When employees violate company rules, are dishonest or disloyal, or fail to perform satisfactorily, employers may wish to impose some type of punishment. Generally, employers are free to discipline employees for any reason employers consider legitimate, and are not required to prove that they had “good cause” to justify the discipline. But, employers may be liable for wrongful discipline if disciplinary action is contrary to state or federal laws, the terms of their employment contracts and/or company policies and practices. Accordingly, employers should proceed with caution in disciplining employees and make sure that certain steps are followed. The attached report describes some of the key issues with employee discipline programs and policies and includes a model form of progressive discipline policy.
Internal Revenue Code Section 409A ("Section 409A"), which was enacted in October 2004 as part of the American Jobs Creation Act of 2004 and generally became effective on January 1, 2005, dramatically changed the rules governing “non-qualified deferred compensation arrangements” and impacted a wide range of plans and arrangements, including bonus arrangements (annual, performance-based, multi-year, and contingent signing bonuses); severance plans and arrangements; individual employment agreements; discounted stock option plans and stock options with additional deferral features; and stock appreciation rights, phantom stock, and restricted stock unit plans. Section 409A imposes significant restrictions on distributions, deferrals and changes in the timing of election and in the form and timing of benefit payments and calls for a 20% additional tax on the recipient (as well as penalties similar to interest) unless specific requirements set out in Section 409A and the related regulations are satisfied. As a result, companies have been required to undertake substantial reviews of their covered equity compensation plans and arrangements and consider the need to make changes in their policies and procedures including ensuring that the material terms of all non-qualified deferred compensation arrangements are set forth in writing.
One area of concern for private companies has been the impact of Section 409A on stock options since, if such options are identified as having been granted at below “fair market value,” they would be treated as non-qualified deferred compensation and thus subject the grantee to taxation when the options vest as well as triggering the additional 20% penalty. With respect to non-statutory stock options, companies must verify that they have been granted at an exercise price at (or above) fair market value. With respect to options that are intended to qualify as incentive stock options (“ISOs”), companies must double-check to confirm that the stock that will be issued upon exercise of the ISO was properly valued at the time the option was granted to conform to the ISO requirements and thus fall outside of the restrictions that might otherwise apply under Section 409A.
In response, such companies must be prepared to clearly and carefully document the steps taken to value employee stock options including the factors taken into account by the board of directors in determining the fair market value of the underlying common stock at the time the decision was made to grant the option. The Regulations relating to Section 409A require employers or other service recipients to use a “reasonable valuation method” to determine the value of stock underlying compensatory option grants. While, in general, reasonableness will be based on the relevant facts and circumstances as of a specified valuation date, the IRS has announced that it intends to consider the following factors to test the reasonableness of a proposed valuation method: the value of the company's tangible and intangible assets; the present value of the company's future cash flows; the market value of stock or equity interests in substantially similar businesses that can be determined readily by objective means; the effects of any control premiums and/or marketability discounts; and/or whether the proposed valuation method is used for other material purposes by the company, its stockholders, or creditors; and other relevant factors.
Private companies are not be required to incur the expense of obtaining an independent valuation from an outside expert; however, they nonetheless should be prepared to demonstrate that input has been received from persons with significant knowledge and experience in valuing illiquid securities (e.g., a board member affiliated with a venture capital company or senior in-house finance or accounting personnel with valuation experience). Such companies may, of course, obtain a “Section 409A” valuation report from an outside expert and incorporate that report into the minutes and related resolutions for meetings of the board of directors and/or audit or compensation committees at which option grants were considered and approved. See Specialty Form appearing at § 171:337 in Business Transactions Solutions on Westlaw Next.
Restrictions on the use and disclosure of trade secrets and other confidential information are basic elements of any trade secret protection program and companies need to understand when and how to include such restriction into non-solicitation and non-competition agreements they ask their managers and employees to sign in order to restrict their ability to solicit business from the customers for the benefit of their future employers or to otherwise actively or passively engage in activities that compete with the company’s business. Non-solicitation agreements are appropriate for employees, such as sales representatives, whose job activities involve extensive interaction with the customers of the employer. A non-competition agreement may be useful for senior management and other key employees who may logically be inclined to compete with the employer following termination of his or her employment, either directly or as an employee of another company. Care must be taken, however, not to run afoul of applicable state laws that dictate the scope of enforceability of specific attempts to limit competitive activities. Westlaw Next subscribers can learn more about, and obtain examples of, non-solicitation and non-competition agreements, by reviewing the chapter on Employee Noncompetition and Nonsolicitation Agreements in Business Transactions Solution (§§ 168:1 et seq.).
Your clients need to understand their obligations with respect to granting family, medical and military leaves to their employees. A good way to get the conversation going with your clients is to provide them with a Client Alert on the subject. The following is a good way for you to get started:
The federal Family and Medical Leave Act (FMLA) requires covered employers to provide eligible individuals with up to 12 workweeks of unpaid leave per year for the birth, adoption, or foster care placement of a child; or serious health conditions of employees or their children, spouse, or parents. In addition, the FMLA includes two military family lead entitlements—the military caregiver leave and the qualifying exigency leave. Under the terms of the military caregiver leave eligible employees are entitled to take up to 26 weeks of job-protected leave in a 12-month period to care for a covered service member with a serious illness or injury incurred in the line of active duty. The qualifying exigency leave can be used by eligible family members to take up to 12 weeks of FMLA leave for “qualifying exigencies” arising out of a covered military member's active duty status, or call to active duty, in support of a contingency operation. Under the FMLA regulations promulgated by the federal Department of Labor (DOL) the following events would qualify as “qualifying exigencies”: short-notice deployment (i.e., called to active duty seven or fewer days prior to the date of deployment); military events, ceremonies or programs related to active duty or related activities; childcare and school activities; financial or legal appointments; counseling; rest and recuperation; post-deployment activities (e.g., arrival ceremonies and reintegration briefings); and additional activities agreed upon by the employer and employee.
Covered employers must also give information to employees about their rights under the FMLA, post various notices including prescribed information, and include information about the FMLA in their personnel handbook. They must also prepare records concerning basic payroll information required by wage and hour laws, dates FMLA leave is taken (or hours, if taken in increments of less than a day), copies of FMLA notices that they give to employees or that employees give to them, copies of written policies about benefits and the taking of leaves, premium payments of employee benefits, and any dispute between them and employees regarding FMLA leave.
Generally, employers are covered by the FMLA if they have 50 or more employees on their payroll for at least 20 calendar weeks in the current or preceding calendar year. To be eligible for FMLA leave, employees must Have been employed for at least 12 months by the covered employer, work at least 1,250 hours in the last 12-month period, be at a worksite that is within 75 miles of where at least 50 employees work, have a specified family care or medical problem, provide reasonable advance notice and appropriate certificates, and not have exhausted their 12-workweek maximum for the current 12-month period. Time spent on vacation or sick leave may be applied towards the 12-month requirement as long as the employee is maintained on the payroll and is receiving other benefits from the employer such as group health plan benefits and workers' compensation coverage.
In order to satisfy the requirement of a “serious health condition” there must be an illness or injury involving either inpatient care or continuing treatment by a health care provider. The continuing treatment requirement is satisfied if an employee is incapacitated for more than three consecutive days and does one of the following: (1) visits a health care provider twice within 30 days of the first day of incapacity (unless extenuating circumstances prevent a follow-up visit), with the first visit coming within seven days of the first day of incapacity; or (2) sees a health care provider within seven days of the first day of incapacity and then begins a regimen of continuing treatment under the provider's supervision (e.g., physical therapy, medication etc.).
The FMLA regulations include various forms of certifications that must be used to request FMLA leave including certifications of health care providers regarding the existence of a serious health condition and certifications. Certain employer representatives, such as human resource professionals and leave administrators, are permitted to contact an employee's health care provider to clarify and authenticate a certification of medical condition received from the provider.
The federal regulations in this area are complex and the situation may be even more complicated when state laws are factored into the analysis regarding a particular employee's request for family and medical leave. Please contact our offices for assistance in understanding your obligations under the FMLA and in preparing and/or updating key policies and forms including a general statement of employee rights under the FMLA, a description of family and medical leave rights to be included in their personnel handbook and a separate description of rights relating to military leaves.
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Additional information on the FMLA and other employment law matters is available in Business Transactions Solution on Westlaw Next.
Among other things, Title VII of the Civil Rights Act of 1964 [42 U.S.C.A. §§ 2000e et seq.] prohibits harassment of an employee
based on the employee’s race, color, religion, sex, or national origin and
imposes various obligations on employers to protect their employees against
various forms of harassment by non-employees (i.e., supervisors). One
of the key, if not most important, factors in determining an employer’s liability
for workplace harassment is the status of the employee accused of engaging in
harassment and case law has drawn a sharp line between co-workers and
supervisors. Specifically, if the harassing
employee is the victim’s co-worker, the employer is liable only if it was
negligent in controlling working conditions.
However, different rules apply when the harasser falls within the
judicially accepted definition of a “supervisor” and in that situation the
standard will be determined based on whether or not a “tangible employment
action”—defined by the US Supreme Court as “a significant change in employment
status, such as hiring, firing, failing to promote, reassignment with
significantly different responsibilities, or a decision causing a significant
change in benefits”[Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, 761,
118 S.Ct. 2257, 141 L.Ed.2d 633 (1998)]—is involved. If the supervisor’s harassment culminates in
a tangible employment action the employer is strictly liable. But if no tangible employment action is
taken, the employer may escape liability by establishing, as an affirmative
defense, that (1) the employer exercised reasonable care to prevent and correct
any harassing behavior and (2) that the plaintiff unreasonably failed to take
advantage of the preventive or corrective opportunities that the employer
provided. [See Faragher v. City of Boca Raton, 524 U.S. 775, 807, 118 S.Ct.
2275, 141 L.Ed.2d 662 (1998); Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, 765,
118 S.Ct. 2257, 141 L.Ed.2d 633 (1998)]
federal Equal Employment Opportunity Commission (“EEOC”), when prosecuting
harassment cases under Title VII, long relied on the meaning of “supervisor” in
general usage and in other legal contexts, thus leading to an expanded view of
employees that might be considered to be supervisors. However, in a recent decision handed down on
June 24, 2013 the Supreme Court mandated a narrower approach by holding that an
employee is a “supervisor” for purposes of vicarious liability under Title VII
only if he or she is empowered by the employer to take tangible employment
actions against the victim. [Vance v. Ball State
University et al. _ U.S. _ (June 24, 2013)] The Court explained that its decision
regarding the definition of supervisor took into account the fact that many
modern organizations have abandoned a hierarchical management structure in
favor of giving employees overlapping authority with respect to work
assignments and that its concept of a supervisor could be readily applied and
that, in fact, an alleged harasser’s supervisor status could often be capable
of being discerned before (or soon after) litigation commences and would likely
be resolved as a matter of law before trial.
As to the concerns of the EEOC that employers might attempt to insulate
themselves from liability for workplace harassment by empowering only a handful
of individuals to take tangible employment actions, the Court noted that
employees would not be unprotected against harassment by co-workers who possess
some authority to assign daily tasks and that in such cases a victim could
still prevail by showing that the employer was negligent in permitting the
harassment to occur and that the jury should be instructed that the nature and
degree of authority wielded by the harasser is an important factor in
The actual impact of the Court’s ruling remains to be seen and no
employer can afford to be in a situation where a credible claim can be made
that it was negligent with respect to its efforts to ensure that its workplace
remains free of harassment. Prudent
employees have already taken the following steps in developing their
anti-harassment programs: adoption of a
written sexual harassment policy and implementation of programs to ensure that
the policy is effectively communicated to all supervisors and employees; design and
implementation of a complaint procedure to encourage reporting and full and
discrete investigation of discrimination or harassment claims; posting of
information posters and preparation and dissemination of information sheets and
pamphlets on identifying, reporting and preventing sexual harassment; and offering both
supervisors and employees training and educational programs focusing on
prevention of sexual harassment and other forms of discrimination.
For further discussion of Title VII and other elements of Title
VII compliance programs see my Westlaw Next publication Business Transactions Solutions, Employment Law Compliance (§§ 100:1 et seq.).
I completed a series of three posts
on Findlaw Corporate Counsel on various aspects of working with the HR
department by discussing the "nuts and bolts" of the attorney’s HR
"tool kit": documents, systems and compliance programs. To view the post click here. Earlier posts discussed the
activities and responsibilities of the HR department and legal and regulatory
environment in which HR professionals work.
In my latest post to Westlaw Insider I describe the growing push by states to implement employee password protection laws.
Workplace safety is a major concern for all companies, not only because of potential legal liability but also because of the disruption caused by the inability of trained and skilled workers to be available to do their jobs. The policies in this area begin at the time that a new employee is hired and companies must carefully consider the circumstances under which medical examinations will be required as a condition of employment. During the term of employment attention turns to making sure employees are trained to act safely and that procedures are in place for quickly responding to accidents involving employees and/or visitors to the workplace. Finally, workplace violence is, unfortunately, a not uncommon experience and companies need to have procedures in place to screen for potential problems with new employees and monitor situations in the workplace that might escalate to the point where someone is in danger. For an example, see the form that we've included in this month's report.
Many of the important decisions during the employment relationship that raise legal issues, such as promotion, discipline and termination, turn on the results of a process commonly referred to as “performance evaluation” and it is important for companies to formalize and institutional their performance evaluation procedures. This report includes various tools for creating an effective and fair performance evaluation program including a sample of a performance improvement plan for an employee who might be struggling to achieve the goals and objectives set by the company.
Companies need to exercise caution when dealing with the Fair Labor Standards Act and its rules regarding minimum wage and overtime pay. Companies should develop and use one or more checklists that address key issues associated with wage and hour law compliance and should also create policies and procedures to be sure that FLSA requirements are satisfied. This report includes a number of tools that companies can use include a sample overtime policy.