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On September 7, 2012, the National Labor Relations Board (NLRB) issued an opinion in Costco Wholesale Corp. v. NLRB. The case is an important one for all employers (regardless of whether their employees are union or non-union). It deals with the NLRB’s continuing focus on what it believes to be over-reaching employment policies that violate Section 7 and/or 8 of the National Labor Relations Act (NLRA). In fact, in the last 12 months, the NLRB’s Acting General Counsel has issued three reports on the issue.

Section 8 of the NLRA states that it is an “unfair labor practice” for an employer to “interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7.” Section 7 of the NLRA provides all employees (union and non-union) with the right to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

In Costco, the United Food and Commercial Workers Union (“Union”) began a campaign to organize the meat department at one of Costco’s warehouse locations and filed a petition to represent the employees. According to the Union, during the campaign Costco allegedly unlawfully interrogated its employees by making various statements about their involvement with the Union. The Union brought an unfair labor practice action against Costco on this basis and also challenged certain employment policies that Costco had prohibiting employees from engaging in certain conduct.

What is most disturbing about this case is that the policies at issue are not uncommon and are reasonably aimed at protecting the employer’s and other employees’ confidential information and their reputations. Specifically, Costco’s handbook included policies that prohibited employees from posting or distributing materials on company property, discussing other employees’ private matters (such as leaves of absence and personal health information), and sharing or transmitting employees’ “sensitive information” (e.g. financial information, social security numbers, telephone numbers, emails, and addresses). Costco also prohibited employees from electronically posting statements that “damage the Company, defame any individual or damage any person’s reputation, or violate the policies outlined in the Costco Employee Agreement” and prohibited employees from leaving the employer’s premises without permission. The policies provided that employees who violated the rules could be subject to discipline, up to and including termination.

Nevertheless, the NLRB determined that the policies limiting the posting and sharing of information violated the NLRA and the policy regarding the rule prohibiting statements that damage the Company or any person’s reputation, could be construed by employees as “…prohibit[ing] Section 7 activity.” Therefore, according to the NLRB, an employer’s general prohibition of statements that could damage or defame the company or others could be viewed by the NLRB as violations of employees’ right to “concerted activity.”

How then does an employer draft effective policies in way to reduce the risk of a NLRA violation?

In Costco, the NLRB disapproved of a “broad” prohibition against sharing confidential information or making statements that damage the Company or any person’s reputation, and found that such prohibitions “clearly” encompass concerted communications under the NLRA. The NLRB emphasized that “there is nothing in [Costco’s] rules that even arguably suggests that protected communications are excluded from the broad parameters of the rules.” Also according to the NLRB, the employer’s policy “does not present accompanying language that would tend to restrict its application.”

Given these statements, it would appear that the NLRB expects for an employer’s policies that prohibit the sharing of confidential information or the making of statements that damage the Company or any person’s reputation, include language that clearly states that any protected concerted activities under the NLRA are excluded from such policies.

Recommendation: Based on the Costco decision and the apparent heightened scrutiny by the NLRB of the language of various employment policies, employers are advised to work with their employment counsel to analyze and update their employment policy manuals or handbooks appropriately.

The Ninth Circuit has referred the Peabody v. Time Warner Cable case to the California Supreme Court to answer this question.

Under the commissioned salesperson exemption, or the “inside sales exemption” in Wage Orders 4 and 7 (ONLY) an employee is exempt from overtime if his or her earnings: 1) exceed one and one-half times the minimum wage; and 2) more than half of the employee’s compensation represents commissions. Under California’s minimum hourly wage of $8.00, an inside sales commissioned employee must earn at least $12.00 per hour to qualify for the exemption.

Susan Peabody was employed by Time Warner Cable as an Account Executive in the Media Sales Department. She was a commissioned salesperson who sold advertising on Time Warner Cable’s various cable channels. She was paid a base annual salary of $20,000 per year and also earned commissions based on the revenue generated by advertising that aired every broadcast month. According to Time Warner Cable, a “broadcast month” lasted four or five weeks. Ms. Peabody worked approximately 45 hours per week and was paid on a biweekly basis.

Ms. Peabody filed a class action against Time Warner Cable claiming that she was entitled to overtime because she was not exempt under the “inside sales exemption.” According to Ms. Peabody, she received large monthly commissions in only about half of the pay periods, and therefore she did not earn at least 1 ½ times the minimum wage in the remaining pay periods, as required by the inside sales exemption.

Time Warner argued that Ms. Peabody’s earnings should be calculated based on the “broadcast month” (every four or five weeks), so that Ms. Peabody’s commissions covered the pay periods for which they were earned rather than the actual pay period in which the commissions were paid. Based on this calculation, Ms. Peabody was clearly paid enough each pay period to qualify for the inside sales exemption. Noting that there is no California authority on this issue, the Ninth Circuit referred the issue to the California Supreme Court for a ruling.

We will monitor the case and let readers know what the California Supreme Court decides.

Robert v. Board of County Commissioners of Brown County, Kansas, et. al. (10th Cir. Aug. 29, 2012) No. 11-3902

The job description for Robert’s job as a supervisor of felony offenders included 18 “essential functions.” Some of those included functions like performing drug screenings, ensuring compliance with court orders, testifying in court, and “field work,” which consisted of visiting the homes of individuals who had been released from prison to assist them in their reentry into society. The job required “considerable fieldwork . . . throughout the 22nd Judicial District,” “visits in less than desirable environments,” and “potentially dangerous situations in field/office contacts.”

In January 2004, Robert began to experience severe pain in her back and hips. Her condition was eventually diagnosed as sacroiliac joint dysfunction. She scheduled surgery for her condition in April. In the meantime, walking became impossible, and she used crutches and later a wheelchair to get around. She continued to work from the office, though some adjustments were necessary; for example, she participated in court hearings by telephone. In the weeks immediately preceding her surgery, and again during her recovery, Robert worked from home by auditing case files for closed cases. During this time, she was unable to visit offenders at their homes or in jail, and she was similarly unable to supervise drug and alcohol screenings. As a result, other employees took up those tasks for her. According to Robert’s supervisor, the increased workload for other employees created tension and ultimately contributed to one employee’s resignation. Robert returned to the office in July or August 2004 and was eventually able to resume all of her work activities.

However, Robert’s good health was fleeting. In November 2005, she fell down the stairs in the Brown County courthouse. Shortly thereafter, symptoms of her joint dysfunction returned, leading her to schedule another surgery for April 2006. Like before, Robert continued to come in to the office prior to the operation, but she was unable to perform site visits, testify in court, or supervise screenings. Once again, her co-workers had to assume those duties. Because she was injured at work, Brown County’s workers’ compensation insurance covered her medical care. After her surgery, Robert took FMLA leave which lasted until July 5, 2006, at which point, Robert still was unable to return to work, although she also had exhausted her sick and vacation leave. Although the evidence was unclear as to the extent of the information Robert provide to Brown County, Robert told her supervisor that she would be able to walk with a cane in three to four weeks. According to reports from the workers’ compensation carrier, Robert would not be able to come into the office for a couple months. The supervisor’s journal notes were somewhat oblique but suggested that she understood the workers’ compensation carrier to convey that Robert could, in the best of scenarios, return to work with a cane in a month.

At this point, Robert had exhausted her FMLA, sick, and vacation leave, and the supervisor recommended that the Board terminate her employment. On July 31, the Board voted to terminate Robert. The supervisor, who considered Robert a friend, insisted on delivering her termination letter in person. Unbeknownst to Sloan, Robert’s husband recorded the emotional conversation that took place between the supervisor and Robert. The supervisor told Robert that the County Commissioners had decided to terminate her because she was unable to return to work at full capacity after her leave ended. Robert was shocked and upset, but acknowledged she was “an at-will employee, okay, and it’s up.” In fact, she recognized her at-will employment status several times during the conversation.

Robert then sued the County, the Commissioners, and her supervisor. She claimed that her termination constituted unlawful retaliation for her use of FMLA leave, discrimination under the ADA, and, other claims. The district court granted summary judgment in favor of the defendants on all claims and Robert appealed. The Tenth Circuit upheld the dismissal, finding that Robert was unable to set forth a prima facie case of discrimination under the ADA because she could not show that she was qualified to perform the essential functions of her job with or without accommodation. It first addressed the fact that Robert could not perform the essential functions that were included in her job description without accommodation, because of her impairment. The Court pointed out that the County’s willingness to excuse Robert’s inability to perform site visits during her first, lengthy but “ostensibly temporary,” period of time in 2004 was not evidence that those duties were nonessential. According to the Tenth Circuit, “[t]o give weight to that argument would perversely punish employers for going beyond the minimum standards of the ADA.”

The Tenth Circuit also addressed the important and complicated issue of how much leave an employer must give an employee as a form of “reasonable accommodation” under the ADA. The Court recognized that a brief leave of absence for medical treatment or recovery can be a reasonable accommodation. However, the Court went on to explain that there are two limits on the “bounds of reasonableness” for that leave.

· First, the employee must provide an estimated date on which he or she can resume the essential functions of the job. The Court said that without that information, an employer is unable to determine the reasonableness of the request.

· Second, the leave request must assure that the essential functions can be undertaken in the “near future.” The Court did not specify how “near” that future must be but it did cite another case in which the court held that a six-month leave request was too long to be a reasonable accommodation.

The Court found that Robert’s needed accommodation exceeded both criteria for reasonableness, because she failed to provide any definite date on which she would be fully mobile and could return to field work. As such, the Court held that the only potential accommodation that would allow Robert to perform the essential functions of her position was an indefinite reprieve from those functions and such an accommodation is unreasonable as a matter of law.

Lesson for Employers: This decision makes clear that job descriptions outlining the “essential functions” of an employee’s position are key in evaluating whether or not a reasonable accommodation can be provided to an employee under the ADA. As such, the importance of properly drafted job descriptions cannot be overstated. The other lesson from this decision is the importance of contemporaneous documentation of the interactive processes (dialogue) between the employer and the employee when evaluating the employee’s work restrictions and the availability of a leave of absence as a form of reasonable accommodation. If an employer can show that an employee has failed to provide an estimated return to work date and/or that the employee will be able to resume the essential functions of the job in the “near future,” then the employer is more likely to be able to defend against a failure to accommodate claim under the ADA if the employee is terminated or not reinstated. Of course, each case must be evaluated on its own based on the particular circumstances involved.

Readers of this blog will note that we frequently remind them that California law generally prohibits non-compete agreements. There are very limited exceptions to this general rule, one being that the seller of goodwill in a business can be bound by a valid non-compete agreement to protect the goodwill that is being purchased. Sometimes, the buyer of a company will want to continue to employ certain key employees, who can also be the sellers of the goodwill of the former company. We have seen instances where the purchasing company gets creative and subjects the seller/key employee to two covenants not to compete, one in the purchase agreement and the other in an employment agreement. Last week, a California appellate court shut the door on this approach in the case Fillpoint, LLC v. Maas.

Maas was an employee and stockholder in a video game company. In 2005, Handleman (which was later acquired by Fillpoint) purchased the video company pursuant to a purchase agreement. Under the terms of that purchase agreement, Maas agreed to a covenant not to compete for three years after the closing date of the transaction. At about the same time, Maas signed an employment agreement by which he agreed to work for the acquiring company for three years. That employment agreement had a separate covenant not to compete which prohibited Maas from working in the video game industry for one year after the termination of his employment.

After working for the new company for three years, Maas resigned and six months later joined a competitor. Fillpoint sued Maas for breach of contract for violating the one year non-compete in his employment agreement (and also sued his new employer for interference with contractual relations). At the time of trial, Maas filed a motion for non-suit stating that the one year non-compete set forth in his employment agreement was unenforceable under California law. The trial court agreed and dismissed the lawsuit.

In affirming the court’s dismissal, the appellate court began by recognizing that Business and Professions Code section 16600 prohibits any contract “by which anyone is restrained from engaging in a lawful, profession, trade or business,” except as otherwise provided under California law. Section 16601 makes an exception in the case where the non-compete is necessary to protect a buyer’s purchase of a company’s goodwill. The court noted, “section 16601’s exception serves an important commercial purpose by protecting the value of the business acquired by the buyer. ‘In the case of the sale of the goodwill of the business, it is ‘unfair’ for the seller to engage in competition which diminishes the value of the asset he sold.’” Thus, the Court had no problem recognizing the validity of the three year non-compete provision that was contained in the purchase agreement.

However, the Court noted that the non-compete provision in the employment agreement was a bit different than the one contained in the purchase agreement. Although the Court held that both agreements had to be read together since they were part of the same transaction, the non-compete in the employment agreement would only be enforceable if it satisfied the “goodwill” exception under section 16601. The Court held that it did not.

The Court reasoned that the non-compete in the purchase agreement was reasonably necessary to protect the value of the goodwill that was being purchased. This complied with section 16601. However, the one year non-compete in the employment agreement was clearly intended to affect Maas’s rights to be employed in the future after the expiration of the three year non-compete period in the purchase agreement. The Court concluded: “The purchase agreement’s covenant was focused on protecting the acquired goodwill for a limited period of time. The employment agreement’s covenant targeted an employee’s fundamental right to pursue his or her profession.” Thus, the Court held that the additional one year non-compete provision in the employment agreement was unenforceable.

The Fillpoint decision continues the trend in California for courts to heavily scrutinize restrictive covenants to ensure that they meet the spirit of section 16600 and its prohibitions against restraining an employee’s mobility. Businesses that are acquiring other companies and want to employ key employees who happen to be selling shareholders need to consult with legal counsel to ensure that the structure of the deal, including any non-compete provisions, is enforceable under California law.

As this blog frequently reminds its readers, California state courts take a hard look at arbitration agreements in the employment context. The recent case: Sparks v. Vista Del Mar Child & Family Services, from the Second Appellate District of California provides additional support for why employers need to be extra careful in establishing enforceable arbitration provisions.

Mr. Sparks was hired as Vista Del Mar’s controller in April 2007 and was terminated three years later. He claimed he was fired in retaliation for complaints he had made about various employment practices. After filing his complaint in state court, Vista Del Mar filed a petition to compel arbitration of the dispute citing a provision in its employee handbook that all employment matters were subject to binding arbitration. The trial court denied the petition and refused to order the matter to arbitration. The California appellate court affirmed this decision (by a split 2-1 vote).

After Mr. Sparks was hired, he received a 2006 employee handbook and signed an acknowledgement that he had received and reviewed the handbook and agreed to abide by its terms. An arbitration provision appeared on pages 35 and 36 of the handbook in the same font and style as the other provisions in the handbook. The employee handbook contained language that it was not intended to create a contract of employment and both the handbook and acknowledgement stated that the employer was free to change, rescind or add to the policies, benefits or practices described in the handbook.

Mr. Sparks was later provided a 2009 employee handbook but (for some reason) was not asked to sign a new acknowledgement. The arbitration provision was nearly identical in the 2009 handbook as the 2006 handbook but provided additional language that the employee, in acknowledging receipt of the handbook, would also be agreeing to the inclusion of the arbitration provision.

The appellate court began by recognizing that “[a]rbitration is recognized as a matter of contract and a party cannot be forced to arbitrate something in the absence of an agreement to do so.” Although the subject arbitration clause provided for the application of the Federal Arbitration Act (“FAA”), the appellate court ruled that California state law would determine whether there was a binding contract to arbitrate and not the FAA.

In holding that the arbitration policy in the 2006 handbook was unenforceable, the Court found the following facts persuasive:

• The arbitration provision was not prominently distinguished from the other clauses nor was there any place for the employees to acknowledge it in writing;

• The acknowledgement of receipt of the handbook made no reference to the arbitration provision (unlike the later 2009 handbook);

• The handbook was “distributed” to all employees with language that suggested it was informational rather than contractual;

• The arbitration provision was “illusory” in that the employer could unilaterally modify the handbook, including the arbitration provision, at any time;

• The rules of the American Arbitration Association which were referred to in the arbitration policy were never provided to Mr. Sparks;

• There was no evidence that the arbitration provision was subject to negotiation nor did it provide any express provision for discovery rights should arbitration be ordered.

The Sparks case is a reminder to employers that they need to be extra careful when presenting employees with arbitration clauses and must take care to ensure that the employee’s acceptance of the arbitration policy is properly documented. Merely relying on the fact that an employee handbook has an arbitration provision is unlikely in itself to allow an employer to compel an employee’s lawsuit into arbitration.