Is Your Business At Risk? Take a Short Risk Test to Find Out

How does a business owner minimize its risk of litigation or other costly disputes?  The first thing an owner must do is identify areas which are most likely to lead to conflict with either other owners, employees or customers.  While any of the following areas can lead to trouble, if a business owner’s answer is “no” to more than than a handful of these critical areas, unwanted issues could be lurking on the horizon.

1.  Does the Company have signed By-laws or an Operating Agreement?

Setting the “rules of the game” between owners is critical.  Even single member limited liability companies should have operating agreements to ensure it’s not considered a sole proprietorship in the event of litigation.

2.  Does the Company comply with corporate formalities such as documenting annual meetings?

Many companies’ governing documents provide for mandatory annual meetings or periodic valuations for buy-out purposes.  Failing to follow those provisions can lead to owner disputes.

3.  Does the Company have a succession plan in place?

Small business owners in particular often fail to have a plan in place in the event of their death or disability.  This can leave owners’ family members and the company itself in jeopardy. A Company’s succession plan should be part of the owners’ estate planning.

4.  Does the Company have an employee handbook?

A comprehensive employee handbook which covers all issues of the employees’ relationship with the Company is essential.  The lack of such a document with at-will provisions, social media policies and anti-discrimination and harassment policies can lead to litigation from a terminated employee.

 

5.  Are the Company’s key employees subject to non-compete agreements?

Both Michigan and Florida enforce well-drafted non-compete and non-solicit agreements.  Employees without such an agreement can turn your customers into theirs after they leave.

6.  Does the Company have confidentiality agreements to protect its sensitive information?

A Company must take measures to protect its confidential information.  Confidentiality agreements with those who have access to proprietary data are critical.

7.  Are the company’s customer relationships properly documented with contracts? 

Customer and client relationships are the lifeblood of any company.  Without proper contracts which include provisions for termination, default and dispute resolution, a Company can be at risk for litigation.

8.  Is any real estate owned by Company titled in the name of a separate entity?

If the business is operated from real estate which the Company owns, having a separate entity to hold that real estate can limit the risk to the business operations in the event of certain claims such as personal injury.

If the Company has multiple owners: 

9.  Does it have restrictions on an owner’s ability to sell ownership interests?

Although many small business interests are not marketable, an owner may wish to sell his interest to a spouse or key employee.  Without restrictions on such a sale, the other owner may end up with a business partner he doesn’t want.

10.  Does it have buy-sell agreements in the event of retirement or death of an owner?

Without proper buy-sell procedures, the retirement or death of an owner in a multi-owner business can lead to disputes between the owners or their beneficiaries.

Does your Company have some areas of risk?  Contact me to discuss how to reduce them.

Eric A. Parzianello
313-672-7300
eparzianello@hspplc.com

Using Employee Staffing Companies? You May Not Be as Protected as You Think

Businesses often use employee staffing companies or temporary employment agencies to avoid many employment liability risks such as hiring, firing and wage decisions. A recent decision of the National Labor Relations Board may erode that protection.

In the case of Browning-Ferris Industries, the Board found that two or more entities may be joint employers of a single work force if they share control or reserve authority to control the terms and conditions of employment. The Board found that “reserved authority to control terms and conditions of employment, even if not exercised, is clearly relevant to the joint-employment inquiry.”

Businesses which retain the potential to exercise control over a worker’s wages and working conditions, regardless of whether that control is ultimately used, may remain liable to the workers for actions of its staffing company. These businesses should review their staffing contracts to ensure they include language specifying that the business is not a co-employer and consider eliminating provisions that reserve some control over the workers, such as retaining the right to terminate the worker.

This summary was taken from the November HSP Business Briefing.

Eric A. Parzianello
eparzianello@hspplc.com
313-672-7300

A Detroit Documentary By Michael Bolton? Yes it’s true.

As detailed in this Washington Post article, Michael Bolton of 1980’s fame is working on a documentary about the work being done to revive the Motor City.

Great article – linked here – and better video – linked below – of his efforts and the re-birth of downtown Detroit. We’re happy to be a part of the city.

Pre-Hiring Social Media Screening: 3 Tips for Employers and Applicants

Did you hear the one about the Texas teenager fired for a tweet about her new job – even before she started?  Yes – that happened in Texas earlier this year when a Jet’s Pizza employee took to Twitter to post about the “f*** a** job” she was about to start.  On the day she was to start, the store owner saw her tweet and replied: “no… you don’t start the FA job today! I just fired you!”, as reported by Time.  Although this tweet cost someone her job, social media provides land mines for employers and prospective employees alike.

Employers Need to Exercise Caution When Using Social Media

In Michigan, the Texas Twitter termination would have been permissible only because the employer did not request password access to the prospective employee’s account. Michigan employers need to be aware of the “Internet Privacy Protection Act” (“IPPA”).  The IPPA imposes criminal and civil penalties on employers for requesting an employee or job applicant to permit access to that person’s personal internet accounts, such as Facebook and Twitter, by providing their private passwords. The IPPA provides that violations are punishable by fines up to $1,000 and possible attorney fees.

Additionally, an employer may not discriminate against a job applicant based on factors such as age, religion, national origin, marital status, pregnancy status or disability, all of which are often available on an applicant’s social media site.  In Gaskell v. University of Kentucky, 2010 WL 4867630 (E.D. Ky. Nov. 3, 2010), the plaintiff was not hired after another employee viewed the plaintiff’s personal website and sent an e-mail to the hiring committee expressing concern about the plaintiff’s religious beliefs.  The Court found that there was an issue for trial as to whether the plaintiff’s religious beliefs were a motivating factor in the University’s decision to not hire him.  The University ultimately settled the case by paying the plaintiff $125,000.00.

Job Applicants Can Cost Themselves Jobs Through Social Media

Job applicants should also be careful about social media usage. A recent Social Media Survey conducted by Jobvite found that 93% of recruiters will review a candidate’s social profile before making a hiring decision and 55% of employers have reconsidered a candidate based on what they find on Facebook, Twitter or LinkedIn.

The reasons for those reconsiderations?  Not surprisingly, any reference to illegal drugs leads the pack of reasons to negatively reconsider an applicant.  Posts of a sexual nature, those containing profanity and those referencing alcohol or guns also negatively impact an application according to the survey. Even bad spelling and poor grammar create opportunities for a prospective employer to reconsider hiring someone: 66% of hiring managers said they would hold poor spelling and grammar against candidates.  So, what type of social media posts can help your perception?  Posts about volunteering or charitable donations created a positive impression with 65% of recruiters according to the survey.

The Bottom Lines  

For employers, to minimize the chance an applicant may make a claim for discrimination, employers should:

1) Have a written policy detailing which social media sites are used to screen applicants and what information is considered;

2) Keep records of what negative information was reviewed to disqualify a candidate;

3) Become familiar with your state’s laws on accessing job applicants’ social media.

For job applicants:

1) Make your social media sites (other than your LinkedIn profile) private – although this will only minimize and not eliminate the likelihood of an employer finding information about you;

2) Add volunteer and charitable works to your LinkedIn profile;

3) Most importantly, don’t ever publish anything you wouldn’t want to discuss in an interview.

Eric A. Parzianello
eparzianello@hspplc.com
313-672-7300

Audit Your Contractors – They May Cause You To Be Liable for Their Employees

Once a company is found to be a joint employer with its contractor, it is jointly liable for any wage violations committed by the contractor. In a May 28, 2015, Florida federal court decision, a company was held liable as a “joint employer” for improper payments its contractor required from its employees.  The essential question at issue in the case was whether the workers are dependent on the company as an economic reality.

In Garcia-Celestino vs. Citrus Consolidated, the plaintiffs alleged that a citrus grower’s contractor demanded that they pay back a portion of their wages in exchange for not reporting them as illegal immigrants and having them deported to Mexico. The workers said the contractor forced about 200 workers to pay over $100,000 during three harvest seasons.

The United States District Court of the Middle District of Florida balanced several factors in making a determination as to whether the grower was a joint employer.  If a company makes decisions such as: (1) for whom and how many employees to hire; (2) how to design the employees’ management structure; (3) when the work day begins; (4) when the laborers shall start and stop their work throughout the day; and (5) whether a laborer should be disciplined or retained, it is likely a joint employer.

Joint employer status can also be found if the company supervises workers regardless of whether orders are communicated directly to the worker or indirectly through the contractor.  The authority to hire, fire, or modify the employment conditions of the workers and the extent of the company’s involvement in the payroll procedures and wage payments is also considered.

The court found that the workers provided an integral service for the grower, indirectly but extensively supervised the workers and was also directly involved in payroll practices thereby affecting Plaintiffs’ pay.  The grower therefore will be liable in an amount to be determined for the adverse effect on the workers’ wages and possible Fair Labor Standards Act (“FLSA”) violations.  A full copy of the decision can be found at my firm’s website:   Garcia-Celestino vs. Citrus Consolidated.

Lesson for companies working with contractors:  audit their employment practices or ensure that you don’t cross decisional control lines and risk being considered a joint employer.

Eric Parzianello
eparzianello@hspplc.com
313-672-7300

Think Your Arbitration Clause is Sending Your Dispute to Arbitration? It May Not

Depending on the nature of the dispute and which side you’re on, arbitration can be a good mechanism to provide a resolution.  Parties often insert some type of arbitration clause in their agreements believing that all disputes under that agreement must be arbitrated.  If, however, the arbitration clause is not sufficiently broad to cover any type of dispute and a complaint is drafted with the intent of avoiding arbitration, court litigation will proceed as one Florida appeals court recently held.

In Sherwood v. Slazinski, Dr. Leonard Slazinski and other members of a limited liability company (LLC) filed an action against two other members of the LLC, the Sherwoods, seeking declaratory and injunctive relief.  Like most Operating Agreements, the one at issue addressed company formation, capital contributions, profits/losses, distributions, management, compensation, bookkeeping and transfers.  The Operating Agreement also contained the following clause:

• “[i]n the event of any impasse in decision-making, not otherwise capable of being decided according to the terms of the Operating Agreement, the matter shall first be referred to voluntary nonbinding mediation. In the event there is no satisfactory resolution after such mediation, it shall be referred to arbitration….”

The Sherwoods filed a motion to compel arbitration on the basis of this clause.  The Court of Appeals found that “to compel arbitration, the Sherwoods had to demonstrate: (1) that a valid written agreement to arbitrate existed, (2) that an arbitrable issue existed, and (3) that the right to arbitrate had not been waived.”In a February 20, 2015, decision, the Florida Court of Appeals concluded that the dispute as framed by Dr. Slazinski in his complaint did not fall within the scope of the arbitration clause since the clause related only to member duties and decision-making impasses. Because the arbitration clause was narrowly drafted, it didn’t extend “to any and all claims that may arise or relate to the agreements governing the business.” The Court therefore denied the requested arbitration.

If you desire arbitration for any type of dispute, make sure your clause says that.  If you’re trying to avoid arbitration, make sure your complaint is drafted to ensure that result.

Eric Parzianello

eparzianello@hspplc.com

313-672-7300

Do Your Employment Agreements Require Arbitration and Preclude Class Actions?

A February 17, 2015, decision of the district court in the Southern District of Florida confirms the ability of an employer to require an incoming employee to execute and be bound by an arbitration agreement.

In Curbelo v. Autonation Benefits, Inc., the plaintiff electronically signed a confidentiality, no-solicit, non-compete, and arbitration agreement on her first day on the job. The agreement required arbitration of any claim she could bring against her employer “i ncluding participation as a class representative or class member on any claim.” The plaintiff sued the employer in federal court under the Fair Labor Standards Act for wage violations and sought to act as a class representative on behalf of other employees. The federal court found that both the arbitration clause and the class action waiver were valid and enforceable. The court ordered the case to arbitration.

Arbitration clauses in your employment agreements can be another way to limit your litigation risk. Make sure your employment agreements protect your company.

Eric Parzianello
eparzianello@hspplc.com
313-672-7300

Millions of Dollars Can Turn on a Phrase: The Story of How Football Coach Contracts Affected the Universities of Michigan, Florida and Wisconsin

College football is big fun for fans but big business for universities.  Employment agreements for head coaches are as important as those for private sector employees.

The recent hiring and firing of three college football head coaches certainly raised some interesting contractual issues involving millions of dollars.

At Colorado State University (“CSU”), Jim McElwain’s decision to leave for a more lucrative position at the University of Florida required a $7.5 million buyout payment to CSU – but one which curiously could be reduced at the president’s discretion. At the University of Michigan, the timing of Brady Hoke’s dismissal earned him $1 million more than if he were fired a few weeks later. At the University of Wisconsin, Gary Andersen gave notice of his departure for Oregon State University, triggering a potential $3 million buyout.

THE McELWAIN / COLORADO STATE CONTRACT

In the case of Jim McElwain, he entered into a new contract with CSU in June of 2014 after two years on the job. McElwain’s contract was full of incentives.  Some provisions allowed him to make up to an extra $150,000 if certain player graduation rates were realized and earn substantial increases to his base salary if CSU achieved a final national ranking in the top 10 or if it appeared in a post-season College Football Playoff system game.

The new contract extended at least through 2018 with annual options for either McElwain or CSU to extend it through 2023.  The agreement gave the coach the right to terminate it, without cause, and take a new job at any time.  However, if McElwain terminated it before December 31, 2018, he was required to pay the University $7,500,000 as liquidated damages.  Former CSU athletic director Jack Graham told the Colorodoan that the whole purpose of the new agreement was to give McElwain an opportunity to make money based on his performance and to give him security in the form of a 10-year agreement. In exchange, Graham said McElwain had to agree to a break-up fee that would make it very difficult for him to leave CSU for any other university. Graham said that McElwain’s attorney asked “a number of times if we would carve out Alabama and other top head football coaching jobs from the breakup fee,” but Graham declined to do so. Nevertheless, Graham was at least partially overruled on that issue by CSU’s president, Tony Frank.

Graham said that “unfortunately . . . Tony agreed to reduce if not eliminate the breakup fee if a ‘dream job’ were to come along.”  To the credit of McElwain’s attorney, they ultimately agreed on the following language which essentially left the buyout to the president’s discretion:

“The Parties acknowledge, understand, and agree that in the case or event of extenuating circumstances the University’s President shall have the discretion, but not the obligation, to reduce in whole or in part McElwain’s obligation to pay Liquidated Damages to the University. McElwain shall have the right to request that the Parties engage in a good faith discussion of such Liquidated Damages amount prior to McElwain providing formal notice to the University of his decision to terminate this Agreement without cause, and in such event the University agrees to engage in such discussion, although the University has no obligation to reduce in whole or in part McElwain’s obligation to pay Liquidated Damages, with an understanding and acknowledgement that lime will be of the essence in coming to a final decision.”

This provision essentially undermined what could have been an iron-clad liquidated damages provision. A complete copy of the agreement can be viewed at Scribd.

Ultimately, reports by the Coloradoan indicate that CSU will receive a portion of the $7.5 million buyout.  However, the president’s discretionary provision permitted him to agree that CSU would instead receive $3 million over a six-year period from the University of Florida Athletic Association and $2 million from McElwain over an unspecified period of time.  The University of Florida also agreed to play a football game against Colorado State in Gainesville between 2017 and 2020 and pay $2 million to Colorado State for that appearance.

THE BRADY HOKE CONTRACT

In the case of the University of Michigan, it entered into a six year contract with Brady Hoke for its head football coaching position in 2011. Unlike McElwain’s contract at CSU, Hoke had no buyout clause if he left U of M prior to the expiration of the contract, although U of M did have to pay $1 million to to buy out Hoke’s contract at San Diego State University. Hoke also had no incentives for graduation performance, national ranking or appearances in a College Football Playoff Game. The contract did however have incentives for Big Ten Conference Championship game appearances.  Hoke was required to attend alumni,  donor solicitation, recruitment-related and other events as reasonably directed by the Athletic Director. A termination provision in Hoke’s contract also raised interesting issues.

U of M was able to terminate the contract without cause at any time and in fact did terminate Hoke’s employment on December 2, 2014. The contract had a sliding scale of buyout payments due to Hoke in the event of such termination. Because Hoke’s last date of employment occurred during “Contract Year Four” which was defined as ending on December 31, 2014, U of M was obligated to pay Hoke $3 million in monthly installments through 2016.  Had it terminated Hoke a few weeks later (on or after January 1, 2015), it would have been obligated to pay Hoke only $2 million in monthly installments through 2016.  The January 1 trigger date for determining the amount of the buyout is curious – when college football coaches are fired, it is typically done immediately after the season ends in late November or early December for various reasons including recruiting. The negotiation of that provision certainly benefitted Hoke.

Interestingly, he is required to seek employment in order to receive that full buyout in an ambiguous provision of the contract – the complete copy of which can be found at Crain’s Detroit.  The specific provision reads as follows:

The Head Coach is required to mitigate the University’s obligations under Section 4.01(a) by making reasonable efforts to obtain other football related employment (such as a head or assistant coach of a professional football team, head men’s football coach of an NCAA Division I team, or media commentator) as soon as possible following such termination.. . . .The University’s obligation to pay the Head Coach as set forth in Section 4.01(a) shall be reduced by Head Coach’s total compensation from all such sources.

This provision is anything but clear.  While “football related employment” is extremely broad, the parenthetical uses the phrase “such as” to describe types of employment without specifically defining or limiting them.  From the university’s perspective, it could take the position that the parenthetical merely contains examples of football related employment and an assistant NCAA coach position or any other football related employment would all reduce U of M’s obligation to pay Hoke the full buyout amount.  From Hoke’s perspective, anything other than the listed positions would still entitle him to receive the full buyout.  As with any contract, a lack of clarity can lead to later disputes.

THE GARY ANDERSEN CONTRACT

The most recent coaching move came at the University of Wisconsin where head coach Gary Andersen left after just two years on the job and after just signing a contract extension in early 2014.  Like McElwain, Andersen’s contract has a buyout provision which is also discretionary.  However, the language of Andersen’s contract does not leave the decision solely to the president but to the University itself, requiring a vote of the Board of Regents:

This Agreement may be terminated by Coach by giving University written notice of the termination of his employment with University. In such event, if Coach accepts another coaching position at any time during the remaining term of this Agreement, Coach may be required to pay to the University, at University’s sole discretion, in lieu of any and all other legal remedies, damages of any type or equitable relief available to the University, and without regard to actions by the University to mitigate its damages, liquidated damages in an amount of three million dollars ($3,000,000.00) if separation occurs within first two years of Employment Agreement (February 1[2014] – January 31 [2016]) as amended; two million dollars ($2,000,000.00) if separation occurs during years three or four of Employment Agreement as amended; or one million dollars ($1,000,000.00) if separation occurs during year five of the Employment Agreement as amended.

Such liquidated damages shall be due and payable within one hundred twenty (120) days after notice of termination of this Agreement or after acceptance of employment in a college, university or professional program as stated above, whichever occurs first.

Oregon State was undeterred by this provision and scooped up its new head coach within days of losing Mike Riley to the University of Nebraska.

Eric Parzianello

eparzianello@hspplc.com
313-672-7300

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How Can An Employer Limit Its Litigation Risk?

An employee’s post-termination lawsuit can be very costly for an employer regardless of whether the claims have any merit.  A complaint alleging discrimination based on sexual harassment or age, race or gender discrimination can result in significant litigation and/or settlement cost.  One way for an employer to limit the risk of such claims is to shorten the time by which an employee must file any suit against the employer.

In the case of Posselius v. Springer Pub. Co., Inc., the plaintiff began working for her employer in 2000. In 2005, she received a revised employee handbook and signed a form acknowledging her receipt of the book.  That form in part stated:

“I agree that in consideration for my employment or continued employment that any claim or lawsuit arising out of my employment with, or my application for employment with, the Company or any of its principals or subsidiaries must be filed no more than six (6) months after the day of the employment action that is the subject of the claim or lawsuit. While I understand that the statute of limitations for claims arising out of an employment action may be longer than six (6) months, I agree to be bound by the six (6) month period of limitations set forth herein, and I WAIVE ANY STATUTE OF LIMITATIONS TO THE CONTRARY.”

The plaintiff was terminated in July of 2008 and she filed suit a year later in July of 2009 for gender discrimination. The employer argued that the plaintiff’s action was barred by the six-month contractual limitations period in the signed acknowledgment.  The Michigan Court of Appeals agreed and dismissed the lawsuit.  It found that “because the acknowledgement form created an enforceable agreement and was not ambiguous, plaintiff was bound by the provision requiring claims to be brought within six months.”

This is one of many ways an employer can reduce the likelihood of litigation.  A regular review by an employer of its policies and procedures is highly recommended.

Eric Parzianello
eparzianello@hspplc.com
313-672-7300

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Do You Have a Written Post-Termination Commission Agreement? If Not, It Could Be Costly

When commission based employees terminate their employment, do they get commissions for sales made after they leave?  If no contract exists regarding post-termination commissions and the salesperson procured the sales, the employer must pay commissions even after termination of the employee under the procuring cause doctrine.  We recently obtained a significant victory for our client in Oakland County (MI) Circuit Court in large part because his former employer failed to have any written agreement with him regarding commissions.

What is the procuring cause doctrine?  The procuring-cause doctrine applies when the parties have a contract regarding the payment of sales commissions, but the contract is silent regarding the payment of post-termination commissions. The procuring-cause doctrine acts as a default rule for interpreting a contract that is silent with respect to commissions on sales generated by a salesperson before, but consummated after, termination of the relationship between the salesperson and the principal.

An salesperson is entitled to recover a commission whether or not he has personally concluded and completed the sale as long as  his efforts were the procuring cause of the sale.

How is “procuring cause” defined? A procuring cause has been defined by Michigan courts as the “chief means” by which a sale was finally effected. Whether a salesperson was a procuring cause generally turns on the facts of each case making written agreements critical in order to avoid litigating those facts.

Employers and salespersons both should minimize their litigation risk by having written agreements in place before any termination occurs.

Eric Parzianello
eparzianello@hspplc.com
313-672-7300

How The Employee You Terminated 20 Years Ago Can Still Be a Shareholder in Your Company

Is it possible that the employee you terminated 20 years ago retains an ownership interest in your company?

In the recent case of Turner v. J&J Slavik Inc., a Michigan corporation’s former employee claimed that his shares in the company were not redeemed pursuant to the procedures in the parties’ stock restriction and redemption agreement when his employment terminated in January 1992.  He therefore contended that he holds the same ownership interest today.  The Michigan Court of Appeals agreed.

The agreement provided, in part, that: “[i]n the event the employment . . . of [plaintiff] . . . terminates, . . . [defendant] shall purchase, and [plaintiff] . . . shall sell, all of the shares of common stock in [defendant] then owned by such terminated employee.”  The purchase price was to be “the fair market value thereof as of . . . the last day of the month immediately preceding the termination of employment . . ..” “Fair market value” meant “the amount of [defendant’s] assets less the amount of its liabilities (book value) on the [v]aluation [d]ate divided by the number of shares outstanding . . . .”  However, no valuation occurred.  Instead, the company simply represented to the employee that the shares were worthless.  Additionally, despite the agreement’s deadline for the closing of the redemption of the stock, no such closing took place.

The Court found that the agreement contained no exemption from the valuation and closing procedure for allegedly worthless shares.  The Court ruled that because the redemption procedure was not followed, the employee’s stock was not canceled, and the employee did not lose his status as a shareholder.

Here, an employer’s prudence in having a well-drafted agreement with its employees was negated by the failure to follow its own procedures.

Eric Parzianello
eparzianello@hspplc.com
313-672-7300

Sixth Circuit Bails Out Employer’s Questionable Drafting: Arbitration Clause Enforced Despite Lack of Mention of Survival

The Sixth Circuit Court of Appeals recently bailed out an employer from some questionable drafting in its professional services contracts.  As a result, multiple former workers were required to arbitrate their claims individually as opposed to a class.

In Huffman v. Hilltop Companies LLC, the plaintiffs were hired by Hilltop to review the files of mortgage loans originated by PNC Bank. For over a year, they regularly worked in excess of forty hours per week but were not paid at overtime rates because they were classified as independent contractors – a classification the plaintiffs believed was erroneous.

One paragraph of their 24 paragraph Professional Services Contract contained the following arbitration clause:21.  ARBITRATION. Any Claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration administered by the American Arbitration Association (“AAA”) in accordance with its Commercial Arbitration Rules and its Optional Procedures for Large, Complex Commercial Disputes. The … arbitration and all related proceedings and discovery shall take place pursuant to a protective order entered by the arbitrators that adequately protects the confidential nature of the parties’ proprietary and confidential information.

A separate paragraph containing the survival clause read as follows:

22. SURVIVAL. Paragraphs 4, 5, 6, 7, 8, 9, 10. 11, 12, 14, 17, and 22 shall survive the expiration or earlier termination of this Agreement.

The plaintiffs’ contracts were terminated and they later filed suit in federal court alleging a violation of the Fair Labor Standards Act.  The employer argued that the plaintiffs were required to arbitrate their claims; the plaintiffs argued that the arbitration clause expired when the contracts were terminated since it wasn’t one of the twelve paragraphs listed in the survival clause.

The federal district court agreed with the plaintiffs.  It ruled that there was a “clear implication” that the parties intended the arbitration clause to expire with the agreement since 12 of the 24 paragraphs in the contracts were identified in the survival clause – and the “Arbitration” paragraph was not one of them. 

However, the Court of Appeals reversed.  It held that there is a strong presumption in favor of arbitration.  It found that the plaintiffs’ interpretation that the arbitration clause terminated upon the contract’s termination depends on a “strained reading” of the contract.  The listing of half of the contract’s paragraphs in the survival clause was apparently not enough for the Court:  it stated that “if the survival clause listed twenty-three of the agreement’s twenty-four clauses—all but the arbitration clause—that might constitute a clear implication, and yield a different result.”

The Court then not only held that the multiple plaintiffs were required to arbitrate but that they could not proceed as a class in arbitration.  Though the contract and the arbitration clause did not address classwide arbitration, the court held that the plaintiffs must proceed individually in the absence of a specific authorization to do so.  Despite this ruling, an employer would best be served by an explicit reference that an arbitration provision survives termination and a specific prohibition against classwide arbitration.  

Eric A. Parzianello
eparzianello@hspplc.com
313-672-7300

How To Breach An Employment Agreement and Still Enforce Your Former Employee’s Non-Compete

Can non-compete agreements still be enforceable when an employer fails to pay the employee amounts due under the same contract?  A Florida court found that answer to be ‘yes’.

A typical defense of an employee accused of violating a non-competition agreement is that the employer breached some agreement either by failing to pay amounts due under the contract or in some other manner. While this is usually a valid defense which could undermine an injunction enforcing the non-competition provision, careful drafting by the employer can make its prior breach irrelevant.

In the recent Florida case of Richland Towers v. Denton, the trial court found that the employer had not paid bonuses to the employee as required under the employment agreements. The court accepted the argument that this was a prior breach rendering the non-competition covenants unenforceable. The 2nd District Court of Appeals, however, reversed this decision. It found that to “reach this conclusion, the circuit court necessarily had to determine that the parties’ obligations under the contracts were dependent covenants. When a dependent covenant has been breached, the entire contract is virtually destroyed.”

The agreement however had an explicit provision which “trumped” the general rule that covenants are considered dependent.  The agreement provided as follows:

“Covenants Independent. Each restrictive covenant on the part of the Employee set forth in this Agreement shall be construed as a covenant independent of any other covenant or provisions of this Agreement or any other agreement which the Corporation and the Employee may have, fully performed and not executory, and the existence of any claim or cause of action by the Employee against the Corporation, whether predicated upon another covenant or provision of the Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation of any other covenant.”

Because the covenants were independent, the employer’s prior breach of the agreement was irrelevant to the enforcement of the non-competition provision.

On a separate issue, the Court of Appeals also found that the discontinuation of business by the corporation which signed the agreements was irrelevant: another provision in the agreements provided that the corporation’s affiliates could enforce the non-competition provisions:

“Corporation (and each of the Affiliates comprising the Corporation) shall be deemed to be third party beneficiaries under this Agreement with the right to seek enforcement hereof and make claims hereunder, including but not limited to claims arising under this Section 10.”

The Court of Appeals therefore reversed the denial of the temporary injunction.  This decision is another example that the likelihood of success on a request for an injunction enforcing a non-compete provision depends in large part on the language of the contract.

Eric A. Parzianello
eparzianello@hspplc.com
313-672-7300

 

How Employers Can Protect Against Résumé Lies: The Steve Masiello Story

After Manhattan College’s basketball team nearly upset the University of Louisville in the NCAA tournament on March 20, 2014, its coach, Steve Masiello, was offered and apparently agreed to terms on a new job with the University of South Florida.  As Lee Corso might say, “not so fast my friend.”  Fortunately, for South Florida, the offer was contingent upon a background check.  

As reported in a story by the New York Times, the offer was pulled after South Florida officials discovered an “inaccuracy” on his résumé which said that he graduated from the University of Kentucky in 2000.  Masiello had attended but in fact did not graduate from Kentucky.  South Florida policy requires head coaches to have earned at least a bachelor’s degree.  This wasn’t Masiello’s first such misrepresentation about that degree; his bio on the official Manhattan College website – still active as of April 22, 2014 – lists his “alma mater” as Kentucky in 2000.

This story was reminiscent of football coach George O’Leary who falsely claimed that he had earned a master’s degree in education from New York University.  Unfortunately for the University of Notre Dame, this didn’t come to light until after Notre Dame offered O’Leary the position of head coach in 2001, he accepted it and a press conference was held to announce Tyrone Willingham’s replacement to the sports world.

Five days later, the New York Times reported that “O’Leary had resigned suddenly after admitting to falsifying parts of his academic and athletic background.”

How do employers protect themselves from these types of situations?  Ideally, a formal offer and employment agreement would not be extended until after a background check is completed.  However, time constraints often do not allow for complete background checks, drug testing and the like.  Offers of employment should therefore have an “out” clause for the employer: a clause which makes clear that the offer can be revoked even after acceptance if certain information is discovered within a certain time.  A sample clause:

• The effectiveness of this Employment Agreement is conditioned upon successful completion of a background check on Employee to be completed within 21 days after execution of this Agreement (the “Revocation Period”).  In the event Employer determines in its sole discretion that there are any inaccuracies in Employee’s representations, Employer shall provide written notice of revocation of this Agreement and Employer shall have no liability to Employee under this Agreement or otherwise.  Employee is cautioned to not take any action, including the voluntary termination of Employee’s current employment, until this Revocation Period expires.

As for Masiello, his position even as Manhattan’s coach remained in limbo until recently when Manhattan announced that Masiello would complete 10 credit hours at Kentucky this summer and then be eligible to return as Manhattan’s head coach.  Apparently, Manhattan never bothered with a background check either.

Eric Parzianello
eparzianello@hspplc.com
313-672-7300

 

On Twitter Bets, NCAA Upsets and “Manning Up”

Is a one-sided bet enforceable?  NFL player Roddy White doesn’t think so.  Before last week’s first round NCAA game between 3rd seeded Duke and 14th seeded Mercer, White tweeted to a Mercer fan that he’d give him 50 yard-line first row season tickets if Mercer beat Duke.  Mercer, a 13 point underdog, upset Duke 78-71.

White went back to Twitter to say he’d only give him tickets to one game.  After getting roasted in the Twitter-verse, White tweeted:  “Y’all people are crazy on twitter you want me to man up and pay a bet to a person that had nothing to lose in the bet #soundsridicules“.  Screenshots of the Twitter exchange can be found here.

Aside from the fact that, yes, he should “man up” after tweeting an unprovoked bet to a Mercer fan, White is legally correct.  For an enforceable agreement to exist, there must be consideration: something of value given by both parties that induces them to enter into an agreement.  Without consideration, there’s no contract here unless the Mercer fan did something in reliance on White’s statement.

Regardless, the lesson here is to shut up unless you’re ready to “man up.”

Tiger Woods Finds Florida’s Deceptive Trade Act Costly

Your business contract has been breached in Florida and litigation can be costly.  However, as Tiger Woods will likely soon find out, Florida’s Deceptive Trade Practices Act (“DTPA”) provides a powerful tool for the collection of attorney’s fees.

Florida’s DTPA prohibits “unfair methods of competition, unconscionable acts or practices, and unfair or deceptive acts or practices in the conduct of any trade or commerce.”  Under the DTPA, the prevailing party may receive his or her reasonable attorney’s fees and costs from the nonprevailing party.  Therefore, even if your contract doesn’t provide for attorney’s fees in the event of breach, adding this cause of action may be beneficial if you can prevail on it.

In the recent case of Gotta Have It Golf Inc. vs. ETW Corp., owned by pro golfer Tiger Woods, the plaintiff had an exclusive arrangement requiring Woods’ company to provide memorabilia. It accused Woods of violating a 2001 licensing agreement after his company did not provide it the agreed amount of autographs and photographs for the plaintiff to sell.  Gotta Have It Golf alleged that Woods provided only 550 of 1,300 agreed autographs and denied the use of numerous photographs.

Although Woods testified at trial, a six woman jury was apparently unimpressed.  After deliberating for two hours on March 12, 2014, the jury found that Woods’ company breached its contract, violated its duty of good faith and fair dealing, and, importantly, engaged in deceptive and unfair trade practices under the DTPA.  A copy of the jury verdict can be found here.

The jury awarded $668,346.00 in damages to Gotta Have It Golf. Because of interest to be added to the judgment, the total amount owed could exceed $1.3 million.  Additionally, because the jury found liability under the DTPA, the plaintiff’s attorneys will seek attorney’s fees which could approximate $1 million.  Without making a claim under the DTPA, the plaintiff would likely have not had any ability to recover its attorney’s fees.

Lesson:  litigation creativity can result in cost effective representation.

Five Things an Employer Can Do Before a Wage and Hour Claim is Made

Employers both large and small continue to be affected by Wage and Hour claims.  In one recently reported case, a Domino’s Pizza franchisee agreed to pay $1.28 million to 61 pizza delivery workers based on claims of unpaid work.  In a case in which we’re involved, a collective action was filed in federal court on behalf of workers employed by a company but allegedly misclassified as independent contractors.  In another case, the Department of Labor’s Wage and Hour Division received a complaint from a worker and sent the letter no employer wants to receive:

Dear Owner/Manager:
The Wage and Hour Division (WHD) of the U.S. Department of Labor is responsible for administering and enforcing a number of federal labor laws, including The Fair Labor Standards Act (FLSA). This letter is to inform you of the agency’s plans to visit your establishment on February 6, 2014, at 10:00 a.m. to determine your compliance with the FLSA. 

The Department of Labor’s WHD website makes it very easy for any employee to make a claim. The WHD touts that “there are no charges to file a complaint or for the WHD to conduct an investigation” and that it will enforce wage laws “without regard to an employee’s immigration status.”  Damages in a wage and hour case may include attorney fees as well as double the amount of unpaid or under-paid wages.  Not surprisingly, National Economic Research Associates reports that on average, companies paid approximately $4.5 million to resolve cases involving wage and hour violations in 2013.

What can an employer do before a claim is made or an audit is demanded by the Wage and Hour Division?

1. Conduct periodic internal audits with labor counsel to ensure compliance with applicable laws
2. Ensure that employees who are classified as salaried workers and thus exempt from overtime pay are properly classified
3. Review written job descriptions to ensure that duties of exempt employees reflect their actual job duties
4. Determine that any workers classified as independent contractors are properly classified and are not actually employees
5. Ensure that time record keeping procedures accurately reflect the work done

These procedures can help minimize the risk of an audit or a claim by an employee for unpaid wages or overtime.

Revitalizing Detroit Requires a Leap of Faith and Solid Preparation

It was a cold, February day in 2012 when my partner Mark Snitchler and I drove downtown on Woodward Avenue from Oakland County to view possible Detroit office space for our new law firm Hubbard Snitchler & Parzianello PLC. Despite the passing of more than a decade since moving from Detroit to Franklin, as I traversed the city streets, it initially appeared not much had changed in the city. My immediate thought was “maybe this isn’t such a good idea.” Over the next couple hours, however, my confidence would be restored.

Our “idea” to move downtown was inspired by Detroit’s recent rejuvenation. As companies and organizations moved back to the city, we believed a boutique business law firm, like the one we planned to open, would thrive in Detroit. We met with Bruce Schwartz, Quicken’s Detroit Relocation Ambassador, for what we thought would be a building tour. As Snitchler recalled, “Although we visited a number of buildings, what stood out more was the vision Bruce laid out for us.”

Schwartz shared Dan Gilbert’s plan for downtown, which centers on redeveloping Woodward Avenue and surrounding districts like Capitol Park and Grand Circus Park into a thriving urban environment made of new and renovated residences, offices, stores, restaurants and cultural attractions.  After we examined projection drawings of the Woodward corridor and reviewed artists’ renderings of renovated buildings, we were captivated by the matter-of-fact confidence in what was planned. Still, we were making a huge bet on the city making a comeback. While every new venture has risk, Snitchler, John Hubbard and I knew advance research and planning was a necessity to minimize our risk.

Taking our own advice, we focused on the following items, key to starting any new business:

Develop a business plan. A discussion between owners of the “how,” “why” and “where” of the business is important. For us, our individual expertise had been established, but we still needed to address the markets and clientele we would target. The industry outlook, analysis of competition and financial projections are additional elements of a good business plan. And for us, incorporating Detroit into our future marketing would be important. 

Decide on a business structure. The decision to form a business as a limited liability company, corporation or other entity depends on various factors. Regardless of the type, a company needs a legal entity to limit the owners’ personal liability and maximize tax benefits.  We worked with CPAs to determine the most appropriate structure for our business.

Obtain start-up capital. All ventures need to establish banking relationships. Loans for equipment and lines of credit should be explored. We’re starting to see banks that are more willing to extend loans to start-ups. That has positively affected the downtown area. At the same time, there are grants, tax abatements and other funding programs that should be explored.

Draft an operating agreement. One of our busiest practice areas is business breakup litigation. When partners don’t plan an exit strategy, it can lead to court battles. Discussion of the terms on which one partner can leave or be asked to leave the business may take the “romance” out of the initial stages of a professional relationship, but it is essential. Non-solicitation agreements also should be considered with a new venture so departing partners or employees can’t attempt to take customers on their way out.

Negotiate a lease.  A lease agreement may a new venture’s largest obligation.  Seeking counsel to help understand all lease obligations – such as taxes, insurance, and common area maintenance charges – is important.  Negotiating terms such as length, tenant improvements, and options for additional years is also essential. 

Recruitment.  There’s no question a vast majority of graduates, entrepreneurs and professionals are looking to work and live in a cool, urban setting.  Detroit has that.  As a case in point, when the David Broderick Tower at Woodward and Witherell was redeveloped into 125 apartments last September, every residence was leased.  As more residences, offices and merchants are added, we believe it will attract the best and brightest professionals in the world.  Instead of brain drain, Detroit is experiencing a brain gain. 

As for our firm, there have only been a couple unanticipated growing pains in moving downtown.  As Hubbard jokes, “We’re still working on patience – waiting for elevators or driving to the top level of the parking garage to find a space. But that means more people are coming back to Detroit, so it’s a good thing.”

Our bet on the city’s comeback is already paying off.  Mark noted, “We’ve attracted new clients who either have businesses located in the city or are looking to move here. Our downtown move to the Chrysler House is a big reason for that, and it uniquely positions us to assist those clients.”

Each day we are reminded of Detroit’s potential by the wall-size Fathead photos of a bustling downtown, taken in 1917, adorning our office. The photos are as much a nod to the city’s rich history as to our belief that the city is coming back. At our firm, we think it’s actually already back.

This article was originally published in dBusiness Magazine in its July/August 2013 Edition.

Top 7 Safeguards To Protect Confidential Information

How do I protect my confidential information ?  It’s a common question asked by corporate executives and business owners who are increasingly concerned about how to protect their company’s sensitive material. The disclosure of customer lists, pricing information and business techniques could negatively impact a company’s revenues.  What are the top safeguards a business owner can put in place to protect critical information?

1. Store critical information with controlled physical access
2. Limit access to sensitive information in electronic format
3. Clearly mark any confidential information
4. Ensure departing employees return confidential information in their possession
5. Restrict copying and transmission of confidential information
6. Require employees and others who will view sensitive material to sign confidentiality agreements
7. Enforce any violations of confidentiality agreements or company policy

Managers Beware: You Can Be Individually Liable For Discriminating Against Employees

Until recently, federal courts have almost uniformly found that managers or supervisors cannot be individually liable under Title VII, which protects employees against discrimination based on grounds such as race, color, religion, sex, or national origin.  Under Title VII, liability is typically limited to the employer.  A November 4, 2013, case from the Sixth Circuit (which covers Michigan, Tennessee, Kentucky and Ohio), however, has strayed from that general interpretation of the statute.

In Mengelkamp v. Lake Metropolitan Housing Authority, a female plaintiff who was employed at annual salary of $46,000 sued her employer and manager for sex discrimination.  She alleged and a jury found that her male manager consciously disregarded her rights and engaged in “outrageous” and “flagrant” actions.   The jury awarded the plaintiff compensatory damages of $195,000 against the employer and punitive damages of $105,000 against her manager.  The Court of Appeals upheld both awards.  As to the punitive damages, the Court found that the manager held a supervisory position, had significant control over the plaintiff’s firing, and was the person in charge of employment conditions.  The manager was therefore an “employee” under the statute and could be found individually liable.

Lesson for managers and supervisors:  don’t discriminate . . . . or find a job outside of the Sixth Circuit.