Gruntled Employees

Massachusetts: closed for business

States spend skitillions of dollars (a skitillion is one followed by a wad of zeroes, or ten to the wad) on catchy slogans and jingles to lure gullible businesses to open plants and offices there. If you're from Massachusetts and of a certain age (that is, you now enjoy your federal age-discrimination rights), you probably still suffer from that dreaded 1970s earworm, "Makin' It in Massachusetts." Oh, those clever double entendres!

Anyway, the Commonwealth can stop spending tax dollars on musical lures for businesses because they're leaving and they ain't coming back. Why?

Treble damages. (Not to be confused with "treble entendres.") ("Treble" is a slightly fancy way for lawyers to say "triple." As in, "Jacoby Ellsbury just trebled to the triangle at Fenway. He's wicked good.") (Hey, it's a Massachusetts-themed post, OK?)

Here's the 411: The Massachusetts legislature passed Senate Bill No. 1059 into law on April 14, making treble damages mandatory for an employer’s violation of the Commonwealth’s wage-and-hour laws. Employees bringing claims over the payment of wages, minimum wage, or overtime could win three times the actual damages they suffered — even when the violation is inadvertent. The law, which passed when Governor Deval Patrick declined to veto it, overturns a 2005 decision of the Supreme Judicial Court that limited treble damages to cases involving an employer’s “willful misconduct.”

Previously, the statute left it up to the judge to determine whether an employer had maliciously violated the wage law before awarding treble damages. This allowed the court to distinguish between employers who intentionally deprived workers of their earned wages and employers who stumbled over the confusing technicalities of the wage laws. In Wiedmann v. The Bradford Group, the Massachusetts high court confirmed that the law gave judges the discretion to award treble damages to willful offenders. It was this case that the legislature overturned with the amended statute.

The new legislation becomes effective on July 13, 2008, and will govern all cases filed thereafter. What is uncertain is whether the law will have retroactive effect over earlier cases. Language in the legislation says that it was intended to “clarify the existing law and to reiterate the original intention of the general court that triple damages are mandatory.” (Ironically, the old statute’s legislative history makes clear that this was not the “original intention.") This language will encourage plaintiffs’ attorneys to argue that the law should be applied retroactively. If this argument prevails, all pending wage claims — and perhaps even those that have not yet been filed — would be subject to mandatory treble damages. We expect there will be hard-fought litigation over this issue.

With the passage of this new law, Massachusetts becomes the first state in the nation to make treble damages mandatory in wage-and-hour cases. With wage claims and class-action lawsuits already on the rise, Massachusetts now becomes the jurisdiction of choice for plaintiffs. (At least someone will be makin' it in Massachusetts.) Employers must be more careful than ever to ensure that they are complying with the Commonwealth’s wage laws.

What employers can do

• Pay your employees on time — especially when they depart.
• Make sure they’re properly classified as exempt or nonexempt.
• Have your employment counsel audit your pay practices.

In the meantime, Go Sox!

[Shout out to Steve Reed for his spot-on legal analysis.]

Are noncompetes the new Sarbanes-Oxley?

We talked last week about the increase in noncompete cases over the last decade (see "The rising noncompete tide"). Over that period, the number of published noncompete decisions in state and federal courts nationwide has doubled. And over the past two years (2004 to 2006), the number of decisions has surged 37%.

Several people have asked for more information on how I got these numbers. My firm did a series of LexisNexis searches designed to find reported noncompete decisions for each year. The complete results are shown in the chart above.

What this doesn't tell you is the number of noncompete cases filed each year. Those numbers are much larger because most noncompete cases are decided at the trial-court level instead of at the appellate-court level. Most trial-court decisions go unpublished, particularly when the decision is just a ruling on a motion for preliminary injunction, which is how most noncompete cases end. (The old employer asks the court to stop — or "enjoin" — the new employer from hiring the employee who signed the noncompete.) The increase in the number of cases filed would be even more dramatic.

Why the growth in noncompetes? One reason for this surge is the increase in employees signing noncompetes, especially outside the IT industry. Another reason is the fiercer competition for top-level talent. It's hard to get good people, and companies don't want their rivals to take theirs.

Many in-house counsel will tell you that one of their biggest employment-law concerns is the rise in Sarbanes-Oxley whistleblower lawsuits. But compare the number of cases filed under SOX's Section 806 (the only part of the Act that allows an individual to sue) with the noncompete statistics above. According to the U.S. Department of Labor, only 130 SOX whistleblower cases were decided in 2006. (You can get more data on SOX cases at the DOL's website.) And while that number has risen over the four years since the Act was introduced, the number of those cases pales when compared to noncompetes.

Maybe noncompetes are the new Sarbanes-Oxley whistleblower bogeyman.

*    *    *

Several talented writers have picked up on the story of noncompete mania. Evil HR Lady weighed in with this comment, and Charles Green at Trusted Advisor Associates had this to say. Over at OregonLive: At Work, Brent Hunsberger contributed "Noncompete clauses on the rise?" And Professor Paul Secunda over at Workplace Prof Blog adds "Non-Compete Legislation To Combat Increasing Number of Cases." The latter two posts discuss legislation pending in Oregon designed to stem the noncompete tide.

The rising noncompete tide

FinancialWeek's Frank Byrt has a great piece on the rise of noncompete litigation directed at top executives: "No place like home: Companies blocking more execs from jumping to competitors" (registration required, maybe). Frank's jumping-off point is the recent high-profile litigation between TJX and Pier 1. In that dispute, Alexander Smith left his job as a group president at TJX to become Pier 1's CEO. TJX fired off a lawyer-letter warning Smith that he was violating his noncompete agreement. Pier 1 then made a preemptive strike by seeking a temporary restraining order to prevent TJX from interfering with Smith's new employment.

As that battle rages, Frank notes the growth in noncompete litigation and the fact that top executives are increasingly becoming targets. Frank and I had a lengthy discussion about this, and some of that discussion made it into his article:

More and more employers — witness clothing retailer TJX Cos. — are threatening to sue to enforce non-compete clauses of executives’ employment agreements when they jump ship, and it’s no longer just to protect company secrets or customer lists.

Rather, companies are more frequently using non-compete litigation to try to block top employees from working for a competitor, said Boston attorney Jay Shepherd. “I think part of it is that it’s harder to get good top executives, so there’s a competition for that talent.

“Our non-compete litigation is growing like crazy,” he said of his employment law firm. The portion of non-compete cases it handles has grown to 65% of the practice, about double that of 2002.

Some of the new cases stem from the recent flurry of mergers and acquisitions. In these situations, typically the merged company doesn’t want departing executives, who have left of their own volition, trying to duplicate their success there with the competitor down the road, Mr. Shepherd explained.

“We’re definitely seeing more of this,” he added. “And people forget that companies can get emotional, too,” and will file lawsuits based on a sense of betrayal or disloyalty and, occasionally, out of spite.

And it's not just noncompete lawsuits against executives that are rising. Our own research tells us that noncompete cases have surged over the last decade. The number of published decisions in state and federal courts nationwide nearly doubled from 1996 to 2006. Over the past three years, the number of reported cases rose 32%. One reason is the increase in employees signing noncompetes, especially outside the IT industry. Another reason is the fiercer competition for top-level talent.

Bottom line: If you're thinking of hiring your competitor's top performer, be prepared to battle it out in court.

Issues raised by "lift outs"

Robert Weisman of The Boston Globe had a nice piece called "The business of lift outs," describing some of the problems companies face when they "lift out" a team of workers intact from another company. Rob describes lift outs thus:

The practice of scooping up talented groups of workers, once relatively rare and frowned upon as poaching, has become far more common and respectable. Headhunters have given it a more upscale name — "lift outs" — and companies in a range of sectors, from finance and technology, to healthcare and professional services, have embraced it as the quickest way to gain a foothold in a new market or region.

Although the term hasn't really gone mainstream yet, the phenomenon is quite common. At our firm, we deal with lift outs (or, if we're representing the former employer, "employee raiding") all the time. Rob called me to talk about some of the problems the company doing the lifting might face, and we chatted about litigation and corporate-culture problems:

But lift outs don't always go smoothly. Litigation is a popular option for jilted employers, especially at technology and life sciences companies where noncompete and nonsolicitation contracts are commonplace. Whether such contracts can be enforced hinges on many factors, including the type of new jobs the team is assuming, how employees were approached by the team leader, whether they seek to capitalize on customer relationships developed on the payroll of their former companies, and the judge or jurisdiction handling a lawsuit.

Even in the absence of legal challenges, lift outs can backfire. "People at a law firm can resent it if they're getting ready to become partner and new people are brought in above them," said Jay Shepherd, a Boston employment lawyer. "And while the team might work well together, they may not fit in well with the culture of the new firm."

The noncompete lawsuits that often result from lift outs are the more obvious and overtly expensive side effect. But the lifting company should not underestimate the integration problems that often arise when a clique of people — often receiving some special treatment — are suddenly thrust together with employees who've been around a lot longer. It might seem junior high schoolish, but the costs of the new kids not getting along with the old ones could end up being more severe than the expense of noncompete litigation.

Think hard before you lift out.

Workplace romance: love affairs and lawsuits

The Boston Globe's Jason Touhey has a nice article on the pitfalls of office romance, both for employees and employers. Jason reports that anywhere from 40 to 60 percent of workers admit to having had a romantic relationship in the workplace at some point in their careers. Since many people frown on that behavior (and people often lie to survey takers), you can assume that the number is somewhat higher.

Jason also reports that a quarter of all employers ban or discourage office relationships, with penalties including counseling, reprimands, or even termination. But employers should not assume that having a policy is going to automatically protect them from problems:

Most employers realize, however, their seldom-read manuals cannot top one of the most elemental powers in nature.

"Employers can't pretend that people are going to completely separate their [love] lives and their workplace lives," said Jay Shepherd, principal at Shepherd Law Group, a Boston firm serving businesses with employee disputes. "You just need to be smart about it and keep your eyes open for problems."

Companies also don't like it when couples split up. Failed workplace relationships can lead to productivity problems, lawsuits, and harassment claims, Shepherd said.

(I couldn't have said it any better myself. By the way, I said "sex lives," not "[love] lives.")

Jason also notes that 80 percent of respondents agree that relationships between supervisors and subordinates cannot be tolerated. (Implicit in that statistic is that 20 percent of respondents either didn't understand the question or enjoy lawsuits.)

Policies are fine, but they are no substitute for good management. And good management is the best protection from the potential sexual-harassment lawsuits that can be part of the ugly aftermath of a failed workplace romance. (See the recent post on why sexual-harassment cases are so hard to defend.)

No lawyer tricks for defending against sexual harassment

Sexual harassment is the hardest employee claim to defend against. Why? Because it's the claim most likely to make its way to a jury.

When we're defending our employer clients, we try to get most types of employee claims narrowed or dismissed using an arsenal of legal tactics.

Lawyer tricks, in jaded terms.

For example, say I'm defending a disability-discrimination claim. Here are the different arguments I can make to try to get the claim dismissed:

1. the employee's not actually disabled
2. her condition isn't serious enough to meet the disability threshold
3. she's not "otherwise qualified" to perform her job
4. she refuses to accept the reasonable accommodations my client's provided
5. the accommodations needed to allow her to do the essential functions of her job are not reasonable
6. she's already claimed elsewhere that she's totally disabled, meaning she can't work, period

As you can see, there are a number of arguments I can use in a legal motion to try to get the claim dismissed. They're not easy arguments — disability cases are very tricky — but they are arguments.

Sexual harassment is different. I have fewer arguments I can make. Once the employee clears the hurdle of showing that the conduct actually was sexual harassment — meaning that it was unwelcome sexual conduct at work — she's off to the races. The only remaining issues are questions of facts — "he said, she said." And questions of facts are decided at trial. Once a sexual-harassment case gets to trial, the employee has a solid chance of winning, and a probable six-figure payout if she does.

The smart employer has a serious antiharassment policy and regularly trains its employees and managers so they know what harassment is and how to prevent it. That's much more effective than lawyer tricks.

Wal-Mart: Rolling back prices ... and employee pay

Wal-Mart's in the news again as a model employer. A Pennsylvania jury assessed a $78.5 million damage award against the world's largest retailer for violating state wage laws. The court concluded that Wal-Mart had required employees to work off the clock and through breaks. Plaintiffs' lawyer Michael Donovan, who represented about 187,000 current and former employees in the class action, told reporters that the award could rise to $162 million including bad-faith damages and attorneys' fees. The AP story (via the San Francisco Chronicle) is here.

In his WSJ Law Blog, Peter Lattman has this quote from the company, showing how it wasn't really their fault:

"Many employees testified that they skipped, or cut short, their breaks by their own choice,'’ said a Wal-Mart spokesman in an e-mailed statement. “Wal-Mart strongly discourages this practice and should not be penalized when an employee chooses to do this on his or her own.'’

Poor Wal-Mart. Having its employees take advantage of it by "choosing" to work for free. No fair.

It's too easy to pile on Wal-Mart over treating its workers poorly. What's more interesting to me as a management lawyer is the plaintiffs' attorneys' using electronic evidence to help prove their case. Apparently, the jury saw evidence that showed employees logged on to their registers when they were not on the clock.

Payment-of-wage cases are very hard for employers to win. You either paid the workers or you didn't. It's stupid to try to get away with not paying employees. It's even stupider to think that plaintiffs' lawyers aren't going to find out.

New HR metric: "retained dignity"

I was all set to write a post about dignity and fired employees, and then Nick Roy's HR Horizons beat me to it with a terrific post called "Firing Employees with Dignity." (Just to be clear: we're talking about firing employees in a way that preserves their dignity — not firing dignified employees.) In it, Nick talks about softening the emotional blow of firing people. He gives good advice, including "NEVER fire someone by email" — advice RadioShack could have used.

Here's what I can add: As a management-side employment litigator for the past dozen years, I've seen firsthand the effect of firing people without protecting their dignity. It is, in my experience, the number-one leading indicator of employee lawsuits. It is one thing to lose your job; it's another to lose face. Employees who feel like they lost more than their job — who feel like they were screwed over — are much, much more likely to sue.

In fact, you can mathematize it:

RD = 1 - (NA + FS)

where RD is the fired employee's retained dignity, NA is the employee's natural anger over being fired, and FS is amount by which the employee feels screwed. (All values are on a scale from .00 to 1.00.) You can then plug the retained dignity into a rough formula for the likelihood of an employee lawsuit:

P_lawsuit = (1 - RD) + [STR(case) * $]

where the probability of the fired employee suing is based on the retained dignity, the strength of the case, and the amount of money to be won.

Some forward-thinking companies are beginning to use HR metrics to quantify the return on investment for various human-capital operations and initiatives. (For more on this interesting topic, click on the books The HR Scorecard and The ROI of Human Capital in the booklist to the right.) Companies should consider adding retained dignity to these metrics.

There have always been ethical reasons for firing employees in a way that preserves their dignity. Now there are financial reasons, too. Higher retained-dignity scores mean lower employee-lawsuit costs.