New York Employment Financial Disputes Lawyer
Long Island employment lawyer Steven Mitcovechell Sack has considerable experience in handling many aspects of employment financial disputes including:
- Employee wage and hour disputes, including overtime, tips and gratuities, minimum wage, unemployment benefits, and disability matters
- Commission and compensation disputes
- Bonus issues and claims
- Offer letters, employment agreements, and severance issues
Most people do not know how to resign properly. The slightest mistake can expose you to a lawsuit or cause the forfeiture of valuable benefits. Some people resign without receiving a firm job offer from a new employer. Later, after learning the new job did not materialize, they are unable to be rehired by their former employer and spend months out of work unnecessarily.
It doesn’t have to happen this way. Problems such as these can be avoided by thinking ahead. A proper resignation occurs when you are able to step into a new job with increased benefits without missing a day’s pay, have no legal exposure, and collect what you are owed from the former employer. Take the following hypothetical for example:
Bari is called into her boss’s office and told that she is being summarily discharged. However, the company states that she can resign by signing a letter of resignation, which it has prepared and presents to her.
Bari thinks it is better to resign than to be fired, so she signs the letter of resignation and leaves the premises. When she files for unemployment benefits, she learns she is not entitled to benefits unless she can prove that she was forced to resign. The company introduces the letter of resignation as evidence that no pressure or undue influence was forced on Bari and it was her voluntary decision; she is denied unemployment insurance benefits.
Bari consults an employment lawyer. She learns that had she not resigned she would have received severance. She also learns that she could have made a deal with her employer (and confirmed it in writing) that although the company would agree to inform prospective employers that she resigned for personal reasons, it would not contest her unemployment benefits or deny paying her other benefits she would have received had she allowed the company to fire her. The lawyer also explained that if she was close to earning a vested pension, profit-sharing benefits, or year-end bonus, her resignation would seriously undermine a claim for those expected benefits.
The golden rule is never to quit a job if you can help it. Refuse an employer’s offer to resign whenever possible. This is because if you resign you may be waiving a claim to unemployment and other severance benefits, including earned commissions. This is a trap many employees fall into.
However, there are occasions when you may receive a better job offer and decide to resign from your current position. Information in this section will tell you how to do so properly to increase the chances that the job at your new employer will not be short-lived. For maximum protection, review and implement the following strategies where possible.
1. SIGN A WRITTEN CONTRACT WITH A NEW EMPLOYER BEFORE RESIGNING. A written contract with a definite term of employment (for example, six months or one year) can protect you from situations where the new employer changes its mind and decides not to hire you, or fires you after a short period of time. This often happens with devastating consequences but can be avoided by insisting on a valid agreement with job security before starting work. If the new employer does not agree to this, think twice before jumping ship.
Many clients wish to learn what rights they have after resigning from a job and accepting a position with a new employer. Generally, they forget (or are afraid) to get a firm commitment of job security from a new employer before they resign from a good job. On some occasions, unfortunate workers sell their homes and relocate their family to a distant locale, only to discover they aren’t happy or that the employer is not satisfied with the arrangement shortly after the move is made. They ask if they can sue the new employer for promissory estoppel, misrepresentation, and other related legal causes of action as a result of the new job going sour.
While it is possible to recover money as a result of the new employer’s broken promises, this could have been avoided had they insisted on receiving an employment agreement that contained a definite promise of job security.
Remember, a job is like a romance. Companies woo applicants with promises of fulfillment and riches. Then, when the honeymoon is over, even highly qualified people find themselves being treated unfairly. This is the nature of the working world. Remember this for your own good. Never leave a good job voluntarily without a strong employment agreement from your new employer if you can help it.
2. REVIEW YOUR CURRENT CONTRACT OR LETTER OF AGREEMENT. If notice is required to be given, do this so you will not violate the contract’s obligations.
This is an important concern. For example, if your contract requires you to give 30 days’ notice before leaving, you must do so to avoid the company claiming you are in breach of contract. If you do not resign properly, you may be sued for damages. Damages in such cases are typically calculated at the employer’s cost of training a replacement. However, if you resign prematurely at an important time (e.g., during market week if you are a salesperson, or right before a customer is consummating an important deal in which your services are required, but the deal is blown because you leave), the damages could be significant.
There are occasions where an employer will release you from your obligations immediately after you give proper notice. This is because the employer may not want you around for, say, 30 days after it knows you will be leaving. If your contract requires notice, offer it but anticipate, discuss, or seize the opportunity that you may leave suddenly at the employer’s request. If the employer agrees, ask to receive the wages you would have earned during the notice period as part of a severance package. Some employers may be amenable to this.
Finally, since the employer may tell you to get out immediately after you give notice, anticipate this may occur and plan accordingly. Consider removing valuable contents from your office before giving notice, because the employer may tell you to vacate the premises and you won’t have this opportunity later. Get your affairs in order. Select the best time to resign to suit your needs knowing this may occur.
3. GET LEGAL ADVICE IF YOU BELIEVE YOUR CURRENT EMPLOYER WILL REJECT (OR REJECTS) AN OFFER TO RESIGN. On rare occasions, an employer may be inclined to do this, especially if you have an important job and your presence is essential to completing a major task or project. This could happen when you have a written employment contract with a definite term (say for a year) and you wish to resign six months into the contract period.
If you choose to leave anyway, you may be subjecting yourself to a breach of contract lawsuit. An employment attorney may advise that the most obvious damages you would suffer might be the employer’s costs to train a suitable replacement. If the company was forced to hire a replacement at a higher salary or with greater benefits, the difference in pay might also be cause for damages.
Fortunately, in many cases, the damages typically asserted by an employer against someone breaking a contract and leaving a job prematurely are speculative and hard to prove. I have observed that the vast majority of employers are inclined to set you free because keeping you around is dangerous (you could be sharing information with a competitor) and bad for morale (since you will probably not be giving your best when forced to remain).
All of these factors should be considered before you decide to break a contract. As consideration, a lawyer may recommend that you continue to work for the company as a consultant with less compensation in return for getting the employer to “let you out” of the contract. To minimize the risks of a lawsuit, these and other ideas should sometimes be explored before the decision to leave is made.
4. GIVE NOTICE ONLY WHERE NECESSARY. In many jobs, giving notice is not required or necessary (contrary to the public’s misconception) especially if you are hired at will. However, the employer will usually benefit when you offer notice because it may then have time to seek and train a replacement. It may also give you the opportunity to bargain for additional financial benefits before walking out the door.
Two weeks’ notice is probably more than adequate; avoid giving more notice than necessary. Do not offer notice if you must start a new job immediately and believe this will jeopardize your new position. However, if you are entitled to a large bonus or commission in the near future, postpone resigning until you have received such a benefit.
Many employers often summarily reject an employee’s notice and ask you to leave the minute they are notified of your intentions. The reason is that some employers believe you will copy pertinent documents or cause trouble. Don’t be surprised if this occurs. Anticipate it and plan ahead.
5. SHOULD YOU RESIGN BY LETTER? Only when it is used to clarify resignation benefits, request prompt payment of monies previously due, confirm unfair or illegal treatment, or put you on record that the resignation will not be effective until some later date. If these reasons are important, always resign by letter. When you do, keep the letter brief and avoid giving reasons for the resignation without having a lawyer review the letter first. The reason is that the letter may be used as evidence at a later trial or proceeding and can preclude you from offering other reasons for the resignation or tipping your hand in the event of a lawsuit.
The example on page 407 is the kind of resignation letter you may wish to draft. You should deliver it by hand or send it by certified mail, return receipt requested, in order to prove delivery.
6. NEVER RESIGN IF GIVEN THE CHOICE. Many employers have written policies that state that no severance or other posttermination benefits will be paid to workers who resign. Additionally, in many states, you are not entitled to unemployment insurance benefits after voluntarily resigning from a job. If you are a commission salesperson, it is often more difficult to argue that you are entitled to commissions due on orders shipped after a resignation (as opposed to after a firing).
STRATEGY: Think twice if the employer gives you the option of resignation or discharge. Talk to a lawyer for advice. It is generally preferable that clients be fired rather than resign, since potential damage claims and severance benefits may remain intact. If you are worried what others may think, you can always negotiate that the employer will tell outsiders that you “resigned for personal reasons” (even if you were fired).
7. KEEP QUIET. Tell friends and business associates of your decision to resign after telling your current employer, not before.
8. AVOID BAD-MOUTHING. It is not a good idea to tell others about the circumstances surrounding a resignation, particularly if you are leaving on less-than-pleasant terms. Many employers have sued former employees for defamation, product disparagement, and unfair competition on discovering that harmful oral or written comments were made. Additionally, when the statement disparages the quality of a company’s product and at the same time implies that an officer or principal of the employer is dishonest, fraudulent, or incompetent (thus affecting the individual’s personal reputation), a private lawsuit for personal defamation may be brought. Some companies withhold severance pay and other voluntary benefits as a way of getting even. Thus, avoid discussing your employer in a negative way with anyone.
9. RETURN COMPANY PROPERTY. Disputes sometimes occur when property belonging to the employer is not returned. You probably must return such property (automobile keys, confidential customer lists, samples, etc) immediately on resignation to avoid claims of conversion, fraud, and breach of contract.
If you return items by mail, get a receipt to prove delivery. A few states permit you to retain company property as a lien in the event you are owed money that the employer refuses to pay. However, since many states do not recognize this, speak to an employment attorney before taking such action.
Sample Letter of Resignation
Name of Officer
Name of Employer
Re: My Resignation
Dear (Name of Officer):
Please be advised that I am resigning from my job as (title) effective (date).
As of this date, I believe that (describe what salary, commissions, other
benefits) are due and I look forward to discussing my termination benefits with
I shall be returning all property belonging to the company (specify) by
(date) and will be available to assist you in a smooth transition if requested.
Thank you for your attention to these matters.
Very truly yours,
Sent certified mail, return receipt requested
Restrictive Covenants, Trade Secrets, and Gag Orders
Employees often resign from a job or are lured away to a rival company to compete directly against their former employers. Sometimes they take valuable customer lists, trade secrets, and confidential information (such as prices and requirements of key customers) with them. When the former company discovers this, a lawsuit may be filed to stop the employee from using such information. In other instances, a former employer may attempt to stop the individual from using information that was learned and acquired while working. Can this be done? This section discusses lawsuits often commenced by employers to restrict a workers’ ability to work or discuss important information after quitting or being fired. The following information can decrease the chances that such problems will occur and give you a better understanding of the legalities in this area.
RESTRICTIVE COVENANTS. Restrictive covenants, also referred to as covenants not to compete, are clauses in written employment contracts, confidentiality agreements, or termination agreements that are used for many purposes. Depending on the facts, when properly drafted and when state law allows, such clauses may:
- Restrict an employee from working for a competitor of the former employer
- Restrict an employee from starting a business or forming a venture with others that directly competes against the former employer
- Restrict an employee from contacting or soliciting former or current customers or employees of the employer
- Restrict an employee from using confidential knowledge, trade secrets, customer lists, and other privileged information learned while working for the former employee
- Restrict an employee from any of the above in geographic or time limitations
The above points are illustrated by the following actual clauses often used in agreements:
For a period of one (1) year following the termination of your employment for any reason, it is agreed that you will not contact, solicit, or be employed by any person, firm, association, or corporation to which you sold products of the Employer during the year preceding the termination of your employment.”
During the period of this Agreement and for a period of one (1) year thereafter, the Employee agrees that he or any company he is affiliated with, either directly or indirectly, shall not induce, hire, solicit, or otherwise utilize the services of any employee or sales rep currently employed by the Company.”
Without a written contract containing a restrictive covenant, employees generally cannot be stopped from working for a competitor or starting a competing business after they resign or are fired from a job. This is especially true if you resigned for a good reason (e.g., were not being paid in a timely fashion) and have not stolen trade secrets or confidential information. In situations where employees signed an agreement with a covenant-not-to-compete clause either before or after commencing work, the general trend is that such restrictions may not be enforceable because they unfairly inhibit a person’s ability to earn a living at his or her chosen profession.
The enforcement of any written covenant varies on a state-by-state basis and usually depends on a number of factors unique to each particular case. Many states, such as New York, have left the issue to the courts to decide. Other states, including Oregon, Louisiana, and Texas, have responded legislatively by enacting statutes regulating the enforceability of such clauses. In those states where restrictive covenants are not automatically illegal (as they are generally when they restrict independent contractors, sales reps and agents, brokers, and professional such as doctors), the primary focus of a judge is usually the reasonableness of the covenant in terms of geographic scope, time restraints, and purpose.
An employer may increase the chances of having such a clause enforced when the covenant is short in terms of geographic location (i.e., the ex-employee is prohibited from calling on only a few large customers located within the county where the ex-employer’s main office is located, instead of the entire United States); when such customers were procured by the employer’s efforts and not the employee’s; and when the prohibition does not exceed six months to a year.
Thus a restrictive covenant prohibiting a lighting-services employee from competing in the lighting retrofitting business within a hundred-mile radius of his former employer for five years after termination was found to be unreasonable and unenforceable by the Nevada Supreme Court.
STRATEGY: A non-solicitation provision may bar you from calling on specific customers but does not generally prohibit you from taking orders if customers independently call you. Remember this and act accordingly.
Courts sometimes respond more favorably to situations where companies have paid the employee extra consideration, such as $2,500 or an extra week’s vacation before signing a contract containing such a provision, or negotiating a greater severance package in consideration for signing a contract with such a clause. And in some states, if the agreement provides that the ex-employee will receive his or her regular salary while the covenant is being enforced so that no loss of salary takes place during the restricted period, some judges may enforce the clause depending on other factors.
These factors often include an examination into whether the ex-employee’s services are special, unique, or extraordinary; whether the restriction is necessary for the company to protect its business; and whether the person is in possession of trade secrets and other confidential information that, if disclosed or used in competition, would severely damage the company. When the employer prepares a restrictive covenant that is signed by the employee and is found to be enforceable, the restrictions may also apply to competing businesses conducted by the employee’s family members with background help from the employee even though they did not sign any agreements.
In order to establish that an employee is “unique,” the employee must generally show more than that the employee excels at his work or that his performance is of great value. The employer generally has the difficult burden of proving that the employee’s services are of such character as to make his replacement impossible or that the loss of such services would cause the employer irreparable injury. This is often difficult to prove.
In some states, if you are required to sign an agreement containing a restrictive covenant after you begin working, the court may find such an agreement to be unenforceable because no additional consideration was conveyed. In such states, a judge will not enforce it unless the company gives a corresponding benefit (e.g., an increase in salary, a bona fide promotion, or a beneficial change in job status). Other states may rule in the company’s favor on this point, however, finding that the additional consideration was the ability to keep the job (which would be lost if someone refused to sign the document). Since state laws vary substantially as to what constitutes sufficient consideration to enforce covenants in these cases, speak with a knowledgeable employment attorney to explore your options.
Be aware that some kinds of noncompete pacts stand a better chance of being upheld than others. These include a situation where a business is sold and the seller (who was an employee) agrees not to compete with the buyer for a specified period of time after the sale.
The following strategies may be helpful for protection in this area.
1. AVOID SIGNING ANY AGREEMENT CONTAINING A RESTRICTIVE COVENANT. Even if you work and/or live in a state that does not recognize such clauses, it is still not a good idea to sign any agreement containing such a clause. The reason is that a restrictive covenant provision may have a chilling effect and impair your ability to get to keep another job.
Restrictive covenants carry the implied threat that the company may institute legal action after your resignation or termination. This may effectively discourage you from contacting prospective employers or customers in your industry, establishing a competing business, or finding a job. On numerous occasions, my clients were asked by prospective employers if they were legally bound by any future working restrictions. Many times they were forced to provide copies of existing contracts and as a result were unable to secure employment.
If you are sued and the company seeks a temporary injunction to immediately stop you from working, your legal fees and costs to successfully defend yourself in court could be prohibitive. The problem is that many employers think they are protected when they have employees sign noncompetition clauses. Although such protection may be illusory, companies often take great pains to go to court to find out if these clauses are enforceable and to demonstrate to current employees their resolve in not allowing others to do the same thing. Thus, even if you win, you will probably get stuck with a hefty legal bill. In this country, losing parties are typically not required to pay for the prevailing party’s attorney fees. Even if you think a prospective employer will foot the bill for your court fight, it’s generally not wise to expose yourself to the risk of finding out.
2. AVOID SIGNING ANY COVENANT THAT CONTAINS A LIQUIDATED DAMAGES PROVISION. Such a clause may say, for example, that if you violate the agreement, you must return that portion of your compensation (e.g., extra salary or other money) you have received in consideration for signing an agreement not to compete, or you must forfeit benefits (e.g., valuable stock options) due to vest in the future. While perhaps not affecting the enforceability of the covenant itself, a forfeiture provision may represent a threat of substantial economic harm.
3. CONSULT AN EMPLOYMENT ATTORNEY IMMEDIATELY IF AN EX-EMPLOYER THREATENS TO SUE TO ENFORCE A RESTRICTIVE COVENANT. You may be surprised to learn that the employer will be unsuccessful in the event of a lawsuit. Courts in many states are now ruling that noncompete agreements are not enforceable (a) when they restrict a person’s right to work (particularly if your trade is your only means of support), (b) when they are being used merely to guard the employer’s turf, ©) when trade secrets (defined in the next section) are not involved, or (d) when you must work to support a family member with special needs (e.g., a spouse who is ill). Do not take any action detrimental to your interest, such as signing a document admitting any wrongdoing, until you have spoken with counsel. Many people are pressured by ex-employers to do things they later regret. Avoid being intimidated whenever possible.
4. DETERMINE IF THE EMPLOYER HAS BREACHED ANY OBLIGATIONS OR DUTIES OWED TO YOU. When companies are in breach of important contract terms, the law generally presumes they have “unclean hands.” Sometimes in such situations restrictive covenants will not be applied against you. In one case, for example, I defended several sales employees who had gone into business in competition with their ex-employer. Earlier, these individuals had contacted me to review an employment agreement they had signed with the ex-employer. The agreement did contain a restrictive covenant, but during the consultation I had learned that the employer, to save the company money, had reduced their salaries despite their written protests. I advised my clients that since the employer was obligated to pay a predetermined salary specified by contract, the failure to do so might release them from the covenant in the agreement.
The employees were sued after commencing business operations. At the trial, the judge heard testimony regarding this unilateral unjustified cut of pay. The judge agreed that the employer had unfairly reduced their compensation without their consent and ruled that the restrictive covenant could not be enforced against them.
STRATEGY: An employment attorney may try to get some leverage by asserting legitimate counterclaims, such as that you were victimized by sexual harassment or age or race discrimination while working. Your defense can become even stronger when you present evidence demonstrating you were treated wrongfully. If you are a salesperson, you can also gain leverage by stating your customers do not want to get involved in litigation and that you will drag them in if the case proceeds. The company may be reluctant to harm its customers in this manner and may decide that the ill will created by a lawsuit is not worth it.
Always avoid bad-mouthing the ex-employer during litigation proceedings. It is important for a judge to view your case in a sympathetic way; the more you are viewed as the innocent party just trying to earn a living, the more likely the judge may rule that enforcing the covenant isn’t fair. Also, the odds of winning your case can get better the longer the company delays in commencing action. If the employer waits several months after learning of your alleged misconduct, a judge may feel that is wasn’t so important to the employer after all and deny the employer’s request for injunctive relief.
5. RETRIEVE A COPY OF ANY PERTINENT AGREEMENT YOU MAY HAVE SIGNED. When people resign or are discharged and receive a formal demand that they refrain from certain acts (usually in the form of a cease-and-desist letter), often they cannot locate the agreement containing the restrictive covenant. This places them at a disadvantage. For example, they may be unable to obtain an accurate opinion from a lawyer if he or she cannot review the contract and may be forced to spend unnecessary legal fees trying to obtain a copy from the ex-employer. Thus, request copies of all documents that you sign and store them in a safe place for later review by you and your lawyer. Plan ahead and try to obtain copies from the company before you depart or are fired because it is much easier to do this while you are still there than after you are out the door.
6. RESEARCHTHELAWINYOURSTATE. Restrictive covenants that are unreasonable will not be upheld. But in some states, if the court finds the covenant to be overbroad in terms of geographic scope or time limitation, it has the ability to enforce the clause merely by reducing the time frame or territory (e.g., reducing it from two years to three months), and unless the employer acted in bad faith, courts in these jurisdictions may modify covenants to the extent necessary to protect the employer’s interest without imposing undue hardship on the employee.
In other “all or nothing at all” states, the covenant will be stricken in its entirety without any modification.
Each state has its own procedure and unique requirements for accepting a company’s application to grant injunctive relief rather than award damages. This means that the court may issue an order (i.e., an injunction) prohibiting the individual from working for the company’s competitor. If the employee fails to comply with the court’s order, he or she may be held in contempt. However, in some states, during the pendency of the action, if the employee believes he is right, his attorney may request court permission to post a bond for the damages the employer may be awarded so that the employee can continue to work for the competitor. Thus, research the unique law in your state to understand your rights.
From an employer’s perspective, there are a number of points to remember to increase the odds of prevailing in restrictive covenant litigation against a former employee. Reasonable, well drafted restrictive covenants can protect an employer from a disloyal ex-employee. Without a written contract containing a restrictive covenant a company cannot stop a former employee from working for a competitor except in the rare instance where it is proven that the employee has stolen and is using trade secrets (discussed in the next section). However, by inserting in a contract a restrictive covenant of reasonable geographic scope and duration, such a tactic can be pursued if someone goes over to a competitor. This is of particular significance to companies that train their own employees in a unique skill, only to lose them later to a competitor.
Companies that sue ex-employees to enforce a restrictive covenant don’t always win. Since the primary focus of the court is usually the reasonableness of the covenant, it is best to limit the covenant where practical and keep it short in terms of geographic location (i.e., never prohibit the employee from calling on customers located throughout the “entire United States”).
Courts respond favorably to situations where companies have paid the employee additional consideration, such as $5,000, an extra month’s vacation or greater severance pay, in exchange for the employee’s signing a contract containing a restrictive covenant. Better still, if the contract states that the employee will receive $X per week (i.e., one-third of his/her regular salary) while the restriction is in effect after the termination of the contract, this may constitute adequate consideration to allow the covenant to continue.
State and federal courts enable employers to pursue legal remedies when key employees depart to work for competitors. These include benefit forfeiture provisions, liquidated damages, salary continuation programs during a limited non-compete period, injunctions, and lawsuits to collect damages. But if a company fails to take action immediately after hearing the covenant has been violated, (e.g., sending a strong cease-and-desist letter to the ex-employee and her new company, and then filing a motion for a preliminary injunction in court), a case can be weakened. For example, by delaying action for six months, a skeptical judge might question just how harmful the ex-employee’s move really was. And if the covenant is short to begin with (say nine months), and the employer brings an action seven months later, what is the point?
There is a greater chance of losing the right to enforce a restrictive covenant when companies require employees who are already on-the-job to sign employment contracts containing such clauses. The reason is that in many states such a request by an employer will not be viewed as conferring any additional consideration (benefit) upon the employee to make such a clause valid.
When commencing a case, employers must be able to prove in court that the person’s skills are unique, special, and extraordinary. This may be a difficult hurdle to overcome. Yet in one case, a judge determined that an employee was the only “star” of the former employer, and that the business would inevitably fail if the employee left. In another case, a state trial court found that several currency traders were unique employees because of their special relationships with customers, fostered by the employer at its expense. In both cases, the court granted the employer’s request for permanent injunctive relief. Note: But even when uniqueness is proved, a number of states will not allow a company to restrain a talented professional (such as a doctor), or an independent contractor sales rep, agent , or broker from working for a competitor after the contract expired or was terminated.
The successful enforcement of a restrictive covenant or forfeiture provision is based on a case’s unique facts and the laws of the state where the parties work. If a company proceeds with litigation, it must not have “unclean hands,” especially after receiving a written demand. The chances of enforcing restrictive covenants are slim when employers intentionally breach important financial obligations to departing ex-employees.
TRADE SECRETS AND CONFIDENTIAL INFORMATION. It was once reported that Dow Chemical and General Electric reached an out-of-court settlement over employee poaching. Dow had accused GE of systematically recruiting an engineer with no supervisory responsibility who worked with automakers in projects involving high-tech plastics. In another case, after General Motors accused Volkswagen of stealing secrets when it recruited Jose Ignacio Lopez and seven of his GM associates, it was reported that GM received $1.1 billion to settle the matter.
Experts suggest that more companies and employees are willing to steal trade secrets, especially in high-tech industries, because many workers do not feel much loyalty in this era of corporate downsizing. Often ex-employees take valuable customer lists, trade secrets, and confidential information (such as prices and requirements of key customers) with them. When the company discovers this, a lawsuit may be filed to stop the ex-employee from using the information. Whether the employer will prevail will depend on many factors, including, (often most importantly), whether trade secrets are involved.
A trade secret may consist of any formula, pattern, device, or compilation of information used in business that gives a company an opportunity to obtain an advantage over competitors that do not know or use it. Although an exact definition is impossible, trade secrets are usually involved when:
- An employer takes precautions to guard the secrecy of the information
- An employer has expended significant money and effort in developing the information
- It is difficult to acquire the information outside the company (i.e., it isn’t generally known to outsiders)
- Employees are warned that trade secrets are involved and that they are obligated to act in a confidential manner
Employees are tied to restrictive covenants in written agreements that bar or limit them from revealing to others such information, especially to new or potential employers competing with the company.
Clients consult the author to determine whether a particular procedure or operating process constitutes a trade secret. Unfortunately, the answer is not always clear cut. Generally, all or most of the preceding elements have to be present to establish that a given process or procedure is a trade secret and to determine whether it has been illegally conveyed when an employee is discharged or departs. Lawsuits and injunctions brought by companies in this area are often quite complicated and costly to defend, even for victorious ex-employees, because each case must be analyzed and decided on its own particular facts and circumstances. Additionally, courts generally do not like to punish smart workers who learn on the job and try to better themselves thereafter by using their acquired knowledge on a new job. Only when an employer will be clearly damaged and lose its competitive advantage is it likely to be victorious in a lawsuit. And this is only after it demonstrates that a trade secret or confidential information has been or will be conveyed.
In one case an employer lost an injunction action brought in an attempt to stop a competitor from using its customer lists. The situation arose when a former employee who had worked as a truck driver and occasional mechanic began working for a major competitor to the company’s detriment. The court noted that at least three copies of its customer list were on open display at different locations of the company’s premises, and it was obvious that anyone could see the list.
Even though a trade secret can be learned by outsiders through legitimate channels such as trade publications and scientific reports, this does not mean it loses its character as a secret. If the idea is taken by an outsider or appropriated by an ex-employee, a company may be able to bar its use. The defense that the secret could have been obtained legitimately may not matter; if the employee got it improperly, he or she may not be able to use it. For example, an ex-employee’s failure to show any independent research or experimentation may make it difficult to prove he or she did not resort to stealing the secrets learned on the job.
An employee who leaves one job for another generally has the right to take with him all the skill and knowledge he has acquired as long as nothing he takes is the property of the employer. Courts distinguish between skills acquired by an employee in his or her work and the trade secrets, if any, of the employer. The former may be used by the employee in subsequent jobs, the latter may not.
An employee’s experience in executing a number of steps to produce a desired end is often not a trade secret. When sales employees become friendly with customers in the course of their employment, they are allowed to call on these customers for new employers. But in some instances, they may be prohibited from using their knowledge of unique customer buying habits, requirements or other special information when soliciting their former employer’s accounts. For example, if a salesperson knows that a particular customer will be in short supply of a special product at a certain time, he may not be able to use that confidential information acquired while working for the former employer.
Perhaps the most frequently disputed issue concerning trade secrets involves customer lists. A “secret” list is not a list of companies or individuals that can be compiled from a telephone directory or other readily available source. A list becomes confidential when the names of customers can be learned by someone only through his or her employment, for example, when the salesperson secretly copies a list of customers that the company spent considerable time, effort, and money and kept under lock and key.
An employee cannot make deals with customers in which he or she promises to perform favors in return for secret kickbacks involving money or other benefits (such as vacations). If you engage in such conduct without the company’s knowledge and consent, the employer can terminate your employment and sue you for damages. Employers typically must consider all the aspects of a potential case before bringing suit, and they have the burden of proving that trade secrets are involved. The next hurdle in any lawsuit often is proving that trade secrets were stolen or misappropriated. When bringing a lawsuit based on misappropriation of trade secrets, typically an employee will argue that the information acquired was common public knowledge obtained by going through directories, trade journals, books, and catalogs. Many times, the question before a court is not how the ex-employee could have obtained the knowledge, but how they did.
When an employer has made a special effort to remind employees of their obligation to protect the company’s trade secrets, they may be held to a higher standard. For example, if posters are displayed in prominent areas reminding workers of their obligation to protect company secrets and this is published on a continuing basis in company journals, work rules, policy manuals, and memos, and if you are requested to sign periodic or yearly trade secret and confidentiality agreements similar to the one beginning on page 426, this may reduce the argument that you didn’t know it was wrong to convey confidential information to a competitor.
As previously mentioned, preliminary injunction actions are often commenced by employers in the attempt to deny future employment to high-level executives and employees who possess confidential business information or trade secrets and are likely to reveal such information to a new employer. The decision whether to grant such relief generally turns on weighing the benefit of protecting proprietary business information with strong public policy against limiting competition and an individual’s ability to earn a living. Generally, to win a preliminary injunction action, the party asserting it must establish the likelihood of irreparable injury in the absence of an injunction and ultimate success on the merits of the claim at trial. The risk of irreparable injury must be actual and imminent, not remote or speculative. Successful employers seeking a preliminary injunction must have concrete evidence of the harm it will suffer if an injunction is not awarded.
The following suggestions may be helpful in this area.
1. AVOID SIGNING CONTRACTS CONTAINING TRADE SECRET PROHIBITIONS. Any contract you sign that contains a trade secret policy will be slanted against you and increase the company’s rights in this area. Employers commonly require employees to sign confidentiality agreements. Although the permissible scope of these agreements varies from state to state, they may be valid and can be used to convince a court that certain information is confidential and should be protected.
If you are asked to sign such an agreement before being hired, you may have no choice if you want the job. The problem becomes more difficult after you have begun working. Many cases have been decided in favor of the company in this area. If you are asked to sign such a document while working and refuse, you can probably be fired legally for insubordination. Always consult an experienced employment attorney for advice or to review any proposed trade secret agreement before you sign it.
2. BE AWARE THAT THE TRANSFER OR RECEIPT OF CONFIDENTIAL INFORMATION, ESPECIALLY BY WRONGFUL ACCESS TO AN EMPLOYER’S COMPUTERS, SERVERS AND/ OR E-MAIL ACCOUNTS, IS ILLEGAL. Employers can assert many state and federal laws for protection in this area. In addition to traditional common law claims of breach of fiduciary duty of loyalty, misappropriation of trade secrets, unfair competition and conversion, a number of states have passed laws making theft of trade secrets a criminal offense. For example, New York declares it a felony for anyone to steal property consisting of scientific material. In the federal system, crimes involving misappropriation of intellectual property have been prosecuted under the National Stolen Property Act (NSPA) and mail and wire fraud statutes. A criminal RICO action may also be asserted.
Another law to be aware of includes the Computer Fraud and Abuse Act (CFAA). This federal law provides civil penalties when someone knowingly with fraudulent intent accesses a protected computer without authorization or exceeds authorized access, causing damage or loss to a computer network. Whether the law can be successfully applied against data thieves depends on the unique facts of each case.
Pursuant to the National Stolen Property Act, if valuable material is stolen and transported to another state, the Federal Bureau of Investigation and the Justice Department can assist employers in apprehending workers because it is a federal crime to sell or receive stolen property worth more than $5,000 that has been transported across state lines.
The Economic Espionage Act, which makes trade secret theft a federal crime, specifically addresses theft perpetrated via the Internet. Section 1832 states it is a federal criminal act for any person to convert a trade secret to his or her own benefit or the benefit of others intending or knowing that the offense will injure any owner of the trade secret. The conversion of a trade secret is defined broadly to cover most acts of misappropriation, and you can also be prosecuted for receiving or possessing trade secret information when you know it was given to you without the owner’s authorization.
Penalties for violating this statute are steep. A person who commits an offense can be imprisoned up to ten years and fined up to $500,000. A corporation can be fined up to $5 million. The significance of this law is that those engaged in trade secret misappropriation can no longer be assured that liability will be limited to civil remedies and damages due to criminal penalties for transgressors.
Additionally, the Uniform Trade Secrets Act (UTSA) has been adopted by approximately 45 states. This law is used to protect employers against disloyal employees and ex-employees who improperly acquire a trade secret, even if the person acquiring the information does not use it for competitive advantage. The law is quite complex. Thus, speak to a knowledgeable employment attorney for further information where warranted.
The law is constantly changing as a result of numerous case decisions interpreting these laws, and statutory amendments by Congress and state legislatures. This is especially so due to the emergence of new technologies requiring legal protection from disloyal employees and ex-employees. Thus, research pertinent federal and state laws to know your rights in this area where applicable. Speak to a knowledgeable attorney for advice and guidance before doing anything you may later regret. Above all, always avoid the temptation of misappropriating data in computers, e-mail, and company servers. The penalties, costs, and legal fees required to mount a defense to civil and criminal charges is probably not worth it.
3. TAKE YOUR FILES HOME BEFORE BEING FIRED IF YOU CAN DO SO. You are generally not allowed to take any materials that were developed while working for the company, including Rolodexes and business-generated reports, letters, diagrams, photographs, and all copies of such valuable materials that are necessary for the company’s continued operations. You may retrieve personal information, but it may be scrutinized by a company official before you depart from the premises. To minimize the possibility of being sued, anticipate ahead and take non-confidential materials away from the office before your official departure. You may thus avoid the possibility of being searched and of not being able to remove such items at the time of your resignation or discharge.
4. LIMIT WHAT YOU SAY AT THE EXIT INTERVIEW. Many employers attempt to elicit information about what knowledge you’ve gained while working and how you intend to use it, especially when you are resigning from a job. At many companies, especially technologyintensive ones, there is a formal termination interview at which the question of confidentiality is discussed. Avoid providing the employer with specifics at an exit interview because the less the employer knows of your plans, the better off you’ll be. Be especially careful not to confirm that you possess trade secrets or that you have a continuing obligation to protect the company’s secrets and agree not to disclose them to others. If the employer identifies exactly what information it considers to be confidential and tells you that you are required not to use such information to its detriment, you may diplomatically object to such comments or state that you do not agree with the company’s position.
5. NEVER SIGN A LETTER OR AGREEMENT STATING THAT YOU HAVE NOT TAKEN CONFIDENTIAL INFORMATION. However, if the employer offers you a significant increase in severance or other financial benefits, it may be worth signing such a document and avoiding a lawsuit after you confer with legal counsel.
6. CONTACT A LAWYER IMMEDIATELY. A competent lawyer can help you retrieve items that the employer does not want to release and aid you in many other important ways. Do this immediately when you are accused of stealing or misappropriating confidential information of a company’s trade secrets. Never admit fault without speaking to a lawyer; defend such charges promptly and aggressively. For example, your lawyer can immediately contact the company and state that the failure to resolve the issue amicably will give rise to a claim of defamation against the company because it is unfairly ruining your business reputation. (Note: Defamation lawsuits involving employees will be discussed in the next section.)
Since it is often unclear whether trade secrets are involved, and since the employer has the burden of proving that misappropriation occurred, do not agree to settle any matter without an employment attorney’s assistance. You may find, for example, that you can solicit your former employer’s customers and use information in the customer lists and shipping histories if such information was easily obtainable by the general public. Although each case is decided on its unique factors and circumstances, many employers lose claims that they have a protectable interest sufficient to support enforcement of a contract’s non-solicitation and non-competition provisions. Just proclaiming that it has lost a trade secret might get the court’s attention but may not help the company prevail without more specific evidence. Thus, know your rights and act accordingly in this area.
When companies distribute memos, usually on an annual basis, reminding key employees of their continuing obligation to protect company trade secrets and requesting their written acknowledgment their chances of prevailing in litigation increase. The signed document should then be saved in each person’s personnel file. A signed statement serves several purposes; it defines what constitutes a trade secret from the company’s point of view and creates a climate of confidentiality when people are hired. Furthermore, it advises employees of the seriousness of the problem, warns employees that the company may take strong legal action if trade secrets or confidential information are conveyed to others during or after the employment relationship, and documents the employee’s consent. If the employee refuses to sign such a document, a company may be able to legally terminate the person and even fight his or her claim to unemployment compensation. The Sample Statement on Trade Secrets, beginning below, illustrates these issues.
A critical element in proving a trade secret is establishing that reasonable efforts were undertaken to protect the information. The more precautions the owner of the information took to maintain the secrecy of the information, the lower the odds that the accused obtained them properly.
Thus, most employers often seek to establish policies dealing with trade secrets, confidential information, and other rules of employee conduct to protect their assets, advise employees of the seriousness of the problem, and create a climate of confidentiality.
Sample Statement on Trade Secrets
The business of our Company involves valuable, confidential and proprietary data and information of various kinds. Such data and information, called “Trade Secrets,” concern:
- The names of Company customers and the nature of the Company’s relationships (e.g., types and amounts of products acquired from the Company) with such customers;
- The Company’s various computer systems and programs;
- Techniques, developments, improvements, inventions and processes that are, or may be, produced in the course of the Company’s operations; and
- Any other information not generally known concerning the Company or its operations, products, suppliers, markets, sales, costs, profits, customer needs and lists, or other information acquired, disclosed, or made known to Employees or agents while in the employ of the Company, which, if used or disclosed, could adversely affect the Company’s business or give competitors an advantage.
Since it would harm our Company if any of our Trade Secrets were known to our competitors, it is the Company’s policy that:
1. No Employee should, during or after his/her employment with the Company, use any Trade Secrets for his/her benefit, or disclose to any person, business, or corporation any Trade Secrets without the prior written consent of the Company.
2. Every Employee shall render exclusive and full-time services and devote his/her best efforts toward the performance of assigned duties and responsibilities (which may be changed at any time).
3. Every Employee should refrain from engaging directly or indirectly in any activity that may compete with, or result in a conflict of interest with the Company or that is not likely to be in the Company’s best interests.
4. Every Employee should fully and completely disclose to the Company any inventions, ideas, works of authorship, and other Trade Secrets made, developed, and/or conceived by him/her alone or jointly with others, arising out of, or relating to, employment at the Company. All such inventions, ideas, works of authorship, copyrights, and other Trade Secrets shall be the sole property of the Company. The Employee agrees to execute and deliver to the Company such assignments, documents, agreements, or instruments which the Company may require from time to time to evidence its ownership of the results and proceeds of the Employee’s services and creations.
5. The Employee understands that he/she owes the highest duty of loyalty with respect to his/her duties. This means that he/she will, among other things, maintain a constant vigil over Company property, never make secret profits at the Company’s expense (e.g., service customers of the Company but bill them for personal benefit, or receive kickbacks or special favors from customers, etc.), dress in a proper fashion, not use drugs or alcohol while on the job, and maintain a personal or Company automobile in good condition together with a valid driver’s license.
6. Every Employee shall avoid discussing any matter of a confidential nature, or which constitutes a Trade Secret, with any competitor or its employees. This includes discussions regarding customers, pricing, and policies. The Employee is reminded that any such discussions may cause the Company and the Employee personally to have violated anti-trust laws, including the Sherman and Clayton Acts. Sanctions of up to three (3) years imprisonment and fines up to $100,000 have been imposed on those who violate such laws.
7. Upon termination of employment, or at any time the Company may request, every Employee shall promptly return to the Company all memoranda, notes, records, reports, technical manuals, and other documents (and all copies thereof) in his/her possession, custody, or control relating to Trade Secrets, all of which written materials, and other things shall be grounds for immediate dismissal. In addition, the Company shall not be obligated in any way to pay any severance upon termination to any Employee who fails to comply with the provisions of this paragraph specifically, and this memo generally.
8. Every Employee agrees to comply with the rules, regulations, policies, and procedures of the Company faithfully and to the best of his/her abilities. The Employee understands that the breach of any covenant contained herein may constitute substantial and irreparable harm to the Company, and the Company may seek injunctive relief and other relief which it deems necessary and appropriate under the circumstances to protect its rights and the Employee shall pay all reasonable attorney fees, costs, and expenses incurred by the Company in the enforcement of any such action.
I [Name of Employee] have received and read a copy of this Trade Secrets and Confidential Information Policy statement, understand all of its terms and agree to be bound by the provisions contained therein.
[Printed Name] [Signature] [Date]
STRATEGY: When employers sit on their rights and not act quickly when a problem is uncovered, the chances of success at the injunction or trial may decrease. Smart companies quarantine a worker’s computer immediately after learning that an employee has resigned from a job and left the premises and review the worker’s e-mail on the network server to discover if trade secrets were downloaded to others or important documents stolen. If wrongdoing is discovered a company can then sue the employee for breach of contract, misappropriation of trade secret, and fraud.
GAG ORDERS AND CONFIDENTIALITY AGREEMENTS. Confidentiality and non-disparagement clauses, commonly known as gag orders, are provisions in agreements or stand-alone agreements that prohibit departing employees from revealing the terms of a settlement or saying anything negative about the company to others who may also have been injured or to the press. Additionally, companies sometimes insert clauses into such agreements prohibiting ex-employees from seeking reemployment with the company, participating as a party or witness in any legal action or proceeding, or soliciting others to file suits against it. To ensure compliance, it is not uncommon for employers to insert penalties with such clauses, which state that if any material statement about the settlement is revealed to others, all monies previously given to the ex-employee must be returned and additional damages paid.
The following clauses were taken from actual agreements and illustrate these points:
Employee acknowledges and agrees to keep the terms of this Agreement strictly confidential. Employee will not disclose any term of this Agreement, including but not limited to the salary and severance pay provided to Employee by Employer, to any person or entity whatsoever with the exception of Employee’s spouse, accountant, and attorney, unless ordered by a court of competent jurisdiction. Employee understands that this provision is of material importance to the Employer, and that damages for the breach hereof will be actual, but difficult to calculate. Accordingly, if Employee violates this provision in any manner, Employee will pay to Employer, as agreed upon liquidated damages, the amount Employee has received or would receive form Employer as severance pay, and an additional amount equal to three (3) times the amount of severance pay. Employee acknowledges and agrees that the extra severance pay to be given is made in consideration for this promise and that this amount of liquidated damages is a fair estimate of the damages that the parties presently anticipate Employer will suffer in the event of a breach of this provision by Employee.
You agree that you will not participate, directly or indirectly, as a party, witness or otherwise against the Company unless compelled by a judicial subpoena.
You will not issue any communication, written or otherwise, that disparages, criticizes, or otherwise reflects adversely or encourages any adverse action against the Company except if testifying truthfully under oath pursuant to subpoena or otherwise.
You agree never to apply for or otherwise seek reemployment with Employer at any time in the future.
Most employers prepare such clauses with the expectation they are enforceable due to the extra payments given to the ex-employee for settlement purposes. They do so to keep other employees from learning about the terms of a lucrative severance package and acting on this information. Believing that the terms of a settlement will remain confidential often encourages employers to settle formal charges of discrimination or other litigation that could affect hundreds of other unsuspecting employees.
When judges are asked to determine whether such clauses are valid, they typically weigh general policy which favors the private voluntary settlement of employment disputes versus the public’s need to obtain valid information. While such provisions have generally been enforced in the past, the answer is not always clear-cut, depending on the unique facts of each case.
For example, in areas where public safety is involved, employer claims that such confidentiality clauses are legal may not be upheld. In one case, a foreman who worked at a nuclear power plant was fired and then contacted the Nuclear Regulatory Commission to complain about numerous safety violations at the plant. He also filed a lawsuit against the company claiming that he was illegally terminated for whistleblowing. The company proposed a settlement that contained numerous gag orders. These clauses would have restricted his ability to provide regulatory agencies with specific information and would not have allowed him to appear voluntarily as a witness in any judicial or administrative proceeding in which the company was a party. The proposed settlement also stated that if he was compelled to testify at any proceeding, he would use all reasonable steps to fight such a subpoena.
After the man’s attorney rejected this proposal, his case continued. He then filed a lawsuit with the U.S. Department of Labor alleging that the proposed gag order violated his rights under the Energy Reorganization Act (ERA) by restricting free speech and his ability to testify about safety violations. He also claimed he was retaliated against by bringing this action.
The U.S. Department of Labor ruled in his favor. It found that the gag order proposal was an adverse employment action under the ERA and represented a serious threat to ensuring clear lines of communication between employees and regulatory agencies on matters of public health and safety.
Other rulings have allowed individuals to reveal discriminatory acts they observed or suffered to the EEOC even after signing separation agreements with gag orders.
To protect yourself in this area, remember the following.
1. KNOW YOUR RIGHTS. There is a general presumption that gag orders and similar provisions will be valid, especially when you receive extra consideration (e.g., three more months’ severance pay) as inducement to sign an agreement and the clause is clearly drafted. Thus, avoid signing any agreement if you do not want to be restrained from discussing the terms of the settlement with others or from suing the company at a later date (unless you are satisfied with the financial terms of the settlement).
2. CONSULT AN EMPLOYMENT ATTORNEY FOR ADVICE. Always seek counsel when presented with a comprehensive settlement agreement that requires you to waive rights of free speech and other protections. You may learn, for example, that it is illegal for a company to force you to sign such a document. If you previously signed an agreement with similar restrictions, you may learn from the lawyer that it is not valid when fraud, duress, or mistake was involved. For example, before signing any such agreement, you must be given ample time (generally at least 21 days) to review the document and consult an attorney of your choosing. Not being given this opportunity might vitiate the entire agreement.
In one case, an African-American woman was terminated for no apparent reason after working seven years for a real estate company. The woman was required to sign a simple general release in order to receive seven weeks severance pay. The release did not contain language indicating that she had a period of time to consider the offer or consult with a lawyer.
After reluctantly signing the document and receiving the money, the woman learned that other white males at the company who were fired received, on the average, three weeks of severance for every year worked. Angered by such alleged disparate treatment, she retained me to protect her rights. As her lawyer, I negotiated for the company to pay her an additional ten weeks’ severance pay, despite the fact she had signed a waiver of her claims.
This case is instructive because it demonstrates that, under certain conditions, settlement agreements, waivers, and releases can be invalidated. In the case, I argued that my client had signed the waiver under duress (just so that she could collect the initial seven weeks of severance pay). Apparently, the company did not want to face the expense and consequences of a potential lawsuit based on gender and race discrimination as well as fraud, and decided to negotiate an amicable settlement.
3. BE AWARE THAT NOT ALL LIQUIDATED DAMAGES CLAUSES ARE ENFORCEABLE.Liquidated damages are an amount of money agreed on in advance by an employer and an employee in a written contract to be paid in the event of a breach or a dispute. If it is not possible to compute the amount of the loss, a judge may uphold the amount specified. However, in most circumstances, when the amount specified has no actual basis in fact (e.g., a clause that in the event the employee reveals the terms of the settlement, he or she is liable to pay back the amount of severance previously received plus an additional amount equal to three times the amount), a judge may disregard it, viewing the amount merely as a penalty.
Sometimes, if an employee cannot discuss the terms of the settlement with anyone (including a spouse, attorney, and accountant), judges in some states may rule that the clause is unconscionable and therefore unenforceable.
4. KEEP YOUR LIPS SEALED. By signing an agreement with a gag order, you are promising not to reveal the terms of the settlement to others. Thus, avoid the temptation of speaking about the settlement with anyone. That way, if you are sued for allegedly breaking your promise, you may eventually prevail in court based on the facts.
STRATEGY: If you previously told someone about the terms of a potential settlement, tell your lawyer about this. The lawyer may be able to modify the language in the final draft of the settlement agreement that prohibits you from talking to others only after the document is signed. This can protect you if it is discovered that you discussed the pending settlement before you were aware that the company would insist on your continued obligation to secrecy (which was confirmed in the written agreement).
Employers across the country are facing a new kind of potential liability from employees: defamation actions, as fired employees are increasingly suing former employers for libel and slander. It is estimated that more than 5,000 claims are filed yearly, with the average winning verdict in the six figures. Furthermore, defending such actions can take years and typically costs employers hundreds of thousands of dollars per case.
In the employment context, defamation is defined as any false statement about an employee communicated by an employer to a third party that harms that employee’s reputation or deters others from dealing with him or her in a business setting. A statement can be defamatory if it holds an individual up to scorn or ridicule, accuses an individual of committing a criminal offense or having a communicable disease that is shunned by society (e.g., AIDS), or even questions an individual’s honesty or competence in certain cases. In essence, it is the invasion of the interest in a reputation and good name.
Most defamation lawsuits arise from the termination of employees. They are the result of the employer giving poor references, making false statements about fired employees, or giving false information to employees about why an individual was terminated. But the ability to sue for defamation doesn’t only arise after a firing. It can also occur when false, damaging statements are revealed to nonessential third parties. In one case for example, it was reported that a salesman who claimed that he was slandered by his fellow employees was awarded $1,027,500, including $775,500 in economic and $250,000 in noneconomic damages, by a jury in Ventura County, CA. The medical laser salesman claimed that several employees slandered him to his customers to improve their own sales within his territory, causing a disruption in his business. He resigned and sued for breach of contract, breach of fiduciary duty and accounting and intentional interference (via slander) with client relations.
The author once represented a man who was falsely accused of drinking excessively at lunch. He obtained a copy of a memo confirming this, which had been read by several coworkers. After the accusation was shown to be true, the client recovered $25,000 in an out-of-court settlement.
Even more significant is that some courts have begun awarding damages to individuals suffering from negative impressions that arise from an employer’s silence or inaction. For example, one worker successfully won a lawsuit against his former employer after claiming that his discharge, following the administration of a lie detector test, gave fellow employees the false impression that he had been fired for participating in a wrongful activity. After his lawyer proved that the test results had been improperly evaluated by an unqualified and unlicensed polygraph examiner and that he was not guilty of any wrongdoing, the South Carolina Supreme Court agreed that this false impression amounted to defamation and awarded him $150,000. Another court agreed that a defamation occurred by the method in which an employer packed and removed documents from a discharged employee’s office. When asked by coworkers what was going on, the employer responded, “You don’t want to know.”
In today’s technology age, be aware that defamatory actions are also occurring in e-mails and blogs, such as inflammatory comments made by an employee on a competitor’s Website, chat site, public discussion group or bulletin board.
Courts are also allowing lawsuits to proceed by people who suffer damage to their reputations from statements in warning letters, office petitions, personnel files, and performance evaluations that contain false information or are used to deny a promotion. The same is true for false statements made at management or employee meetings or even when defamatory graffiti about an employee is written on company grounds and no attempt is made to remove it. If a supervisor writes a memo stating that he lost confidence in an employee’s work and charges the employee with incompetence, untruthfulness, and poor attitude, the employee may have a valid defamation claim if the memo is circulated around the office and read by nonessential third parties, especially when damaging information is disseminated and the employer did not take adequate precautions to determine whether the derogatory information was accurate. For example, in one case a terminated employee sued his former boss for defamation when letters describing his poor performance were distributed and read by several executives. The employee was awarded $90,000 after proving that the information contained in the letters was false and deliberately disseminated to cause him harm.
Harshly criticizing an employee can make an employer vulnerable in a defamation lawsuit. Thus, if you are accused of stealing company property in front of others and slanderous remarks are made (e.g., “You are a crook”), your employer may be guilty of defamation if the remarks are proved false.
Protection can also extend to physical acts. One employee working for an automobile manufacturer was suspected of theft when leaving the premises. Hundreds of workers observed him being forcibly searched and interrogated. After proving the charges were unfounded, the man sued the company. He argued that the rough treatment observed by other workers held him up to ridicule and scorn, since the treatment implied he was guilty of theft; he was awarded $25,000 by a jury.
The following legal causes of action fall under the larger heading of defamation.
Slander arises when an unfair and untrue oral statement is communicated to a third party that damages an individual’s reputation.The spokenwords must pertain to a person’s poor moral character, unreliability, dishonesty, or financial instability (e.g., a statement that the person is filing for bankruptcy, is always being sued, or fails to live up to contractual obligations or business responsibilities when this is false.)
Libel arises when an unfair and untrue statement is made about a person in writing (i.e., in a letter ormemo).The statement becomes actionable when it is read by a third party and damages the person’s business or personal reputation.
To win a defamation case it is generally necessary for your lawyer to prove the following elements in court:
1. A defamatory statement of fact;
2. The statement is false;
3. The statement is “published” (communicated) to a third party;
4. The statement concerns the complaining party;
5. The speaker made the statement with the required level of fault;
6. The statement caused damage, such as the loss of money or professional reputation; and
7. The statement is not protected by privilege.
Mere statements that an employee was discharged from employment and truthful statements about the employee’s work habits are not defamatory because truth is a total defense against claims of libel or slander. Charging a worker with bad manners, being careless or being a troublemaker, not having sufficient skills, or not adequately performing a jobwill not typically qualify as defamation.However, statements that the individual was discharged for cause or unsatisfactory performance, incompetence, or insubordination, coupled with the employer’s refusal to give a recommendation, may be potentially damaging and actionable as defamation.
Many states have enacted laws granting employers a qualified privilege when discussing an ex-employee’s job performance with a prospective employer. This means that the employer may be excused for disseminating information about an individual that later turns out to be false if the person responsible for disseminating the information did so in the course of his or her normal duties (e.g., a personnel supervisor who writes performance appraisals about individuals). However, a qualified privilege can be lost or abused and an employer can be liable if an executive or personnel supervisor knowingly makes false defamatory comments about a former employee out of reckless disregard for the truth, ill will, or spite.
The first thing to remember in any defamation lawsuit is that you must prove that false statements were made to third parties. This is often difficult to do. For example, if you are told by an employment recruiter that he heard slanderous comments from your ex-employer, the recruiter would have to testify in court in order for you to prevail, and many people are reluctant to do this. Moreover, if your ex-employer disseminates harmful information that is true, or you are fired for a legitimate reason that is properly documented and can be proved by the company, you may lose your case. (But if the company treats you harshly in front of others after the discharge, such as escorting you out of the building with a police officer, your case may be strengthened.)
But even if an employment attorney determines that commencing a lawsuit in this area is not in your best interest, the lawyer may be able to compel an employer to stop talking negatively about you to others under the threat of litigation. Sometimes all it takes is for the lawyer to write a strong cease-and-desist letter to the ex-employer demanding that all offensive conduct stop. That is why it is critical to consult an employment attorney immediately to analyze your situation.
Companies typically defend themselves in defamation actions by arguing that the statements communicated about the employee were true, or they had a qualified privilege to say such things, thereby insulating it from prosecution. For example, a supervisor writes a memo stating that he lost confidence in a particular employee’s work and charging the worker with unsatisfactory performance and poor attitude. The worker is then fired, and sues the company for libel. The company may prevail if it can prove that the contents of the memo are the supervisor’s honest opinion.
Companies must carefully guard comments made by upper management regarding an employee. When untrue statements are made which cause someone a great deal of embarrassment, humiliation and stress, damages for loss of reputation are available in an action for libel or slander because the loss of reputation is a foreseeable consequence of the publication of defamatory statements.
Employers should establish policies regarding the disclosure of information. Potentially damaging communications in performance appraisals and comments made to prospective employers should be reviewed by a supervisor before dissemination and the contents should be disclosed to essential third parties only.
Supervisory personnel should be instructed to avoid making excited and emotional remarks to employees, particularly those they are in the process of dismissing. Poor references can lead to expensive lawsuits so the best rule for employers is to play it safe, whenever possible, by avoiding disparaging comments.
Writing derogatory letters concerning ex-employees are fraught with danger. Imputations that an employee is lacking in competence, sobriety, honesty, financial integrity, or chastity are especially dangerous because they are defamatory per se, which means that the plaintiff does not have to prove actual harm to successfully recover a verdict. Money can be recovered against a company simply because the statement is untrue, especially when defamatory per se statements are made and interpreted as impairing the reputation of an individual or business (such as that the employee is a crook, is filing for bankruptcy, is dishonest, of poor moral character, unreliable or dishonest).
Strategies to Increase the Chances of Winning a Defamation Lawsuit
1. AVOID SIGNING A RELEASE. When you sign a release form allowing an employer to investigate and/or discuss your background with others, the law generally allows the employer to be absolved from liability for providing negative information about you to a prospective employer even when the comments are made maliciously. Avoid signing any such waiver prior to or after taking a job or being fired if you can help it.
2. REVIEW THE COMPANY’S REFERENCE POLICIES. These are sometimes contained in an employee handbook or a personnel policy statement or memo. If your employer has disseminated policies in writing, such as that no references of any kind will be given after a firing or that the company will favorably assist departing employees in pursuing and finding new employment, and the company fails to act in accordance with such policies, you may have the right to sue and allege breach of an implied or express contract.
3. NEGOTIATE TO RECEIVE A FAVORABLE REFERENCE AFTER A FIRING.
4. TAKE ACTION IF YOU ARE GIVEN A NEGATIVE REFERENCE IN RETALIATION FOR MAKING OR FILING A DISCRIMINATION COMPLAINT. Some employers will provide negative references to prospective employers out of spite after an employee files a gender, age, or race discrimination lawsuit. Employment attorneys increasingly confront the issue of retaliation, which stems from the way employers handle workers who have reported on-the-job discrimination or harassment under anti-bias laws. Many lawyers believe there is always retaliation after a person files a complaint or charge. Although retaliation claims are sometimes difficult to prove, they can be identified by the negative consequences an employee suffers when the timing of the firing is clear. The reason that asserting a retaliation claim can be helpful is that even if no defamation is proved and the employee eventually loses his or her discrimination case, a retaliation claim is a separate legal cause of action and can proceed to trial. For example, one woman who lost a sexual harassment and defamation case was nevertheless awarded $73,400 by a federal jury that believed she suffered compensable retaliation after her charge was filed with the EEOC.
5. ACT PROMPTLY IF YOU DISCOVER THAT AN EXEMPLOYER IS MAKING DEFAMATORY REMARKS THAT INHIBIT YOUR CHANCES OF OBTAINING NEW EMPLOYMENT. By sending a letter certified mail, return receipt requested, similar to the one on page 442, you are taking an important step to protect your rights. The letter should document what you have learned and put the employer on notice that you will take prompt legal action if the problem persists. Such a letter may serve as proof that defamation occurred and help your lawsuit if you decide to proceed in court.
6. RESEARCH YOUR STATE’S LAWS ANDTAKE IMMEDIATE ACTION IF YOU BELIEVE YOU ARE BEING BLACKLISTED OR WILLFULLY PREVENTED FROM OBTAINING NEW EMPLOYMENT. Many states treat untruthful job references as a crime and punish employers for maliciously attempting to prevent former employees from finding work. Additionally, some states require employers to give a terminated worker a written statement regarding the true cause of his or her dismissal. Once such an explanation has been received by the worker, the employer cannot furnish prospective employers with any reason that deviates from those given in the service letter. In order to receive the benefit of such “service-letter” laws, it is necessary to send a written request because oral requests are generally not sufficient. The sample letter on page 443 is a good illustration of the kind of letter to send. If you do not receive an answer to the letter within a reasonable period of time (e.g., 30 days), or if the employer furnishes you with reasons that are untrue, your state’s service-letter statute may have been violated and you can commence a lawsuit.
While some experts believe damages awarded for defamation are more difficult to obtain in arbitration, don’t hesitate to proceed if the facts warrant such action. For example, in one case it was reported that a major bank was ordered to pay a total of $3.4 million to a former senior stock trader when an arbitration panel found he was defamed after being fired without cause. The panel included $1 million of punitive damages as part of the award.
Since the laws in each state vary, it is best to do your research and get an accurate opinion from an employment lawyer before commencing litigation or arbitration. The bottom line is that employers frequently face greater exposure and potential damages in lawsuits from leaking harmful or confidential information after a firing than from the firing itself. Thus, always know your rights and enforce them as quickly as possible.