Non Compete Agreements in a Sale of Business

hwbAnybody who is buying a business – no matter how large or small – should consider including a non compete agreement or clause in the sale documents. For a buyer, such clause ensures that the seller does not take the proceeds from the sale and open a competing business around the corner using his or her know how and vendor or customer connections.  For a seller, a non compete clause can provide a great bargaining chip during the sale process since the length and scope of the restrictions can factor into the price of the business.

The following list identifies the common sticky points for buyers and sellers during both the negotiation of a non compete agreement as part of the sale of a business and litigation that may arise out of a non compete agreement after the sale.

1. How is the “competitive activity” defined in the non compete agreement? The buyer will want the competitive activity defines as broadly as possible, while the seller will want to make sure that it does not encompass activities that the company has not been engaged in prior to the sale.  Having a defined universe of activities that are tied to the company’s assets, operations and business conducted by the seller will help both parties understand what they can and cannot do after the sale and will minimize the chances of litigation.

2. Is the length of the non compete agreement reasonable?  Business non compete agreements (between two companies) are governed by the Texas Covenants not to Compete Act, which also governs employment non compete agreements (between companies and employees).

Under Section 15.50 of the Texas Covenants not to Compete Act, “a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.”

Pursuant to Section 15.50, any restriction in a business-related non compete agreement must be reasonable. However, Texas courts have interpreted business non competes more broadly than employment or personal services non compete agreements. Thus, a five-year non compete, for example, that would never be enforceable in an employment context, could be found reasonable and enforceable in a sale of business situation.

3. Is the geographic area of the non compete agreement reasonable? The geographic restrictions in a business non compete agreement must be tied to a legitimate business interest and must reasonable. Thus, for example, including a nationwide non compete agreement in a sale of a local moving company that only does business in Dallas, Texas, is not likely to hold water in court as a reasonable geographic restriction.

4. Is the non solicitation clause reasonable and does it include employees, vendors, and customers? Non solicitation agreements or clauses are subject to the same reasonableness requirements as non  compete agreements and must be driven by a legitimate business interest of the company.

5. Does the confidentiality clause impose additional anti-competitive restrictions? If the sale documents do not include a specific non compete or non solicitation agreement, the seller and the buyer should consider whether a confidentiality or non disclosure clause might, nevertheless, result in a anti-competitive restrictions by imposing limitations on what information the seller may or may not use after the sale.  The buyer will want to make sure that the company’s competitive advantage is protected via the confidentiality provision and the seller will want to make that the sale price factors in the additional protections afforded by the confidentiality clause.

Leiza Dolghih litigates disputes arising out of non compete agreements and represents companies that seek to enforce non compete agreements as well as those who have been accused of breaching such agreements. You can contact her at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458 for a consultation regarding your non compete agreement.

Employers Do Not Have to Pay Employees for the Time Spent in a Security Screening After Work, Says the U.S. Supreme Court.

imagesAmazon warehouse employees can’t seem to catch a break. A few years ago, the media was abuzz with the stories about the grueling conditions inside the company’s warehouses. This year, the United States Supreme Court ruled that the warehouse employees are not entitled to overtime pay for the time spent waiting to undergo and going through the required security screenings after the end of their normal work hours.

In Integrity Staffing Solutions, Inc. v. Busk, Integrity Staffing Solutions, Inc. required its hourly warehouse workers, who retrieved products from warehouse shelves and packaged them for delivery to Amazon.com customers, to undergo a security screening before leaving the warehouse each day.

The employees argued that they spent roughly 25 minutes each day waiting to undergo and undergoing the screening that was meant to prevent employee theft and that since such screening was conducted for the sole benefit of the employer and its customers, the employees had to be paid for their time under the Fair Labor Standards Act of 1938 (FLSA).

The employees’ argument was based on the Portal-to-Portal Act (PPA), which provides that employers do not have to pay their employees for (1) “walking, riding, or traveling to and from the actual place of performance of the principal activity or activities which such employee is employed to perform,” and (2) “activities which are preliminary to postliminary to said principal activity or activities.”  The employees argued that the screening time was an integral and indispensable part of their principal activity – retrieval and packaging of Amazon products – and, therefore, was compensable time under the PPA.

The U.S. Supreme Court sided with the employer after finding that the security screening was neither the principal activity for which employees were hired, nor the “integral and indispensable” part of the employees’ duties as warehouse workers. The Court explained that it did not matter whether a particular post- or pre-shift activity was required by an employer, but whether such additional activity was indispensable to the performance of employees’ work.  In this case, the security screening, although required by the employer, was not integral part of the work for which the warehouse employees were hired – packaging of Amazon products. Thus, the employer did not have to pay for such time.

Compensable Pre- and Post-Workshift Activities 

Here are some examples of what pre-shift and post-shift activities the Court has previously held to be compensable because they were indispensable to the main work activities:

  • The time battery-plant employees spent showering and changing clothes because the chemicals in the plant were “toxic to human beings” and the employer conceded that “the clothes-changing and showering activities of the employees [were] indispensable to the performance of their productive work and integrally related thereto.”  Steiner v. Mitchell, 350 U.S. 247, 252-253 (1956).
  • The time the meatpacker employees spent sharpening their knives because dull knives would “slow down production” on the assembly line, “affect the appearance of the meat as well as the quality of the hides,” “cause waste,” and lead to “accidents.” Mitchell v. King Packing Co., 350 U.S. 260, 262 (1956)

Non-Compensable Pre- and Post-Shift Activities 

On the other hand, the Department of Labor regulations explain that the following post- and pre-workshift activities are generally non-compensable:

  • When performed under the conditions normally present, activities including “checking in and out and waiting in line to do so, changing clothes, washing up or showering, and waiting in line to receive pay checks” See 29 CFR Sec 790.7(g) (2013).

Practical Implications 

Those employers who have facilities where employees must pass through gates, security checks, or take other steps before entering or leaving the workplace, should apply the test that the Court formulated in Integrity Staffing Solutions, Inc. v. Busk to any such activities to determine whether they should be compensable or not. If the activity is a “principal” activity or is an “integral and indispensable” part of such “principal activity,” then the employer should pay employees for the time they spend performing such activities. Additional guidance as to what is considered compensable post- and pre-work activity is provided by the Department of Labor here.

For more information regarding compliance with the wage and hour requirements of the Fair Labor Standards Act, contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com.

Arbitration Policies and Employment Agreements – A Tricky Area

imagesMany business owners have been advised by their attorneys at some point in time to include an arbitration clause in their employment agreements or employee handbooks to make sure that any employment disputes are resolved by an arbitrator and not in a court of law.  After all, many attorneys subscribe to the school of thought that arbitration is cheaper and faster than litigation.

Any employers that follow that advice and want to include an arbitration clause, should follow a few simple rules to make sure that the arbitration clause is actually enforceable:

1.  The arbitration clause must be simple and clear.  For example, in Texas Health Resources and Texas Health Presbyterian Hospital Dallas d/b/a Presbyterian Hospital Dallas v. Kruse, an employee of the hospital was able to avoid arbitration by claiming that she did not know that she was required to arbitrate her employment disputes because the employee handbook “encouraged” employees to use an alternative dispute resolution process, but did not state that it was mandatory.

2.  When employment agreements are revised, make sure the arbitration clause remains in effect and covers the necessary areas.  In The Subsea Company v. Raquel Payan and Seven Onshore/Offshore, LLC, an employee attempted to avoid an arbitration clause in her old employment contract because her revised employment agreement did not have such a clause. The Fourteenth Court of Appeals closely looked at the language of the old and the new agreement and determined that since the new employment contract did not address compensation and the old agreement did, the arbitration clause contained in the old agreement continued to apply to compensation disputes.

3. Include a “Halliburton Savings Clause” in an employment handbook.  An employment handbook that contains an arbitration policy should state that it can be changed at any time by the employer only after notice is provided to employees. If an employer can change the rules without giving an employee advance notice, then the agreement between the employer and its employees is illusory and will not be enforced by courts.  The arbitration policy should also make clear that the arbitration process or policy will not be changed once an employee has suffered an employment-related injury or initiated an adverse-employment claims.

If you are interested in having your handbook reviewed and/or revised or you are involved in an employment dispute that involves an arbitration clause and need assistance, please contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com  or (214) 939-4458.

Providing Reference for a Former Employee – What Can an Employer Say in Texas?

SteveCarellOffice.BMost employers at some point get a call asking for a reference for one of their former employees. For good employees such call is not a problem, but for those who were fired or let go due to performance issues, violations of a company policy, or commission of a crime – the employer often faces a choice of not saying anything so as to avoid a defamation claim by the former employee or warning the potential employer of the former employee’s prior history. So, how much exactly can a former employer disclose to a potential employer without facing a defamation lawsuit from the employee?

From a legal stand point, in Texas, truth is an absolute defense to defamation.  Thus, if what you are telling the new employer is true, then it cannot be defamation. From a practical standpoint, however, you should consider how easily could you prove that what you were saying about the employee was true. For example, if you decide to tell the new employer that you fired John Doe because he stole company property – if John Doe filed a suit against you, could you prove it in court that he did so?  The answer is rarely a resounding “yes.” More likely, if push came to shove, it would be the former employer’s word against the employee’s. Thus, even telling the truth about a former employee, may result in a lawsuit (and thousands in attorney’s fees) unless the employer has some proof that its statements were true.

Texas also recognizes that statements by a former employer to a prospective employer are “privileged” (or protected from a defamation claim), unless an employer made such statements with “actual malice.”  Actual malice has nothing to do with bad motive or ill will, but requires proof that the former employer made the statement either knowing that it was false or with reckless disregard of the truth of falsity of the statement. Some courts have labeled it as “calculated falsehood.”  Failure to investigate facts before speaking is not proof of actual malice.  However, making a statement  while entertaining “serious doubt” as to its truth could constitute actual malice.

Conclusion: Employers should be careful when they provide references to their former employees. While a former employer’s statements to a prospective employer are generally privileged (i.e. protected from defamation), if the former employer made false statements that caused an employee to lose his job or offer of a job, s/he might face some serious liability.

On the employee side, unless the employee has at least some proof that his or her former employer made false statements about the employee or had serious doubts about the truth of such statement, the employee bringing a defamation claim might have to pay the former employer’s attorney’s fees in defending against the lawsuit under the Texas Citizens Participation Act (TCPA), as I have previously explained here and here.

For more information regarding defamation and business disparagement claims in Texas, contact Leiza Dolghih.

U.S. Supreme Court Employment Cases to Follow in 2015

SupremeCourtIn 2015, the U.S. Supreme Court is posed to rule on the following important employment law issues:

1. Integrity Staffing Solutions, Inc. v. Busk - must employers compensate employees for the time spent undergoing security screenings at the end of the workday under the Fair Labor Standards Act

The employees in this case allege that Integrity requires post-shift security screenings lasting up to 25 minutes, yet fails to compensate them for the time spent undergoing the screenings, which is a violation of the Fair Labor Standards Act (FLSA).

Integrity claims that it is immune from liability under the Portal-to-Portal Act of 1947, which provides that employers are not required to compensate for activities that are postliminary to an employee’s primary work activities.

The Ninth Circuit sided with the employees and ruled that the employees stated a plausible claim for relief because the security clearances were for Integrity’s benefit and necessary for the employees’ job performance. Specifically, the Court noted that the prevention of employee theft—a concern specific to the employees’ warehouse work duties—motivated the security clearances, thereby benefiting Integrity. Therefore, Integrity was required to compensate its employees for the time spent in the security screening.

UPDATE (12/9/2014) - The U.S. Supreme Court ruled that the time spent undergoing a security screening is not compensable under the FLSA.

2.  Young v. United Parcel Service, Inc. – must an employer accommodate a pregnant woman with work restrictions related to pregnancy in the same manner as it accommodates a non-pregnant employee with the same restrictions? 

UPS offered “light duty program” to workers who were injured on the job, but refused to provide any light duty accommodations to pregnant employees. Young challenged the policy and argued that the Pregnancy Discrimination Act (PDA) requires an employer to provide pregnant employees light duty work if it provides similar work to other employees in other circumstances.

The Fourth Circuit sided with UPS and ruled that: (1) the employer did not “regard” a pregnant employee as disabled under the Americans with Disabilities Act (ADA); and (2) employers are not required under the PDA to provide pregnant employees with light duty assignments so long as the employer treats pregnant employees the same as non-pregnant employees with respect to offering accommodations.

3.  EEOC v. Abercrombie & Fitch Stores, Inc. – does an employee have to provide a direct, explicit notice to the employer of the need for a religious accommodation? 

In this case, EEOC has alleged that Abercrombie violated Title VII when it failed to hire a prospective employee, Samantha Elauf, because of her religious practice without offering her a reasonable accommodation. Elauf, a Muslim, interviewed for a sales position at Abercrombie while wearing a black hijab (headscarf), a practice inconsistent with Abercrombie’s policy prohibiting sales employees from wearing black clothing or “caps.” Although the assistant manager interviewing Elauf assumed that Elauf wore her hijab because she was Muslim, Elauf did not say that she needed to wear it for religious reasons or request a religious accommodation. There was evidence that Abercrombie did not hire Elauf because of her attire.

The Tenth Circuit sided with Abercrombie and explained that plaintiffs claiming religious discrimination based on a failure to accommodate ordinarily must prove that they informed the employer that they engage in a particular practice for religious reasons and require an accommodation. It rejected the EEOC’s position that Title VII may be satisfied by notice short of an explicit communication from the applicant. The Tenth Circuit’s decision is in tension with decisions of the Seventh, Eighth, Ninth, and Eleventh Circuits, which have adopted the EEOC’s position that the element of notice is established where the employer has actual knowledge of an employee or applicant’s religious practice even if there is no an explicit request for an accommodation.

Leiza Dolghih frequently advises employers on how to handle troublesome employees, assists with responding to EEOC charges, and litigates employment disputes. For more information, e-mail Leiza.Dolghih@GodwinLewis.com.

What is a Trade Secret?

downloadWhat are trade secrets and how they are regulated depends largely on what state your business is operating in.  Currently, each state has it own statute and/or body of law that defines what is a “trade secret” and what legal remedies the owner of a trade secret may pursue if such trade secrets are taken or misappropriated from him or her.

In Texas, trade secrets are governed by the Texas Uniform Trade Secrets Act (TUTSA), which came into effect on September 1, 2013.

TUTSA defines “trade secrets” as “information,” that “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use” AND “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Thus, any information that has economic value – either actual or potential – and that the owner has reasonably attempted to keep secret, could constitute a “trade secret” under TUTSA.

Furthermore, TUTSA specifically provides that “trade secrets” may include the following types of information:

  1. formula
  2. pattern
  3. compilation
  4. program
  5. device
  6. method
  7. technique
  8. process
  9. financial data
  10. list of actual or potential customers or suppliers

Moreover, as defined by the statute, “trade secrets” may include information that its owner has not yet had an opportunity to use or information that the owner is no longer using (as long as it still has actual or potential economic value).

“Trade secrets” also include information that has commercial value from a negative viewpoint, such as the results of lengthy and expensive research which proves that a certain process will not work. See UTSA § 1 cmt.

Whether the information is considered “secret” is determined by whether a party undertook “reasonable efforts to maintain the secrecy of such information,” rather than the difficulty with which such information could be acquired.  The standard allows a fact finder to consider the nature of the trade secret and the facts and circumstances surrounding the efforts to maintain its secrecy in order to determine whether these efforts were reasonable under the circumstances.

To learn more about other provisions of TUTSA, see my previous post here.

If you are facing a trade secret misappropriation claim or are suspecting that a theft of trade secrets occurred at your company, contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com.

Religious Discrimination – What Every Business Owner Needs to Know

619763-LGSconundrumx-1382216657-586-640x480Under the Title VII of the Civil Rights Act of 1964, an employer may not discriminate against an employee on the basis of his or her religion. Employer must make reasonable accommodations for the religious observances of its employees unless it creates undue hardship on the business. As you can imagine, whether a requested accommodation is “reasonable” and whether providing such accommodation would create an “undue hardship” on a business, are often two hotly contested issues in religious discrimination cases.

Employee’s burden. An employee will be required to present evidence of the following in order to establish a case of religious discrimination:

(1) employee held a good faith religious belief;

(2) employee’s belief conflicted with an employment requirement;

(3) employer was informed of that belief; and

(4) employee suffered an adverse employment action for failing to comply with the conflicting employment requirement.

An employee who fails to establish one of the above elements cannot prevail on its claim of religious discrimination.  For example, earlier this year, I wrote about an employee whose claim for religious discrimination was dismissed because she failed to show that she told her employer (as opposed to her co-workers) that she could not perform a job function due to her religious beliefs.  Thus, she failed to show that her employer knew about her religious beliefs (third element above).

Employer’s burden. If an employee presents evidence of each element above, the employer may defend by showing that:

(1) it reasonably accommodated the employee; or

(2) it was unable to reasonably accommodate the employee’s needs without undue hardship.

The Fifth Circuit Court of Appeals recently addressed what constitutes an “undue hardship” for an employer as it relates to religious accommodation under Title VII. In Davis v. Fort Bend Countythe county fired its technical support supervisor, who skipped work to attend a church function.  A few days before the county’s scheduled upgrade of its computer system, Ms. Davis notified her supervisor that she would not be present during the update because she planned on attending a church service during that time.  Although Ms. Davis arranged for a replacement during her absence, the County fired her.

The Fifth Circuit explained that an undue burden may arise when: (1) an employer has to force one employee to substitute for another’s religious observance; or (2) an employee’s absence from the job leaves the employer short-handed.  Neither of these factors, however, were present in Fort Bend County, since Ms. Davis was able to find a volunteer employee to cover for her absence due to a church function.  Thus, the county was not left short-handed or suffered any costs associated with Ms. Davis’ absence. Therefore, the county failed to establish an undue hardship.

BOTTOM LINE FOR BUSINESS OWNERS: When an employee requests time off or asks for another accommodation due to his or her religion, whatever that religion might be, a business owner should consider whether granting such a request will create an undue hardship on the business.  If the answer is “no,” then the request should be granted.

The most commonly requested religious accommodations have to do with the dress and/or grooming requirements associated with certain religions.  An employer facing such a request, should read the U.S. Equal Employment Opportunity Commission Religious Garb and Grooming in the Workplace guide recently issued by the EEOC, which provides a lot of examples on how to handle specific requests.

Leiza Dolghih frequently advises employers on how to handle troublesome employees, assists with responding to EEOC charges, and litigates employment disputes. For more information, e-mail Leiza.Dolghih@GodwinLewis.com.

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