The Fifth Circuit Rules that Federal Law Preempts Unfair Competition Claim Under Texas Law

Preemption

The Fifth Circuit Court of Appeals recently considered whether the federal copyright and patent laws (rock!) preempt  Texas common law claim of unfair competition by misappropriation (scissors!). The question reared its head amidst a web of lawsuits involving a medical device company, ThermoTek, and its former distributor, in which the company accused the distributor of obtaining its trade secrets involving a medical device he sold for them and proceeding to use the information to manufacture his own line of competing devices.   

The Fifth Circuit explained that the federal Copyright Act preempts a state law claim where (1) the intellectual property rights at issue are within the subject matter of copyright and (2) the state law protects rights in that property that are equivalent to any of the exclusive rights within the general scope of copyright. Meanwhile, the federal patent statutes preempt a state claim where its aim is to protect “the functional aspects of a product” because such claim would likely obstruct Congress’s goals by offering patent-like protection to intellectual property that its owner chose not to protect with a patent.  

In applying the above tests, the Fifth Circuit Court of Appeals held that the various aspects of the unfair competition by misappropriation claim in ThermoTek’s case against its former distributor were preempted either by the federal copyright or patent laws. 

The Copyright Act preempted the claim to the extent that ThermoTek alleged that the distributor misappropriated its written materials related to the medical device – here, manuals, reports, billing information, and other written documents – because such materials fell within the subject matter of copyright and the unfair competition by misappropriation claim did not qualitatively differ from a copyright claim.  Meanwhile, the federal patent law preempted the unfair competition claim to the extent it sought to protect the medical devices themselves or their functional aspects because the claim substantially interfered with the public’s enjoyment of unpatented aspects of the devices that ThermoTek publicly disclosed. 

TexasBarToday_TopTen_Badge_VectorGraphicBOTTOM LINE:  On a very basic level, the doctrine of preemption allows federal claims to preempt state law claims if they concern the same subject matter. If not analyzed strategically and addressed in the pleadings, this doctrine can wreak havoc on a party’s litigation strategy in a trade secrets lawsuit.  For example, in the ThermoTek lawsuit, the jury found in the company’s favor awarding it $6,000,000.00 in damages on the unfair competition claim. However, after the trial, the court found that the unfair competition claim was preempted by federal law and dismissed it leaving ThermoTek with $0.  In conclusion, trade secrets claims do not exist in a vacuum, but should be analyzed in the context of the existing intellectual property framework along with other types of IP.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.

 

A Famous Dallas Chef Defeats an Injunction Based on “Unclean Hands” Defense, Can Now Use His Name

Foodie or not, if you live in Dallas, you have probably been to one of Kent Rathbun’s restaurants.  And if you read Dallas Observer, you have probably read about Rathbun’s ongoing legal battle with a former business partner, which involves the right to use Rathbun’s name and likeness in the restaurant industry.  If not, this D Magazine article can you fill you in on why Rathbun’s name is a big deal, and this Dallas Observer article can catch you up on the acrimonious relationship and the arising legal woes. 

While the case is ongoing, this past Friday, the Dallas Court of Appeals issued a ruling in Rathbun’s favor on the basis of the “unclean hands” defense, which is often alleged, but rarely supported, in non-competition disputes.  

By way of background, back in 2009, Rathbun assigned the rights to his name and likeness to an entity he co-owned with his then-business partner. After they parted ways, Rathubun filed a lawsuit seeking a declaration from the Court that the assignment was a “covenant not to compete” and was unenforceable because it failed to comply with the requirements of the Texas Covenants Not to Compete Act (see my previous post on the requirements here). 

In response, the former partner sought an injunction from the Court prohibiting Rathbun from using his name or likeness while the parties litigated their dispute based on the assignment agreement. During the temporary injunction hearing, Rathbun introduced (1) deposition testimony of his former business partner regarding his knowledge of Rathbun’s lack of business sophistication and his fiduciary duties owed to Rathbun and (2) deposition testimony that the company to which Rathbun assigned the rights to his name might have assumed some liabilities without full disclosure to Rathbun, even though he was a part-owner at that time.

The trial court denied the injunction, allowing Rathbun to keep using his name as long as he did not disparage his former partner, and the Dallas Court of Appeals upheld the denial. While it refused to consider whether the assignment agreement was a “covenant not to compete” covered by the Texas Covenants Not to Compete Act, it did find that the deposition testimony described above presented sufficient evidence to support the “unclean hands” defense asserted by Rathbun. 

The unclean hands defense “allows a court to decline to grant equitable relief, such as an injunction, to a party whose conduct in connection with the same matter or transaction has been unconscientious, unjust, or marked by a want of good faith, or one who has violated the principles of equity and righteous dealing.”  Here, the Court found that there was some evidence that the company that was now trying to enforce the assignment acted inequitably when it failed to fully disclose to Rathbun that it had assumed certain liabilities, which burdened him as a part-owner of the company.  Consequently, its unclean hands prevented it from obtaining an injunction against Rathbun.

BOTTOM LINE: While the Court of Appeals’ ruling in this case is not a final decision on the merits of this defense and can still be appealed to the Texas Supreme Court, it does provide a glimpse into what type of behavior by a party who seeks an injunction may rise to the level of “unclean hands” such that the party is prevented from getting injunctive relief. 

Companies should be aware that when they seeks to enforce a non-compete agreement, their own behavior can often be scrutinized for any signs of unfair or bad faith conduct that may be used to deny the injunctive relief.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Buc-ee’s Repayment Provision in the Employment Agreement Is Declared Unlawful, Likened to Indentured Servitude

Buc-ees 2Last month  I wrote about how Texas employers can require employees to repay the employers’ training expenses related to those employees, even if that means repaying an equivalent of 1/3 of an employee’s salary.   I culminated my article cautioning the companies to make sure that their repayment requirements in the employment agreements do not violate the Texas Free Enterprise and Antitrust Act of 1983. 

Later the same week, the Houston Court of Appeals found that Buc-ee’s did just that by requiring its assistant manager to repay more than $66,000 in salary for leaving her at-will job to go work for another company, which was not even a competitor of Buc-ee’s. 

Here’s a quick look at what Buc-ee’s did, what the Court of Appeals thought of it, and the lessons that Texas employers can take away from this case.

Buc-ee’s’ Employment Agreements

In 2009, Rieves came to work as an assistant manager for Buc-ee’s. The wages arrangement was such that 70% of her salary would be paid on hourly basis and 30% would be paid in flat fee, translating into $14 an hour and a fixed monthly bonus of $1,528.67 (the “Additional Compensation”).

This 2009 Employment Agreement specifically said that Rieves was an “at-will employee” but also stated that she was “required to work” for Buc-ee’s a minimum of five years and had to provide the employer with a 6-month written separation notice.  If she failed to meet these two requirements, regardless of the reason, she had to repay all of the Additional Compensation.

In 2010, Rieves entered into a new employment agreement with Buc-ee’s that contained similar requirements (4 year term and 6-month separation notice) and stated that if Rieves left before 2014, she had to repay a portion of her salary under the 2010 Employment Agreement and the Additional Compensation under the 2009 Employment Agreement. Thus, under the 2010 Employment Agreement, the longer Rieves worked for Buc-ee’s, the more of  her salary she would have had to pay back. 

The Court of Appeals’ Analysis

In looking at the employment agreements, the Court first and foremost noted that Rieves was an “at-will employee,” which, under the long-standing doctrine in Texas, meant that her employment could be terminated by her or Buc-ee’s for good cause, bad cause, or no cause at all. 

Furthermore, the repayment provisions in Rieves’s employment agreements imposed a severe economic penalty on her if she exercised her right as an at-will employee to leave Buc-ee’s.  Therefore, these provisions had to comply with the Texas Covenants not to Compete Act in order to be enforceable.  They did not.

The repayment provisions penalized Rieves even if Buc-ee’s fired her without a cause and they were not related to Buc-ee’s legitimate business interest because they penalized Rieves even if she went to work for a company that was not Buc-ee’s competitor.  Therefore, the repayment provisions were an unfair restraint of trade in violation of the Texas Free Enterprise and Antitrust Act and were not enforceable.

The Lessons for Texas Employers

TexasBarToday_TopTen_Badge_VectorGraphicWhile Texas recognizes the freedom of parties to contract, employers cannot enter into contracts that are illegal.  Under the Texas Free Enterprise and Antitrust Act, “every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.”  Non-competition agreements that are reasonable and are designed to protect a legitimate business interest are an exception to the rule.  Any other restraint in an employment agreement that prohibits an at-will employee from leaving his or her current employer or restricts such employee’s ability to sell his or her skills in the marketplace is likely to violate the Texas Free Enterprise and Antitrust Act.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Can an employer require employees to repay training costs in Texas?

GiveBack-1000x360Earlier this year, the Second Court of Appeals ruled that an employee had to repay 1/3 of his salary to the employer as a reimbursement for training costs when he decided to leave.  The employee argued that the reimbursement agreement contained in his offer letter was unconscionable (legal term for “patently unfair”) and against public policy, but the Court of Appeals rejected both of these arguments in upholding the trial court’s award.

In Sanders v. Future com, Ltd., Sanders signed an offer letter from Future com that stated that he would be responsible for repaying the company for any training provided to him by Future com if he voluntarily left the company within one year after completing such training.  The repayment included travel expenses and “salary paid for study or course time.”  Sanders left Future com within twelve months of receiving certain training but refused to repay $4,003.39 in travel costs and expenses and $34,476.96 in salary that Future com paid Sanders while he was being trained.  The company sued him for breach of the employment agreement.

Sanders argued that the training reimbursement provision was not enforceable for a host of different reasons, but most notably, because it was unconscionable and against public policy.   The Court of Appeals rejected both of the reasons findings that:

  1. The repayment provision was meant to protect the company from the loss of Sanders’ employment before it had the opportunity to recoup its costs from training him.
  2. The company had a legitimate interest in making sure that it was not training employees for its competitors. 
  3. The company did not have to show that it actually suffered loss form Sanders’ departure. 
  4. The repayment provision was clear and understandable and was not hidden so as to create an “unfair surprise” for Sanders.
  5. Since training repayment provisions have been found to serve public good, this provision was not against public policy. 

TexasBarToday_TopTen_Badge_VectorGraphicTAKEAWAY FOR EMPLOYERS: Generally, training repayment provisions in employment agreements are enforceable in Texas.  Employers should make sure that such clauses are written in a clear and understandable manner and are not hidden within employment contracts.   

When determining the parameters of the reimbursement policies, companies should make sure that they comply with the Texas Texas Free Enterprise and Antitrust Act of 1983, which prohibits the restraint on trade.  In the case above, it appears that the company provided significant amount of training that took up to 1/3 of employee’s working time.  In such circumstances,  a reimbursement clause may be more enforceable than where a company provided minimal training.  Thus, when drafting a training reimbursement policy or agreement, it is best to consult with a qualified attorney to make sure that it is enforceable.

Leiza represents companies in business and employment litigation.  If you need assistance with a business or employment dispute contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Is Your Non-Compete Agreement Enforceable?

stevecarelEvery state has its own rules about the enforceability of non-compete agreements, with many technical requirements, carve outs for certain industries like medical and technology, and various presumptions or public policy-driven rules regarding employers’ ability to limit competition from former employees.

Recently, I’ve been receiving a lot of inquiries from Texas employers or companies that are moving to Texas regarding: (1) whether non-compete agreements are enforceable in Texas?  (2) what types of non-compete agreements are enforceable in this state?  and (3) when should I enforce my non-compete agreement against a departed employee? Many of these companies already have non-compete agreements with their employees, but are worried about their enforceability in Texas courts. 

I have previously written about how to enforce non-compete agreements in Texas, here, here, and hereSo, the answer to the first question is a resounding “Yes, non-compete agreements are enforceable in Texas.”

The answer to the second question is that, generally, only non-compete agreements with reasonable geographic, time and scope restrictions are enforceable in Texas. 

Assuming a positive answer to the first two questions, the answer to the third question depends on the circumstances of a particular departed employee and the answer to the following questions:

  • What position is the employee in at your company? C-Suite? Sales? Another position that gives him or her access to sensitive information within the company?
  • What special skills the employee has and what specialized training the employee has received in that position? 
  • Is the company where the employee is going a competitor of your company?
  • What position is the departed employee going to take at his or her new place of employment? Is it the same or similar position to what he or she was doing at your company?
  • How likely is it that the employee will use the confidential information he learned while working for you at his new job?
  • What activities does your non-compete prohibit the employee from doing?
  • For how long?  Remember, it must be reasonable.
  • What area does it cover? Reasonableness is key. 
  • Did you provide the right type of consideration for the employee’s promise not to compete?
  • Do you have a non-solicit agreement that will protect your company without having to enforce the non-compete agreement?

All of these factors will come into play if you decide to enforce a non-compete agreement in Texas. Additionally, you will need to consider where to file the lawsuit, the evidence that you will need in order to obtain a temporary restraining order against the employee, and a host of procedural and discovery issues that come along with litigating a non-compete case. 

Bottom Line: Enforcing non-compete agreements is as much of a business decision as it is a legal one.  Having a non-compete agreement that is legally enforceable, allows you to decide whether it makes business sense to enforce it against a particular employee.  Without a legally enforceable non-compete agreement, however, the business reasons may not even matter. 

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

2017 Welcomes Changes in Non-Compete Laws

imagesThis year, California, Illinois and Nevada amended their non-compete statutes to help protect the employees’ right to change employers vis-à-vis the employers’ right to restrict unfair competition. Idaho, Maryland, Massachusetts, New York, and Washington considered various amendments, but were unsuccessful in signing them into law, which means they will probably try again in 2018.   

California

An amendment to the California Labor Code, which became effective on January 1, 2017, prohibits employers from requiring employees to litigate or arbitrate employment disputes (1) outside of California or (2) under the laws of another state. The only exception is where an employee was individually represented by a lawyer in negotiating his employment contract.

Penalties apply to an employer who requires a California employee who primarily works and resides in California to sign “as a condition of employment,” an agreement with a provision that requires the employee to adjudicate disputes arising in California in a forum outside of California or under the law of another state.

Illinois

Illinois passed the Freedom to Work Act, effective January 1, 2017, which bars non-compete agreements for workers who earn less than the greater of the federal, state or local minimum wage, or $13.00 an hour.

Nevada

In June of this year, Nevada amended its non-compete statute to state that a non-competition covenant may not restrict a former employee from providing services to a former customer or client if: (1) the former employee did not solicit the former customer or client; (2) the customer or client voluntarily chose to leave and seek the services of the employee; and (3) the former employee is otherwise complying with the non-competition agreement.

The statute also now provides that if there is a reduction in force, reorganization, or similar restructuring, the laid-off employee’s non-competition agreement is only enforceable during the time in which the employer continues to pay the employee’s salary, benefits, or equivalent compensation to the employee.  

Finally, the statute now allows “blue-penciling” and gives the Nevada courts the ability to strike or modify unreasonable terms or provisions from a non-compete agreement and enforce the revised agreement.

More and more states are trying to strike a balance between the workers’ right to change employers and the companies’ right to protect their business interests and goodwill. The end result is a patchwork of non-compete statutes that impose different requirements on employers that operate in different states.  Companies that have employees in several states should consult with legal counsel to make sure that their post-employment covenants are enforceable with respect to all of their employees, regardless of the location.

Leiza represents companies in business and employment litigation.  If you need assistance with a business or employment dispute contact Leiza for a confidential consultation aLeiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

 

Texas Statute Prohibits Firing and Discrimination Against Employees Who Evacuate

2337592_630x354Texas employers may not discharge or otherwise discriminate against an employee who “leaves the employee’s place of employment to participate in a general public evacuation ordered under an emergency evacuation order.” Tex. Labor Code § 22.002.

An emergency evacuation order means an official statement issued by a governmental entity recommending the evacuation of all or part of the population of an area stricken or threatened with a disaster. Tex. Labor Code § 22.001(2). 

You can find a list of emergency evacuation orders related to Hurricane Harvey here.

An employer who violates the statute will be responsible for any lost wages or employer-provided benefits incurred by the employee and will have to reinstate the employee in the same or equivalent position of employment. Tex. Labor Code § 22.003.

There is an exemption for emergency services personnel (fire fighters, police officers and other peace officers, emergency medical technicians, and other individuals who are required, in the course and scope of their employment, to provide services for the benefit of the general public during emergency situations) if the employer provides adequate emergency shelter for such employees. Tex. Labor Code § 22.004.

Because the statute covers “recommended” evacuation, it is unclear whether it covers both “mandatory” and “voluntary” evacuations orders.  To be safe, employers should treat those the same.  The statute is also ambiguous as to whose evacuation orders are covered and simply states that it applies to orders issued by any “authority of this state.” 

BOTTOM LINE Before discharging, demoting, disciplining, or otherwise discriminating against an employee for participating in the evacuation related to Hurricane Harvey, employers should gather specific information related to that employee’s reasons for absence and determine whether the employee falls within the statute’s protections. Meanwhile, the evacuated employees’ pay should be determined in accordance with the Fair Labor Standards Act (FLSA) rules.

Leiza represents companies in business and employment litigation.  If you need assistance with a business or employment dispute contact Leiza for a confidential consultation aLeiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Can You Fire an Employee for Participating in Racist Behavior or Speech Off-the-Clock?

imagesFollowing the events in Charlottesville, Virginia involving a “Unite the Right” rally organized by white nationalist groups protesting the removal of a statue of Robert E. Lee, several participants in the rally were fired by their employers.

Immediately, the media and internet went abuzz with discussions about employees’ freedom of speech and the right to express their opinions, however repulsive they might be to the society, contrasted with the employers’ right to fire employees who damage the company’s reputation and destroy its goodwill.

Business or moral dilemmas aside, as a general rule, employers can fire employees for off-the-clock conduct or speech. While employees have the right to express their opinions under the First Amendment, their employers have the right to fire them for expressing such opinions. In other words, the freedom of speech, when it comes to employment matters, is a myth!

As with any area of the law, there are several exceptions to this rule:

  1. California, Colorado, North Dakota and New York have off-duty conduct laws that protect employees from being fired for legal activities in which they engage on their own time;
  2. California also prohibits employers from firing employees for political activities;
  3. Some off-the-clock speech may be protected under the National Labor Relations Act, which protects employees’ right to discuss their employment conditions;
  4. Public employees may have more (but not much more) freedom of speech rights;
  5. Employment contracts that have “for cause” termination provisions may affect the employer’s right to fire an employee for off-the-clock statements or behavior.

BOTTOM LINE: The above exceptions are limited, so the general rule that employees have no free speech rights applies in most circumstances, including those where an employee participates in a pro-Nazi march or some other racist activity or speech that brings negative media attention to the company and damages its customer goodwill.  

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Top 10 Mistakes Employers Make With Non-Compete Agreements

good-wifeWhile helping hundreds of companies enforce their non-compete agreements and advising many employees on how to get out of them, I noticed that most companies make the same mistakes when it comes to drafting and enforcing their non-compete agreements. In this post, I share the top ten mistakes that often end up costing business their clients, goodwill, and a ton of legal fees:

  1. Not signing non-compete agreements with employees. It seems like a no-brainer, but there are still a lot of companies out there that do not require their employees to sign any non-compete agreements. This is a mistake.  A reasonable non-compete agreement can benefit both the company and the employees. A company is more likely to invest into training of employees with non-compete agreements, and employees will still remain free to work in their chosen field after leaving the employer, subject to a reasonable geographic limit. 
  2. Having restrictions that are too overbroad. Overreaching in non-compete agreements can backfire in that employees feel like they have no choice but to violate them in order to make a living and courts are not likely to grant a temporary retraining order or a temporary injunction on a non-compete that is clearly overbroad. 
  3. Not having a legitimate business interest to protect. A Texas employer must share its confidential information or goodwill with an employee in order to create an enforceable non-compete agreement.  An hourly employee, such as a sandwich-maker or a mechanic, is not going to have access to any confidential information or specialized training.  Thus, most of the time, there would be no legitimate business interest in having such employees subject to a non-compete. Therefore, before asking an employee to sign a non-compete agreement, employers should ask, “What specific business interest am I trying to protect?”
  4. Making all employees execute the same non-compete agreement.  Requiring the same 2-year / 200-mile non-compete agreement for sales people, secretaries, and C-level executives raises a red flag that the company is simply trying to prevent competition and is not protecting a legitimate business interest.  Employees that perform different tasks or serve a different purpose should have different non-compete restraints depending on what they do in the company.
  5. Not providing a proper consideration.  Different states require different types of consideration for non-compete agreements. In some states, just a promise of future employment is sufficient. In other states, an employer must pay money to an employee in exchange for the promise not to compete.  Texas companies should make sure that their non-compete agreements are supported by the right type of consideration in the state where they plan to enforce the non-compete agreements.
  6. Not having new consideration.  When asking an already-existing employee to sign a non-compete agreement, employers must provide new consideration for such agreement.  For more information, see my previous post here.
  7. Not enforcing non-compete agreements. Once the proper non-compete agreements are in place, companies should make it a policy to enforce them.  Otherwise, the agreements lose their effectiveness with employees, who quickly learn from co-workers that the company never enforces the agreements. 
  8. Not enforcing non-compete agreements fast enough.  This is one of the gravest mistakes for companies in terms of consequences. The longer a company waits to seek a temporary restraining order against an employee who is violating his or her non-compete agreement, the more likely the court is to deny the restraining order because the company cannot show an “imminent” and “irreparable” injury.   In other words, if the company has not tried to stop the bleeding, how bad could the bleeding really be and does the court really need to enter an emergency order?
  9. Not providing confidential information. As mentioned above, a proper consideration for a non-compete agreement in Texas includes a company’s promise to provide confidential information to the employee.  Companies, however, must deliver on that promise and actually provide such confidential information in order to make their non-compete agreements enforceable.
  10. Not saving an electronic version of the signed non-compete agreements.  Companies must make sure that they save an electronic signed version of their non-compete agreements in a location where employees cannot access and delete them or take them.

BOTTOM LINE:  Spending some money at the front end of an employment relationship to make sure that the company is protected with a valid non-compete under Texas law can save a company ten times that amount in legal fees when the times comes to enforce the non-compete agreement.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

How to Fire Employees Without Being Sued

notice_of_lawsuitLitigation can be expensive, disruptive to business and bad for employee morale.  The good news is that there are certain things that an employer can do before, during, and after the termination of an employee that can minimize the chances of a lawsuit arising out of the termination. In the spirit of an old proverb that advises that “an ounce of prevention is worth a pound of cure,” this article provides a list of best practices that can help avoid wrongful-termination types of lawsuits and the business interruption that comes with such litigation.

Have a probation period. A probation period of 60 to 90 days for new employees allows a business to determine whether an employee is the right fit, and makes it clear to the employee that they do not have a guaranteed term of employment or any rights that may come with a longer tenure, such as medical or other fringe benefits.  An employer should make sure that any problems with an employee during the probation period are documented. The employee’s file should also clearly show when the probation status changes to regular employment.

Have an employee policy.  An employee handbook that clearly outlines the practice’s policies and procedures is key to avoiding disputes over whether the terminated employee is owed unpaid Paid Time Off (PTO) or other compensation upon termination, or whether such employee was terminated for cause or without cause (an important distinction when it comes to the payment of unemployment benefits). If the handbook contains a description of the company’s progressive discipline policy, consistent application of this policy to all employees can establish a defense to a claim that a particular employee was terminated based on a discrimination or retaliation. It should also contain an anti-harassment policy and explain to employees how to report incidents of harassment, discrimination or retaliation.

Follow the policy.  If a business has a progressive discipline policy, it must make sure that such policy is applied fairly, neutrally, and consistently to all employees.  In other words, if one employee is terminated after receiving three written warnings, then another employee cannot be allowed five such warning before being terminated. Making exceptions to the policy can result in a terminated employee arguing that they were treated differently based on one of the protected categories such as race, gender, religion, and others.

Document problems. Any problems with an employee, especially policy violations, should be documented in their personnel file.  Ideally, the problem should be documented in writing, on a form that is signed by the employee, acknowledging that they received the warning.  If this is not possible, then a written note should be made by the employee’s supervisor noting what the problem is and that it was discussed with the employee. Most termination lawsuits involve a situation where an employee had no documented problems or the problems were documented poorly.

Know which laws apply to your practice. Before dismissing an employee, an employer should become familiar with the laws that might apply.  Often, but not always, that depends on how many employees the business has.  Additionally, certain laws, such as the Family and Medical Leave Act, for example, apply only to employees who have worked for the employer for 12 months and a certain number of hours.  Thus, such a statute does not protect all employees.  Knowing which laws a company must comply with before terminating an employee can save it from an unpleasant surprise in the form of a lawsuit.

Prepare for the termination.  Firing on the spot should only occur in extreme circumstances that justify such an action.  Rather, a typical termination should be preceded by a few steps that tend to minimize the chances of a lawsuit. The person in charge of termination should know which laws apply.  He or she should also review the company’s handbook describing unacceptable employee behavior and the discipline policy and make sure that the company has complied with the policy in documenting the employee’s violations of the rules.  The performance appraisals and any disciplinary action records should be consistent with each other. 

A pre-termination review of all the records related to the employee should establish that the termination is legal under all applicable laws, is justified by the facts, is consistent with the company’s policies and procedures and is consistent with how the business has handled such terminations in the past.

Be professional during the termination meeting. During the termination, the key is to treat the employee with respect, and to be polite but firm.  The discussion should be brief and based on the facts.  While an employee may get emotional, the person on the other end of the discussion should remain professional. If a volatile situation is expected, it may be necessary to have security personnel present.  At the very least, one other person should be present on the employer’s side during the termination, who can later confirm that nothing improper was said during the termination conversation.

Comply with Texas Payday Law.  Many times, employers will take certain deductions from the final check, or will hold the final paycheck until the employee returns company property. These actions may violate the Texas Payday Law statute, which requires employers to follow very specific rules in making the final payment to a terminated employee. 

The Texas Payday Law covers all Texas businesses, regardless of size, and applies to all persons who perform a service for compensation, except for close relatives and independent contractors. It covers salary, commission, bonuses, and certain fringe benefits.  This statute lays out the rules on how and when an employer must pay the final paycheck, depending on whether the employee resigned or was terminated. It also describes when an employer can take deductions from the final paycheck.  Failure to comply with the final paycheck rules under the statute can result in penalties from the Texas Workforce Commission. Therefore, employers should become familiar with this statute and its requirements.

Follow up after the termination. The terminating manager should write down what was said at the meeting in the event of a lawsuit. She or he must also inform the remaining employees on a need-to-know basis about the termination.  If a higher-level employee is terminated, have a staff meeting as soon as possible after the termination and tell them what happened and why, but do not provide the specifics.  You want to stop the rumor mill, not feed it.

Leiza is a business and employment litigation attorney in Dallas, Texas. If you need assistance with a business or employment dispute contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.