A Wrinkle In Time: The EEOC announced its E-RACE Initiative in February 2007, incorporating its position on the use of criminal convictions in the hiring process. Two weeks later, the Third Circuit Court of Appeals in El v. Southeastern Pennsylvania Transportation Authority (SEPTA) threw employers and the EEOC a curve ball. Among other things, the court rejected the EEOC’s long-standing common sense approach, requiring instead that employers provide “some level of empirical proof” demonstrating that the use of criminal convictions accurately predicts job performance. The court, however, refused to go so far as to prohibit all bright-line policies like SEPTA’s (which excluded hiring drivers with any record of a felony conviction for violence against a person) if the policy actually distinguishes between applicants who pose an unacceptable risk and those who do not. The translation — employers should be prepared to present expert testimony if the plaintiff makes an initial showing of disparate impact. SEPTA presented several experts, including a leading criminologist in defense of its policy.

Full Speed Ahead: The SEPTA decision has generated new interest in the topic at the EEOC (despite the agency’s recent loss in EEOC v. Peoplemark in which it was ordered to pay over $750,000.00 in attorney’s fees because it was unable to secure the necessary expert testimony). It is unclear whether the EEOC will revise its policy guidance to incorporate SEPTA (or other changes), but in recent opinion letters and public meetings, the EEOC has demonstrated an increasing level of distrust of anything but the most narrowly tailored policies, indicating changes to current guidance may not be too far away. At a recent public meeting in July 2011, the Commissioners heard a wide range of testimony on the topic. For example, one witness advocated for adoption of a presumption that any criminal conviction policy has a disparate impact and another questioned the quality of the data employers are relying upon in light of the explosion of on-line background check services. These are just some of the issues the EEOC is grappling with in addition to SEPTA.

The Bottom Line For Employers:

A pre-employment question asking about criminal history does not in and of itself violate Title VII, but be very careful how such information is used and be very wary of broad-based or blanket exclusion policies. It is uncertain whether the EEOC and other courts will adopt the SEPTA holding, however, employers should do some end of year housekeeping and consider conducting a privileged review of their existing policies and procedures concerning criminal convictions, paying special attention to the scope and impact of such policies and reviewing for compliance with state laws on criminal background and credit reporting.

When:  Shortly.  OSHA had said that the Small Business Regulatory Enforcement Fairness Act process for I2P2 would begin in June, but that didn’t happen. In the Chat on July 11, OSHA said that it expected that process to begin “shortly,” and at that time a draft of the I2P2 would be available to the public.

What:  Unknown.  The Chat did not provide any clues on what we can expect I2P2 to look like.  The most we learned was that I2P2 would be an “improved, more systematic approach to managing workplace health and safety.”  In the past, we have been told that I2P2 would contain the following elements:

• Management duties
  • Establish a policy
  • Set goals
  • Plan and allocate resources
  • Assign and communicate roles and responsibilities
• Employee participation
  • Involve employees in establishing, maintaining and evaluating the program
  • Employee access to safety and health information
  • Employee role in incident investigations
• Hazard identification and assessment
• Hazard prevention and control
• Education and training
• Program evaluation and improvement

The Bottom Line for Employers:

OSHA has engaged Eastern Research Group to prepare a Safety and Health Practices Survey to determine how safety is managed in various workplaces.  In the meantime, we will need to pay close attention to this rulemaking and further developments, and will keep you posted.

1. Section 525 of the United States Bankruptcy Code prohibits private employers from discharging or discriminating against an individual because he/she has filed for bankruptcy or is associated with a person who has filed for bankruptcy.
2. It is a felony offense under Section 276.001 of the Texas Election Code for a person to withhold wages or another benefit of employment (or to threaten to do so) in retaliation for voting for or against a particular candidate or refusing to say how he/she voted. 
3. Section 158.209 of the Texas Family Code makes it unlawful for an employer to use an order or writ of withholding as grounds for refusing to hire or fire an employee. 
4. Texas Government Code § 431.006 prohibits private employers from terminating an employee who is a member of the military forces of any state because the employee is ordered to authorized training or active duty. 

 The Bottom Line for Employers:

 “At-will” employment has it limits.  Employers should continue to familiarize themselves with all applicable laws governing the workplace; train their managers and supervisors accordingly; and draft policies where appropriate.  These laws may not be as familiar as Title VII, but can be just as costly if not diligently observed.

The settlement – which is now awaiting Court approval – requires Verizon to expressly state in its policies that excusal of an absence as “nonchargeable” may be considered a reasonable accommodation under the ADA, and that where employees have been granted a modified or flexible work schedule as a reasonable accommodation, such absences will not be “chargeable.”  It further states that before terminating any employee under the absence policy, Verizon will make reasonable efforts to determine whether the absence is “nonchargeable.”  When making this determination, Verizon is to apply a detailed set of factors regarding the employee’s condition and the absence(s) themselves.  Specifically, Verizon is to evaluate whether each of the following factors is satisfied:

(a)    The Current Associate has a mental or physical impairment that substantially limits one or more major life activities of such individual as defined by the ADA, and for the period on and after January 1, 2009, as amended through the ADA Amendments Act of 2008;

(b)   The Current Associate’s absence was caused by a disability;

(c)    The Current Associate or someone else on the Current Associate’s behalf requested through the Company’s designated process a period of time off from work due to a disability;

(d)   The Current Associate’s absences have not been unreasonably unpredictable, repeated, frequent or chronic;

(e)    The Current Associate’s absences are not expected to be unreasonably unpredictable, repeated, frequent or chronic;

(f)    Verizon was able to determine, from the request by or on behalf of the Current Associate or through the interactive reasonable accommodation process, a definite or reasonably certain period of time off that the Current Associate would need because of a disability; and

(g)   The Current Associate’s need for time off from work as a reasonable accommodation does not pose a significant difficulty or expense for Verizon’s business.

If all factors are met, the absence(s) must be considered “nonchargeable” and the employee cannot be disciplined or terminated based on the absence. 

The Bottom Line for Employers: 

The ADA’s reasonable accommodation obligation can include modified work schedules, additional leave beyond what is ordinarily offered by the employer, and exceptions to blanket policies to allow employees to take advantage of such accommodations.  In light of this obligation, employers should examine their absence control policies to make sure that they allow for exceptions that may be warranted by the ADA. 

A link to the EEOC’s press release regarding the settlement is here:  http://eeoc.gov/eeoc/newsroom/release/7-6-11a.cfm

A link to the proposed settlement agreement is here:  http://hr.cch.com/eld/11-01832.DCMD.pdf

This case gives employers more ways to contractually restrain employees from competing.  No longer is providing confidential information or specialized training the only safe option.  That said, the case raises important new questions about (1) what forms of financial benefit other than stock options may be sufficient consideration for a noncompete, and (2) how the courts will determine the reasonableness of the restrictions in agreements involving financial benefits.  The case and these issues are discussed in greater detail below.     

The Facts:  Marsh involves a former managing director of Marsh USA Inc., a risk management and insurance business.  According to the company, the director was a “valuable employee who had successfully performed at his position,” and had both attracted and retained business for the company.  During the director’s employment, and to encourage further good performance, Marsh offered him options to purchase 500 shares of stock in Marsh’s parent company.   The options vested in increments and fully vested after four years.  Upon exercise of the options, the director was required to sign a non-solicitation agreement in which he promised that if he left the company within three years after exercising the options, he would not solicit certain company clients or certain employees for a period of two years.  (The agreement also required the director to maintain the confidentiality of Marsh’s trade secrets, but the Court did not examine whether the provision of confidential information was a basis for enforcing the noncompete.)

In attempting to enforce these promises after the director left the company, the company argued that the stock options were sufficient consideration because they furthered the company’s “goodwill,” which is an expressly protectable interest under the Texas Covenants Not to Compete Act, Tex. Bus. & Comm. Code § 15.50.

The Holding:   Previous appellate court precedent had held that stock options and similar financial incentives were not sufficient consideration because, unlike confidential information or specialized training, mere financial consideration does not “give rise to the employer’s interest in restraining the employee from competing.”  In Marsh, the Supreme Court held that this was the wrong test to apply, and thus overruled a portion of its prior decision in Light v. Centel Cellular Co. of Texas setting out this test.  Instead, the Marsh Court held, the proper test is whether the consideration merely gives rise to, or is “reasonably related to,” an “interest worthy of protection.”  Under this test, the Court found, stock options were sufficient consideration because they made the employee an “owner” of the company and linked his interests with the company’s long-term business interests, including the development of solid, long-term customer and employee relationships.  Thus, the stock options furthered the company’s goodwill, which is expressly an “interest worthy of protection.” 

The Court stressed, however, that the “hallmark” of enforcement was whether the particular restrictions at issue are reasonable and do not impose greater restraints than necessary to protect the employer’s interests.  The Court did not attempt to determine whether the particular restrictions at issue in this case were reasonable, but sent the case back to the trial court to make this determination. 

Significant Open Questions —    

What other forms of benefits will suffice and in what fact patterns?  As the three dissenting Justices forcefully pointed out, the Court’s opinion leaves unclear what other forms of financial benefit create sufficient business goodwill.  The majority opinion could conceivably be read to suggest that any form of financial consideration to any employee – such as a bonus, promotion, or even payment of a salary – could further business goodwill, and thus satisfy the majority’s test.  The majority does not directly address this point, except perhaps to explain that stock options generally further goodwill because they are designed to give the employee a greater stake in the company’s performance and in its long-term relationships with customers and employees, and to note that the employee at issue was a valued high-level employee who had already been successful in developing customer relationships.   

What is reasonable?   How will the courts measure the reasonableness of temporal, scope of activity, and geographical restrictions when the only valid consideration is stock options or similar financial benefits?  To date the case law that has developed on the issue of reasonableness has focused on whether confidential information and/or specialized training that the employee has received is substantial enough to justify the particular restrictions in the agreement.  But what facts become relevant when examining financial benefits and their impact on business goodwill?  For example, does the amount or form of the financial benefit matter, including any vesting or similar restrictions?  How is the employee’s “value” to the company to be determined?   

The Bottom Line for Employers:

Employers who want to restrain employee competition now have more options at their disposal.  We know that at a bare minimum, providing stock or stock options to a higher-level, valued employee will satisfy the Marsh test.  It is an open question as to whether other forms of remuneration – such as a bonus, promotion to a higher position, or salary increase – will suffice, and in what fact patterns. 

Employers must also remember that just because a noncompete agreement is based on sufficient consideration does not mean that courts will enforce all of its restrictions as to time, scope of activity, and geography.  Whether particular restrictions will be enforced depends on whether those restrictions are reasonable given the facts and circumstances of the case.   When drafting noncompetes based on stock options or similar financial benefits, employers will need to give careful consideration to the restrictions and whether they are justified by factors such as the employee’s position within the company, the employee’s access to confidential information and trade secrets, his or her performance, the amount of financial benefit being provided, and similar considerations.  Employers also need to keep up with the precedent that develops in this area.