What a Small Business can do to Prevent Employee Problems (Hiring, Wages, Overtime, and Workplace Policies)

A key ingredient of success for a small business owner are the quality and productivity of the employees.  Also, it is important to make sure that employees do not become a drain on the resources of a business, in terms of lost productivity and distraction for the executive staff.  Of course, as a business owner, you are where the buck stops with properly hiring, training and motivating (managing) your employees.  In this article, we will discuss things to consider in minimizing the disputes from your employees.  Answering questions for us today is Gregory Clement, a partner at Burkhalter, Kessler, Clement and George LLP , a law firm based in Irvine CA.

Employee & Business Seller Non Compete Covenants

Just Elementary (JE):  Obviously employees don’t always stay with a company forever.  One tool to prevent an employee taking competitive trade secrets to competing businesses are Non Compete Covenants, a lot of which are boiler plate Non Compete agreements. However, it is known that Non Compete agreements are difficult to enforce in general, especially in California. How can an attorney help craft a Non Compete Agreement that has some teeth to it, especially upon the sale of a business when the buyer is exposed to a higher risk of employee defection?

Greg Clement (GC): Yes.  The buyer needs to ensure that the seller’s employees have signed a properly-drafted Confidentiality Agreement containing legally enforceable employee and customer non-solicitation restrictions. If they have not, the buyer should insist that the seller have its employees do so before the closing and assign the agreement to the buyer at closing.  In addition, the Purchase Agreement should contain a representation and warranty by the seller and the seller’s principal that they do not have any knowledge that any of seller’s employees intend to start a competing business within 6 months of the closing date. The buyer should also have any of the seller’s employees who it retains post-closing sign a similar agreement.   If any of seller’s key employees refuse to sign such an agreement before closing it is a red flag and the buyer needs to investigate the issue further.

JE:  Speaking of which, how about a Non Compete Covenant for the seller of a business that the buyer can have to help protect his/her investment in the business?

GC:  To be enforceable in California in the context of the sale of a business, a non-competition agreement needs to be reasonable in scope (both geographically and breadth of industry sector) and time.  The buyer should be realistic and specific about the field and geographic area to which the non-competition agreement needs to apply and the agreement should be for no longer than 5 years.  If the geographic area extends beyond a local radius it should be listed by county or state, not by radius from the location of the business being sold.

Employee Hiring

JE:  What about screening new employee applicants?  What are suggestions to find out as much as possible about the employee without violating any labor or discrimination laws?

GC: It goes without saying that nowadays all businesses should run a criminal background check on potential new employees and, if the new hire will be handling money, you may even want to consider doing a credit check (for which you require the applicant’s written consent).  However, you should also insist that a job applicant provide you with at least two personal references from whom you can obtain recent, first-hand
knowledge of supervising or working with the applicant, either as a co-worker, vendor or business partner.  Notwithstanding the old rule about references generally being unwilling to provide useful, substantive information, you will find that, if you are persistent, references will often provide a lot of useful information, especially if they have good things to say about the applicant in question. This is especially true in today’s economy, in which many excellent employees have been laid off for purely economic reasons.  Insist on having a personal conversation with your applicant’s references and don’t be afraid to ask probing questions to make sure that the reference isn’t just a close friend of the applicant who is trying to say complimentary things to help his her friend get hired.  Listen carefully to what a reference does – and does not – say in response to your questions and follow-up with the applicant on any inconsistencies.  If your applicant cannot – or will not – provide recent, verifiable references, you should seriously consider not hiring that person.  Remember, 5% of all employees typically cause 90%+ of all HR problems and the best way to avoid an employee lawsuit is to not hire a “problem” employee in the first place.  Poor or rushed pre-hire job applicant screening will come back to bite you!

JE:  This may go without saying, but which details about the hiring process, interview(s), and job offers should be documented and filed?

GC:  New employees and their new employers often get sued by the employee’s old employer for things such as breaches of confidentiality agreements and misappropriation of trade secrets. Make sure you obtain copies of all such agreements that may affect your new hire’s employment and review them with counsel if need be so that you can understand and quantify the potential risks involved.

Make sure you do this every time, with no exceptions, before the new hire begins work.  The best way to do this is in a formal offer letter which you ask the applicant to sign and return to you beneath a bold heading that reads: “AGREED AND ACKNOWLEDGED”, or similar.  Be sure to accurately list or describe the amount and, if applicable, the mode of calculation of all employee compensation, including detailed commissions or bonus plans.  Try to avoid hiring someone before all of the details of compensation have been acknowledged in writing. Stating that an employee’s commission plan will be “determined later” is a recipe for a legal disaster. However, if you absolutely, MUST do this, calendar a reminder to yourself for 30 days, for example, to finalize the employee’s compensation plan, date it, have the employee sign it and put in the employee’s personnel file.

Workplace Policies & Employee Handbook

JE:  What about employee handbooks, there are some online that seem like they can adapted to each business?

GC:  Make sure your Handbook is current and accurate and have it reviewed periodically by counsel and updated as necessary.  Handbooks found on the Internet are often inaccurate or contain provisions that are contrary to California law.  Although this may sound obvious, make sure you know what your Handbook actually says and that your company is following its own policies and procedures.

Employee Wages, Salary & Overtime Pay

JE:  What about overtime pay issues, regarding hourly employees and salaried employees?

GC:  The most common employee lawsuits stem from basic things such as employers not paying overtime, giving required rest and meal breaks and timely paying employees upon termination.  These problems are easily avoided by understanding the rules and periodically auditing your company’s compliance.  There are numerous guides and seminars for HR professionals that explain these legal requirements.

Many employers mistakenly believe that if an employee receives a constant, periodic salary that employee is not required to be paid overtime pay.  This is simply not true.  Whether an employee is exempt from the overtime rules is a sometimes quite complicated analysis that involves many factors and can change over time.  Generally speaking, to be exempt, an employee must have a high level of responsibility and autonomy, or manage 2 or more people more than 50% of the time, and receive a constant salary equal to at least $640/week (i.e., 200% of the minimum wage of $8.00/hour).  It is very common for employers to wrongly classify an employee as exempt, who is not exempt from the overtime laws, with potentially serious and expensive consequences.   Employers should periodically (at least annually) review their employees’ current job duties and responsibilities and be prepared to reclassify employees as appropriate.

JE:  Aren’t there liability and payroll tax advantages to hiring workers as Independent Contractors?

GC: A person is not necessarily an independent contractor under California law just because you and the person in question agree that they are and you provide that person with an IRS Form 1099.  Unless you are dealing with a well-established or bona fide company, you should always seek legal guidance in advance as to whether it is legally appropriate for you to engage someone as an independent contractor and, if so, how to go about doing so.

Employment Practices Liability Insurance

JE:  Aside from hiring wisely and following labor and wage laws, what else can a business owner do to protect their business from employee lawsuits?

GC:  However careful an employer is, an employee claim for wrongful termination or discrimination or the like is inevitable in California.  Employment Practices Liability Insurance (or “EPLI”) will provide your company with defense and indemnity if you are sued or threatened with a wrongful termination action, once you have paid your deductible.  If you do not have EPLI coverage, you should immediately discuss obtaining this coverage with your commercial insurance broker.

Thank you Greg for providing us with keen insight into employee matters.  You can contact Greg Clement of Burkhalter, Kessler, Clement and George LLP at (949) 975-7500 or by email gclement@bkcglaw.com

For more information about how Just Elementary Inc. can help you with your small business, contact our Client Care Manager, Sonia Chhabra, at (888) 926-9193 or by email cs@justelementary.com