policies, a vacation policy that places a “cap” or “ceiling” on vacation pay accruals is permissible. Whereas a “use it or lose it” policy results in a forfeiture of accrued vacation pay, a “cap” simply places a limit on the amount of vacation that can accrue; that is, once a certain level or amount of accrued vacation is earned but not taken, no further vacation or vacation pay accrues until the balance falls below the cap. The time periods involved for taking vacation must, of course, be reasonable. If implementation of a “cap” is a subterfuge to deny employees vacation or vacation benefits, the policy will not be recognized by the Labor Commissioner.

3. Vacation is a form of earn wages that must be paid out on the employee’s last day of work.
An employee who is discharged must be paid all of his or her wages, including accrued vacation, immediately at the time of termination. See Labor Code Sections 201 and 227.3

4. Deductions are not permitted from employee’s final wages for use of vacation that was not accrued.
Vacation is treated as a form of wages under California law, and by permitting an employee to take vacation time before it is earned is similar to providing a loan to the employee.  Employers may not utilize self-help remedies to recover debts from the employee’s final pay check, including deducting wages owed to an employee to cover vacation that time was used but had not yet accrued.

5. “Cliff vesting” policies are problematic.
Employers may set probationary periods or waiting periods during which times employees do not accrue vacation time. However, the DLSE maintains that employers may not maintain a policy granting employees a lump sum of vacation upon reaching certain dates. The DLSE’s view on this type of “cliff vesting” is that the employer is really attempting to provide for accrued vacation, but at the same time is attempting to limit its liability of having to pay out a pro rata share of the accrued vacation if the employee does not work until the date in which the vacation is granted to the employee. It is safer for employers to avoid these lump sum grants of vacation, and simply set a time period (i.e., the employee’s first six months of employment) that the employee does not accrue vacation.

California law is vastly different than Federal law and other states. It can be a trap for employers, but with some understanding of the obligations created under the law it can easily be managed.

Hope you are enjoying the final weeks of the summer.

Mediation is one of the aspects of litigation that can be confusing for parties in a lawsuit, but there are few ground rules to understand about the process that can make it a lot less daunting.  Mediation is a non-binding meeting where the parties in a lawsuit hire an independent third party (a retired judge or lawyer) to try to reach a settlement.  Here are five concepts all parties should understand about the mediation process:

1. The mediator’s role is to make you uncomfortable (but in a good way).

As I wrote in a prior post, a mediator’s only role is to get the case settled.  He or she is not there to be your friend, not to tell you what they feel the case is worth, or to protect your opponent’s position.  Their role is to get a settlement.  Put yourself in the mediator’s shoes, and you have two adversarial parties who hate each other and believe they will win if their case goes to trial.  How, as a mediator, do you get the parties to move off their respective beliefs?  You must attack both sides’ theory of the case by pointing out the weaknesses of each position.

So don’t take the attacks personally, or think that the mediator is only attacking your position.  If the mediator is persuasive about how weak your case is, she is equally persuasive to other side.  Understand that the attacks are not personal and it is not about you as a person, but instead about the facts of the case.

2. Understand when being cooperative will help you get a better deal.

A party involved in a mediation must understand that there are two parts to a mediation: (1) the process and (2) the content.  The process is how you interact with the other party.  Are you cordial?  Do you make small talk?  The content is the subject being negotiated, such as the dollar amounts.  A party that is cooperative about the process and competitive about the content will do better overall in a mediation than compared to a party that is competitive on both the process and content.

Think about how you interact with someone that is simply being a jerk to you on ever little issue, even issues that do not impact the subject being negotiated.  When dealing with the hyper-competitive negotiator, your guard goes up and the negotiation turns more personal.  This is a bad combination for attempting to reach a reasonable settlement.

3. If you make a last, best and final offer, make it your last best and final offer.

Parties’ statements made during a mediation must have credibility.  If you make a “last, best and final offer” during a mediation, and the other side rejects the offer, but you continue to negotiate, you have lost credibility with the other party and the mediator.  As a result, even if you continue to negotiate and truly reach your last, best and final offer, the other side (and the mediator) will not believe that is your final number and will continue to push you beyond this number.  There are occasions to make a last, best and final offer, but if you qualify your offer as such, be ready to walk out of the mediation if the offer is rejected.

4. Bracketing.

Ralph Williams, a mediator with ADR Services, explains bracketing as follows:

Negotiation “bracketing” is the process of making a conditional offer linked to an expected response from the other side.  For example, plaintiff states, “I will demand $500,000 if the defendant offers $200,000.”  Defendant responds by accepting the bracket or proposing a different bracket (Defendant will offer $100,000 if plaintiff demands $400,000) or offering an absolute number.  Plaintiff then replies with one of the same three options.  Using negotiation “bracketing,” the parties send clear signals about their expectations, save time and avoid the stress of the negotiating dance that starts with a $1 million demand and a $10,000 offer.

In addition, brackets are conditional offers.  Therefore, unless the other side accepts the proposed bracket, the party making the offer is not committed to those numbers.  This allows parties to potentially make larger moves without the fear of having those moves held against them later in the mediation or in the case.

The use of bracketing during negotiations can add another layer of complexity to settlement negotiations.  However, with advice from counsel about how to negotiate using brackets, they are an effective tool in resolving cases.  Understanding the concept of bracketing before a mediation – even at a very basic level – will help save time during a mediation and allow you keep your focus on the negotiation.

5. Enter the mediation prepared with a bottom walk-away number, but also a number that represents a goal.

It is important to know what your last best and final number is prior to going into the mediation.  Steve Pearl, a mediator with ADR Services, explains:

Experienced negotiators will set not only the walkaway numbers beyond which they will not move, but also goals that are better than those walkaway numbers. Parties who set “shoot for” numbers as their reference points typically do better than those who only formulate walkaway numbers.

However, just like almost every negotiation “rule” there are drawbacks in setting a walk-away numbers.  Pearl explains that sometimes parties may have to shift their reference points to resolve the case.  So, parties should have clear numbers set going into the mediation, but must also have a mechanism to reevaluate these goals if the case will not settle within these predetermined numbers.

California’s Paid Sick Leave law, the Healthy Workplaces, Healthy Families Act of 2014, became effective on January 1, 2015.  While employer have been subject to the law for over four years, there are still some questions that employers have about their obligations.  Below are five questions that are still routinely asked by employers.

1. Can an employer’s attendance policies violate the law?

Yes.  Employers need to review attendance policies to ensure that the policy does not violate California’s paid sick leave (PSL) requirements.  Many attendance policies discipline employees for an unscheduled absence or if the employee does not provide advanced notice prior to an absence.  Under the terms of the paid sick leave law, if an employee has accrued and available sick leave, and is accrued paid sick leave for a purpose permitted under the law, an employer cannot discipline the employee for the leave.  This is considered a form of discipline against the employee for using his or her paid sick leave as allowed under the paid sick leave law.

However, it is important to note, as California’s Department of Industrial Relations (DIR) states in its frequently asked questions, the paid sick leave law does not “protect” all time off taken by an employee for illness or related purposes.  It “protects” only an employee’s accrued and available paid sick leave as specified in the statute.

2. Can employees take a vacation day and ask for it to be a paid sick leave?

No. An employer is not required to allow an employee to use accrued paid sick days for reasons other than those listed in the statute, which are:

(1) Paid sick time for nonexempt employees shall be calculated in the same manner as the regular rate of pay for the workweek in which the employee uses paid sick time, whether or not the employee actually works overtime in that workweek.

(2) Paid sick time for nonexempt employees shall be calculated by dividing the employee’s total wages, not including overtime premium pay, by the employee’s total hours worked in the full pay periods of the prior 90 days of employment.

(3) Paid sick time for exempt employees shall be calculated in the same manner as the employer calculates wages for other forms of paid leave time.

(Lab. Code § 246, subd. (l).)

3. Can employers require doctor’s notes from employees who take paid sick leave?

California’s Paid Sick Leave law does not address if an employer may require employees to provide a doctor’s note in order to take paid sick leave.  The DIR’s frequently asked questions also do not address this specific question, and only provides the following guidance about the required notice an employee must provide to take PSL:

The employee must notify the employer in advance if the sick leave is planned, as may be the case with scheduled doctors’ visits. If the need is unforeseeable, the employee need only give notice as soon as practical, as may occur in the case of unanticipated illness or a medical emergency.

4. How much will employees be paid for sick leave?

As the DIR sets forth, to determine the rate of pay, the employer may either:

  • Calculate an employee’s regular, non-overtime rate of pay for the workweek in which he or she used paid sick leave, whether or not he or she actually worked overtime in that workweek (in general terms, this is usually done by dividing your total non- overtime compensation by the total non-overtime hours worked), or
  • Divide the employee’s total compensation for the previous 90 days (excluding overtime premium pay) by the total number of non-overtime hours worked in the full pay periods of the prior 90 days of employment.  Employers need to be careful about how to calculate the regular rate of pay for commissioned employees for paid sick leave purposes also.

For exempt employees, paid sick leave is calculated in the same manner the employer calculates wages for other forms of paid leave time, such as for vacation pay, paid-time off, etc….

5. If the employer has employees in a city with a local paid sick leave law, which law applies?

Employers must comply with all leave laws that apply to their business, and must provide the most generous provisions of each leave law.  For example, in Southern California, the following local governments have paid sick leave requirements:

There are a lot of California employment law developments at the mid-point of 2019.  Below are five recent videos from our YouTube Channel discussing these new developments.  Subscribe to our YouTube Channel to keep current.

Also, if you are not already subscribed to my Firm’s newsletter, click here to subscribe to receive updates and invitations for special events we host.

1. Uniforms in the Workplace – New Case Law: Townley v. BJ’s Restaurants

In Townley v. BJ’s Restaurant, the California Court of Appeal recently ruled that employers are not required to reimburse employees for slip-resistant shoes as they do not qualify as a uniform under California law.  This video addresses this new case, as well as other issues related to uniforms, such as:

  • When must an employer pay for a uniform?
  • When does the employer have to pay for the costs of cleaning the uniform?
  • Can an employer require a deposit for a uniform?

2. What Employers Can do to Protect Against Class Action Claims:

Since insurance does not cover class action claims, what can you do as an employer to protect yourself in these situations?  I discuss a few options in this video.

3. 5 Key Issues for Terminations in California:

Terminations. It is not a subject you cover in management class, or any class for that reason. But yet the termination process is one of the more common business decisions that will receive the most scrutiny, and are probably the most legally challenged decisions in the workplace.

4. California Legislature Places Gig Economy in Cross-hairs:

The California legislature is setting its sights on limiting employers’ use of independent contractors in the gig economy.

5. Minimum Wage Increases on the State and Local Levels: What you Need to Know

Here’s a brief overview of what employers need to know about minimum wage increases.

Happy Friday.  Here is a refresher post for today’s Friday’s Five about some requirements about 10-minute rest breaks required for non-exempt employees:

1. Timing of rest breaks

The 10-minute rest break must be provided to employees who work over three and a half hours.  Employers must authorize and permit employees to take 10-minute rest breaks for every four hours worked, or “major fraction” thereof.  A “major fraction” of four hours is anytime more than two hours.  Insofar as practicable, the rest breaks should be in the middle of each four-hour work period.

2. Rest breaks must be paid and employees must be relieved of all duties

The rest period is considered time worked and must be paid.

Employees must be relieved of all duties during the rest break, and cannot be required to monitor a pager, phone, or other device during the rest break.  The Court in Augustus v. ABM Security Services, Inc., ruled that “one cannot square the practice of compelling employees to remain at the ready, tethered by time and policy to particular locations or communications devices, with the requirement to relieve employees of all work duties and employer control during 10-minute rest periods.” The Court made clear that the employee must be “free from labor, work, or any other employment-related duties. And employees must not only be relieved of work duties, but also freed from employer control over how they spend their time.”  Further analysis on the Augustus case can be read here.

3. Rest breaks need to be “authorized and permitted”

Employers are required to “authorize and permit” rest breaks, and there is no affirmative duty for employers to require that employees take rest breaks.  Employers need to ensure that they do not interfere with an employee’s ability to take the rest break, and if the demands of work are such that employees cannot take the rest break, employers should have a system in place to compensate the employee the applicable “wage premium” of one hour of pay at the employee’s regular rate of pay for any violations.

4. Rest breaks do not need to be recorded

Unlike the 30-minute meal break, the 10-minute rest break does not have to be recorded in the timekeeping system.

5. Piece rate employees must be paid separately for rest breaks

Employers who paid employees on a piece rate basis need to ensure they comply with Labor Code section 226.2, which took effect in January 2016.  Under Labor Code section 226.2, employers who paid employees on a piece rate basis must pay employees for “rest and recovery periods and other nonproductive time separate from any piece-rate compensation.”  The law requires employers to calculate the regular rate of pay for each workweek, and then pay the piece-rate employees the higher of this regular rate of pay or the applicable minimum wage for rest break time.  The law also requires employers to pay piece-rate employees for “nonproductive time” which is defined as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.”  The nonproductive time is required to be paid at a rate no less than the applicable minimum wage rate.  In addition, employers who pay employees on a piece-rate basis need to report the pay for rest breaks, recovery periods, and nonproductive time separately on the employees’ pay stubs.  Employers with piece rate employees should consult with experienced counsel to ensure the correct amounts of time are being calculated and paid for under this law.

I published this post the last couple of years for the Fourth.  Hopefully I’ll be able to keep publishing it for many years to come.  Wishing you a great Fourth, and hope you have some time to put aside your work for a bit and enjoy some time with your family.  Happy Fourth!

Five things I’m thankful for this Fourth of July:

1.     For the great risk and sacrifice our Founding Fathers took to establish the country. 

When learning about the Founding Fathers in high school history class I did not have a perspective about the risks the Founders took in establishing the country.  Only now that I have a business, a family, and am relatively successful, can I realize the huge risks the Founders took.  By all means, they were the establishment, the elite of the American society, and if anyone had an interest in preserving the status quo, it was them.  Their sacrifices of life (theirs and their family members) and their fortunes helped build the foundation we benefit from today.

2.     The ability to speak freely and practice or not practice any religion I want.

It is great being able to freely speak your mind and believe in whatever you want.  It is also great be free to practice (or not) any religion you want.  We live in a very tolerant society, and it is even better when the government is not telling you how to live your life.  It is important to remember that throughout history, this has been the exception for how a government normally behaves.

3.     Our Country’s ability to attract creative people.

People that like creating things and being productive want to practice their trade where the government will basically leave them alone and provide a good environment to protect their gains derived from their hard effort (see item #5 below).  The U.S. provides this environment, and that is why so many people come to the U.S. to create a business or to practice their trade.  It is also important to recognize how lucky we are to have been born in the U.S.

4.     My right to practice any profession and access to unlimited resources to learn the required skills.

No one is dictating what students need to be after they graduate high school or college.  Everyone is free to pursue their interest, and the market decides the value of the effort.  With basically any information freely available on the Internet, anyone can learn almost any skill, and like no other time in human history individuals have an almost free method to sell their services or products over the Internet.  In your mid-40’s and want to make a career change?  Perfect, and you don’t even need to go back to school as the information is freely available on the Internet.  Didn’t finish college and are 20 years old with an idea?  Perfect.  Venture capitalists don’t care about your pedigree, they are only interested if you work hard and don’t give up.

5.     Our legal system.

Yes, it sounds trite.  But while I don’t think our legal system is perfect by any means, it is the best system established in the history of mankind.  Everyone living in the U.S. presently is very lucky to have this benefit.  It is a foundation for many of the items I mentioned above.  Because people have a good basis for predicting the outcomes of their actions, such as being able to retain property legally obtained, and knowing if someone breaches a contract there will be repercussions, it creates an environment that attracts hard effort and the best talent from around the world.  This is why the U.S. has been the leader in ideas and new businesses.  However, just because the system is established it does not mean our work is done.  We have to be vigilant not to lose the fairness, reasonableness, and lack of corruption in legal system.

Happy Fourth of July. I’m off to the neighborhood parade.

Finding an attorney who can help an owner, CEO, or president manage business issues can be a stressful situation if not approached correctly.  Below are five recommendations about what to look for when hiring an attorney, and when an attorney should be engaged (hint: sooner than later).

1. Personality fit is key

Just like any other high-stakes, high-stress relationship, how you get along with your attorney is one of the most fundamental aspects to the relationship.  I’m not saying you have to be able to be best friends with your attorney, but do you learn new things from them when you speak?  Also, consider whether or not  you enjoy calling your attorney.  If you dread speaking with your attorney, you will use them less, and this could cost you a lot of money in the long run.  Your attorney needs to be a trusted advisor that you feel comfortable reaching out to for advice.

Also, the attorney’s personality and how they treat you as a client is a key indicator on how they treat the attorneys on the other side of the deal or in litigation.  Most clients say they want the scorched-earth, brass-knuckles attorney representing them, but in reality, business deals and even litigation (at its core litigation is a business transaction), usually need to be resolved when reasonable people reach a compromise.  If your litigation attorney is billing by the hour and never seems interested in considering how to resolve the case sooner than later, it should raise some concerns.  Likewise, if your business attorney is not working on a flat fee and has issues with every single negotiation point in a deal, this could be a concern.

2. Ask friends and contacts for referrals

If you do not know any attorneys, ask your contacts in your industry for a referral.  If you have a trusted attorney that does not practice the particular issue you need help with, ask that attorney for a referral.  As discussed below, the legal industry is becoming very specialized, and attorneys that routinely practice in the area you need assistance with are critical.

3. Engage attorneys with experience in your industry

Just as important as the attorney’s experience in the practice area, it is equally important to find an attorney with experience in your industry.  If you operate a restaurant, your issues will be much different than the owner of a start-up software company.  Employment laws do not generally change based on which industry your company operates in, but there are some exceptions to this general rule.  Moreover, an attorney that has worked in your industry will be able to bring the experience of previously dealing with the issue, and will be better positioned to understand what to expect two or three steps in the future.

4. Seek lawyers with specializations

For example, I can determine within about five minutes if I’m dealing with opposing counsel who do not routinely litigate employment cases.  Likewise, I would be the first one to admit that I am not the attorney to negotiate your next lease.  Clients save a lot of money when hiring attorneys with experience in the area they need assistance in – many of the routine issues are already understood by the attorney and do not have to be researched.  Generally, a company will typically require the following types of attorneys:

  • Corporate attorney to assist with forming a corporation, raising money from investors, and stock issues.
  • Employment attorney to set up employment policies, such as handbooks, set up and audit pay practices to ensure everyone is properly classified, and to be available for routine advice and counseling issues that will come up from time-to-time.
  • Tax attorney to work with your other attorneys and accountants to advise on tax implications on various transactions and how best to structure the transactions to minimize the tax implications.
  • Intellectual property attorney when dealing with any copyright, trademark, or patent issues.
  • Real estate attorney to review leases or agreements to buy/sell buildings or land.

5. Engage a lawyer before you need them

Once you realize that an attorney will likely be needed for your business, engage the attorney for some small issues.  Make sure your personalities match, see if the attorney provides good value to your company, and get a general sense of the attorney.  In the employment context, it is also a good time for the attorney to get a sense of the company’s policies, meet  people in the human resources department, and potentially review and update the employee handbook.  This general knowledge is helpful when a critical issue arises, and important decisions must be made with your attorney on a very tight timetable.  It is much more comfortable to have at least the beginnings of a relationship with the attorney established, before your company is trusting this advisor with issues that could have significant consequences.

Employers considering implementing non-competition and non-solicitation agreements for their California workforce must understand the differences in these agreements, and California’s public policy against restraints against an employee’s ability to work in their profession or trade.  This Friday’s Five covers five issues that employers should understand regarding non-competition and non-solicitation agreements in California.

1. Non-competition and non-solicitation agreements cannot violate Business & Professions Code section 16600

In California, non-competition agreements are governed by Business & Professions Code section 16600, which states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The statute permits non-competition agreements in the context of sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5).  But other than these narrow exceptions connected with the sale or dissolution of a company, California has a strong public policy against non-competition agreements.

Under the common law, as still recognized by many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed.

2. California Supreme Court ruling in Edwards v. Arthur Andersen regarding non-competition agreements

In 2008, the California Supreme Court ruled on the enforceability of non-competition agreements under California in Edwards v. Arthur Andersen LLP. Arthur Andersen argued that California courts have held that section 16600 embraced the rule of reasonableness in evaluating competitive restraints.

The Court disagreed with Arthur Andersen and held that the non-competition agreement at issue in the case was invalid under California law.  The agreement prohibited the employee from performing professional services for any client he worked with at Arthur Andersen for an 18-month period.  It also prohibited the employee from soliciting any client of Arthur Andersen’s Los Angeles office.  The Court held that these prohibitions restricted the employee’s ability to practice his accounting profession, and therefore was unenforceable under California law.

3. California Supreme Court refused to recognize the “narrow-restraint” exception in non-competition agreements

Arthur Andersen argued that section 16600 has a “narrow-restraint” exception and that its agreement with Edwards survives under this exception because the restraints against the employee were narrow and reasonable.  Arthur Andersen argued that the federal court in International Business Machines Corp. v. Bajorek (9th Cir. 1999) upheld an agreement mandating that an employee forfeits stock options if employed by a competitor within six months of leaving employment. Arthur Andersen also noted that a Ninth Circuit federal court in General Commercial Packaging v. TPS Package (9th Cir. 1997) held that a contractual provision barring one party from courting a specific customer was not an illegal restraint of trade prohibited by section 16600, because it did not “entirely preclude[]” the party from pursuing its trade or business.

In rejecting Arthur Andersen’s argument, the California Supreme Court refused to recognize the “narrow-restraint” exception for noncompetition agreements in California:

Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception. Indeed, no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” [citation] Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect. We reject Andersen’s contention that we should adopt a narrow-restraint exception to section 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.

4. Customer non-solicitation agreements

There are two types of non-solicitation agreements: one that restricts the employee’s ability to solicit customers and another that restricts the employee’s ability to solicit employees (see item #5 below).

In regard to customer non-solicitation agreements, as set forth above, the California Supreme Court in Edwards v. Arthur Andersen ruled that a prohibition on a former employee’s solicitation of clients was an invalid restraint on the employee’s ability to pursue his trade or business.  Similarly, in 2009, a California appellate court in Dowell v. Biosense Webster, Inc. held that a broadly worded non-solicitation clause that prohibited an employee for a period of 18 months postemployment from soliciting any business from, selling to, or rendering any service directly or indirectly to any of the accounts, customers or clients with whom they had contact during their last 12 months of employment was void under section 16600.  In Dowell, the court rejected the employer’s argument that the agreement was enforceable under the trade secret exception because it found the non-solicitation provision was “not narrowly tailored or carefully limited to the protection of trade secrets, but are so broadly worded as to restrain competition.”

5. Employee non-solicitation agreements

Employee non-solicitation clauses can also be found to violate section 16600 if drafted too broadly and it in effect becomes an invalid restraint on the employee’s ability to work in their profession or trade.  However, the court in Loral Corp. v. Moyes (1985), ruled that the agreement at issue was more of a “noninterference agreement” between the employer and former employee.  It upheld the noninterference agreement that prevented the former employee from soliciting employees from the employer, and even though the agreement did not have a time limitation, the court interpreted the agreement to apply a one-year limit.

Likewise, the California Supreme Court held in Reeves v. Hanlon (2004) that a law firm employer could establish a claim for interference with prospective economic advantage against former attorneys who left the firm and solicited employees.  However, the Court noted, “that to recover for a defendant’s interference with an at-will employment relation, a plaintiff must plead and prove that the defendant engaged in an independently wrongful act—i.e., an act ‘proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard’” that induced the solicited employees to leave their employment.

California employers are cautioned to carefully review all agreements that restrict former employees’ ability to compete and solicit customers and employees to ensure the restrictions do not violate California’s strong public policy in allowing employees to perform their chosen profession or trade.