Category: Employment Litigation

5TH ANNUAL EMPLOYMENT LAW INSTITUTE by Richard Friedman

Employer Best Practices for Conducting Sexual Harassment Investigations

A female mid-level employee walks into her employer’s Human Resources (“HR”) Department offices and states that she would like to file a sexual harassment complaint against a senior executive. The employee then lays out her story and describes her fears of retaliation from the executive. This situation can be very difficult for in-house counsel because they are presumably concerned about the well-being of all employees, promoting a suitable company culture, and providing a safe and positive environment which hopefully helps the company to thrive.

Given the seriousness of sexual harassment allegations, which has certainly been highlighted by the #MeToo Movement, it is obviously imperative that employers conduct thorough and impartial investigations into allegations of sexual harassment. In order to ensure a proper investigation occurs, employers should address the following issues, among others.

Who should conduct the investigation?

What is the proper scope?

How should the witness interview be conducted?

In what manner and to whom should the conclusions be communicated?

With proper procedures followed by capable HR personnel, in-house counsel, and/or outside counsel, employers can ensure that a fair investigation is conducted and reduce or eliminate the possibility of company liability for an improper investigation.

Who is an Appropriate Investigator?

Many employers utilize HR staff members or in-house counsel to conduct internal investigations due to their understanding of company policies and/or employment law. Although obviously cost-effective, this approach can eventually result in allegations of conflicts of interest because of the employment relationship between the employer and the employee-investigator. This is particularly true when a senior executive is the target of the investigation.

Employing outside counsel to conduct sexual harassment investigations is the safest way to proceed when the allegations are extremely serious and/or one or more senior executives are involved. Consideration should also be given to having outside counsel conduct an investigation when the complainant is a former employee to reduce or eliminate later allegations in the litigation that I believe is more likely to ensue under such circumstances that the investigation was flawed because the investigator was conflicted. Retaining outside counsel also allows in-house counsel and HR employees to focus on other meaningful workplace functions.

What is the Appropriate Scope of an Investigation?

Of course, the scope of the investigation depends on the nature of the complaint and may change as new facts come to light. That said, the investigator(s) must probe the credibility of the alleged harasser(s), victim, and witnesses and evaluate whether the company’s processes and practices for handling sexual harassment claims were followed. In addition, investigators should make recommendations if they believe (i) certain company processes or practices need to be revised, (ii) systemic problems exist, or (iii) an HR audit is warranted.

A preliminary investigation plan should include a description of known facts and specific issues to be explored, a list of possible witnesses as well as other individuals with relevant information, and known or possible documentary evidence. It should also contain a proposed timeline for completion of the investigation. Potentially relevant evidence includes records of prior complaints, witness interviews, personnel files, performance evaluations, compensation records, timekeeping records, emails and other electronically stored information, voicemails, audio/video recordings, employee notes and logs, and background checks. In determining the appropriate investigatory strategy, investigators should be mindful of the potentially disruptive and unnerving effect of a hard-nosed investigation into alleged employee misconduct.

How Should Witness Interviews Be Conducted?

At the outset of employee interviews, in-house or outside counsel must provide Upjohn warnings to ensure the integrity and confidentiality of employee interviews. In the landmark 1981 case Upjohn Co. v. United States, the United States Supreme Court found that a company’s attorney-client privilege protected communications between attorneys and a company’s employees regardless of their seniority and authority. The Court’s holding gave rise to the Upjohn Warning in which attorney investigators hired by a company inform employee interviewees that the attorney-client relationship exists only between the attorney and the employer. Failure to provide an Upjohn Warning has resulted in employee witnesses being afforded the right to claim the attorney-client privilege with respect to their communications with investigative counsel representing the company.

Another issue that sometimes arises is whether to allow employees being interviewed to have their personal counsel or another representative present. In order to protect the privacy rights of the persons involved, among other reasons, it is my view that employers should generally avoid allowing counsel or a representative to sit in on interviews. If it is permitted under unusual circumstances, employers should articulate guidelines in advance to prevent disruptions, questions, and responses made by an attorney on behalf of his or her client or a representative on behalf of his or her principal.

Although efforts should be made to ensure the confidentiality of information obtained from witness interviews, employers need to understand that relying on the propriety of an investigation as a defense in a litigation may eventually result in a waiver of the attorney-client privilege for that investigation.

Investigative Report

In many routine investigations, it is perfectly appropriate for in-house counsel or HR employees to speak separately with the complainant and the subject of the investigation, send separate confirmatory emails, and not prepare a formal report. However, if counsel believes that remedial or other actions may or will need to be taken, the target is a senior employee, and/or litigation is reasonably likely to ensue, a written report should be prepared absent extraordinary circumstances. When PowerPoint slides are used to make a presentation of the report, attendees, including Board members, should not be allowed to retain any slides because of possible litigation.

Takeaways

Of course, no single approach will suit all companies or all scenarios when sexual harassment allegations have been made so it is imperative for an employer to give careful consideration to what is appropriate given the particular circumstances. However, there are some universal guidelines I believe employers should follow when choosing an investigator. Employers should try to confirm that the investigator is:

  1. well-trained on proper investigation procedures;
  2. knowledgeable about employment and sexual harassment law and company policies;
  3. disinterested in the particular investigation even if an employee of the company at issue;
  4. a skilled interviewer who knows how to listen and when to probe to find relevant information; and
  5. has an acute eye for details since some may eventually prove to be important.

Investigators with these virtues, whether employed by the company or outside counsel, should be able to conduct competent investigations in even the most trying of circumstances. Finally, the form of any report should be governed by the employment status of the complainant(s), the nature of the allegations, and the seniority of the target(s) of the investigation.

Richard B. Friedman
Richard Friedman PLLC

830 Third Avenue, 5th Floor
New York, New York 10022
TEL: 212-600-9539
rfriedman@richardfriedmanlaw.com
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Sexual Harassment Legal Settlements: The Rules Have Changed Under the Tax Cuts and Jobs Act

Sexual Harassment Legal Settlements: The Rules Have Changed Under the Tax Cuts and Jobs Act

At the risk of stating the obvious, the #MeToo movement, in raising awareness about the traumatic experiences of sexual assault and harassment victims, has already begun to spur changes to our laws. This is readily apparent in Section 162(q) of the Tax Cuts and Jobs Act which disallows employers from deducting settlement payments and legal costs related to sexual harassment or abuse matters if the parties signed a settlement agreement with a confidentiality provision. It would appear that ensuring the confidentiality of a settlement now comes at a higher price to corporations which in the past would have deducted the settlement amount and the attorney’s fees related to that matter. However, as is often the case under the “law” of unintended consequences, this provision may prove detrimental to some claimants by causing companies to (i) challenge allegations and fight lawsuits alleging sexual harassment or sexual abuse rather than settle early if they don’t expect to be able to use the foregoing deductions because any settlement will be confidential and/or (ii) insist on paying lower amounts to settle confidentially, including in instances where claimants desire confidentiality because of the unavailability of these deductions.

What Does Section 162(q) Say?

New Internal Revenue Code Section 162(q) provides that, as of December 22, 2017, no deduction shall be allowed for:

” 1. any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or

2. attorney’s fees related to such a settlement or payment.”

This provision applies to payments made on or after December 22, 2017 even if the settlement agreement was signed prior to that date.

How Does It Change Existing Law?

Before Section 162(q) of the Internal Revenue Code was modified, employers could deduct the amounts paid as part of a confidential settlement along with all related legal costs as ordinary and necessary expenses incurred in carrying on their businesses. In forcing employers to choose between non-disclosure of a settlement payment and non-deductibility of the payment and related legal costs, the new section aims to deter settlement agreements containing non-disclosure provisions which have been wildly decried in the media as “hush money” payments that conceal the culpability of employers and thereby do not deter future sexual harassment in the workplace.

IRS Guidance is Needed

Because the IRS has yet to release guidance regarding Section 162(q), there are many unanswered questions, some of which are discussed below.

1. Unintended Consequences for Claimants

Section 162(q) clearly aims to benefit employees who have been the victims of sexual harassment; however, there are aspects of the statute that could end up hurting some of them. First, employees who receive settlements related to sexual harassment or abuse claims may themselves want the settlements to remain confidential out of fear that the publication of the settlement could negatively impact their personal life or future job prospects. Since Section 162(q) provides an incentive for an employer to not settle confidentially, an employee or former employee who desires nondisclosure now has less leverage and may be more likely to accept a lower settlement offer in return for confidentiality. Thus, early settlements may be less common and settlement amounts may be lower than in the past since such amounts and all related legal costs are no longer deductible.

Second, Section 162(q) does not on its face restrict only employers from deducting attorney’s fees. Therefore, it is at least conceivable, however absurd, that claimants could find themselves in a worse position financially than they were in prior to the adoption of the provision. Before Section 162(q) was amended, claimants could take an above-the-line tax deduction on the attorney’s fees they paid; thus, they were only taxed on the net portion of the settlement amount they received. Can claimants possibly be taxed on the entire amount of a settlement, i.e., more than they actually keep after taking into account attorney’s fees and costs which often comprise at least a third of the settlement amount? The far more reasonable position in my view is that, given the stated purpose of the legislation in the Conference Committee Report to disallow any deduction “for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement” (H. Rept. 115-466 at 279), claimants can still deduct attorney’s fees and therefore will only pay taxes on the net amount they receive. However, until the IRS issues clarifying guidelines, some claimants may seek to have employers cover their possible additional tax liability which could present a stumbling block to a settlement.

2. Ambiguity Surrounding the Term “Related To”

Both provisions of 162(q) apply to settlements “related to” sexual harassment or abuse. This is problematic because many plaintiffs allege sexual harassment or abuse in addition to multiple other claims, such as race and gender discrimination claims. In drafting settlement agreements, employers almost always settle all claims simultaneously and do not distinguish between the sexual claims and other allegations. It is now unclear how employers should approach the settlement of multiple claims. Should they insist on separate settlement agreements for the deductible and non-deductible claims? In doing so, can employers offset the tax consequences of a nondeductible settlement by allocating larger amounts to settlements for other, non-sexual related claims? Absent clarifying guidance from the IRS, that seems very likely to occur in my view and, indeed, is probably already being done.

This ambiguity also applies to the provision regarding attorney’s fees. Where there are multiple claims against an employer, its attorneys conduct research and render other legal services vis-a-vis all claims, not only those which relate to sexual harassment or abuse. How should the fees associated with attorney time be allocated under Section 162(q)? Additionally, attorney’s fees are nondeductible only insofar as they relate to “settlement or payment.” Is the investigation of, or response to, a complaint of sexual harassment or abuse sufficiently related to “settlement or payment” to fall within the provision’s purview, or would attorney’s fees related to such legal services be deductible? The answer to these and other questions must await guidance from the IRS and, inevitably in some cases, the United States Tax Court. In the interim, companies confronted with these issues would be well advised to work with counsel who handle these types of matters regularly.

Finally, companies often insist in settlement agreements on general releases of all claims, including those of a sexual nature. Would such a release in a confidential settlement of a matter where there was no allegation of sexual harassment or abuse trigger Section 162(q)? That seems highly unlikely. Nonetheless, companies should give careful consideration before entering into a settlement agreement that contains explicit references to sexual harassment or abuse claims where no such claims were alleged.

Richard B. Friedman
Richard Friedman PLLC

830 Third Avenue, 5th Floor
New York, New York 10022
TEL: 212-600-9539
rfriedman@richardfriedmanlaw.com
www.richardfriedmanlaw.com
www.richardfriedmanlaw.com/blog
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Employer Social Media Practices/Policies and the NLRA by Richard Friedman

Employer Social Media Practices/Policies and the NLRA

In recent years, as the use of social media has exploded, the National Labor Relations Board (“NLRB”) has received allegations of improper discipline of employees for social media postings as well as complaints condemning employer social networking policies. We briefly discuss a few of those decisions below.

In what came to be known as “the first Facebook case,” American Medical Response of Connecticut, Inc., No. 34-CA-12576, an employee criticized her supervisor in a Facebook post for denying her Union representation, which triggered responses from co-workers voicing their support. The employee was suspended the following day and later discharged. The NLRB alleged in a complaint that the employer’s internet and social media policies were overly broad and violated Section 7 of the National Labor Relations Act (the “NLRA” or “Act”), which gives employees the right “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The NLRB’s complaint also alleged that the employee was unlawfully terminated for engaging in protected concerted activity when she posted on Facebook. The NLRB stressed that employees must be permitted to discuss the terms and conditions of their employment with co-workers. The NLRB asserted that the employer violated the NLRA when it discharged the employee for posting comments on Facebook that prompted support from other employees. The case settled when the employer agreed to substantially narrow the scope of its social media policies.

The NLRB addressed whether an employee could be fired for selecting the “like” option on a Facebook post in Three D, LLC d/b/a Triple Play Sports Bar and Grille, 361 NLRB No. 31. The NLRB found that the employer, a bar and restaurant, violated Section 8(a)(1) of the NLRA by unlawfully discharging two employees for their protected, concerted participation in a Facebook discussion in which they criticized perceived errors in their employer’s tax withholding calculations because such communications constituted concerted activities protected by the NLRA.

One of the discharged employees was terminated for “liking” a Facebook post by a former employee containing the discussion. Another employee used an expletive to describe the company co-owner. In finding the terminations unlawful, the NLRB stated that the test set out in Atlantic Steel, 245 NLRB 814, by which the Board determines whether an employee loses the Act’s protection for contemptuous workplace conduct that occurs during an otherwise protected activity, is not well-suited to address statements involving employees’ off-duty, off-site use of social media to communicate with other employees. Under the Atlantic Steel test, the Board balances the following four factors to determine whether an employee loses the Act’s protection:

1. the place of the discussion;
2. the subject matter of the discussion;
3. the nature of the employee’s outburst; and
4. whether the outburst was provoked by the employer’s unfair labor practices.

The Board stated that the first factor alone supported its conclusion that the Atlantic Steel framework should not be applied to the type of employee activities in this case.

Instead, the NLRB applied the tests articulated by the U.S. Supreme Court in the Jefferson Standard (346 U.S. 464(1953)) and Linn (383 U.S. 53 (1966)) cases to the employees’ comments. In Jefferson Standard, the Court had upheld the discharge of employees who publicly attacked the quality of their employer’s product and practices without tying such criticisms to a pending labor controversy. In Linn, the Court had limited state law remedies for defamation during a union-organizing campaign to those situations where the plaintiff could show that “the defamatory statements were circulated with malice” and caused damage. Linn v. Plant Guards Local, 383 U.S. at 64-65. Here, the NLRB concluded that the employees’ statements were neither disloyal nor defamatory under those standards because they neither disparaged the employer’s products or services or undermined its reputation and therefore did not lose the Act’s protection.

The Board also held that the company’s internet/blogging policy, which stated that “engaging in inappropriate discussions about the company, management, and/or co-workers” might constitute a violation of the law “and is subject to disciplinary action, up to and including termination of employment,” was overly broad and unlawfully restricted employees in the exercise of their rights under the Act.

The NLRB has also found that employees can lose protection under the NLRA if their conduct advocates insubordination. In Richmond District Neighborhood Center, 361 NLRB No. 74, the NLRB held that employees who engaged in specific discussions of planned insubordination on Facebook lost the protection they otherwise would have enjoyed under the NLRA. After two employees detailed their plans to disrupt the workplace and flaunted their disregard for their employer’s policies and procedures on Facebook, the discussions were reported by a co-worker who took screenshots of their exchange. Although the NLRB found the employees’ Facebook posts to be a concerted activity, the Board concluded that the employees had lost the protection of the NLRA since their statements advocated insubordination. The NLRB also considered the protracted length of the exchange between the employees and the detailed nature of the specific acts they advocated when determining that their statements had lost protection.

Richard B. Friedman
Richard Friedman PLLC
830 Third Avenue, 5th Floor
New York, New York 10022
TEL: 212-600-9539
FAX: 212-840-8560
rfriedman@richardfriedmanlaw.com
www.richardfriedmanlaw.com
www.richardfriedmanlaw.com/blog
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Non-compete Agreements Under New York Law by Richard Friedman

Non-compete Agreements Under New York Law

Many employers try to limit former employees’ actions at the conclusion of the employment relationship through restrictive covenants. A restrictive covenant is a contractual agreement restricting the post-employment activities of a former employee for a fixed period after the termination of an employment relationship in order to protect the employer’s legitimate business interests.

A. Protectable Interests

Non-compete agreements offer the widest range of protection for employers by limiting a prior employee’s ability to work for a competitor after the employment relationship ends. However, this type of restrictive covenant is often the most difficult to enforce and is generally disfavored in New York. New York courts will enforce non-compete provisions only to the extent necessary to protect an employer’s legitimate interests and where they are reasonable in time and geographic area. Such courts consider the protection of the following kinds of information to be legitimate protectable interests:

1) trade secrets;

2) confidential customer relationships; and

3) confidential customer information.

For example, in Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 71 (2d Cir. 1999), the court noted that an employer has sufficient interest in retaining its current customers to support a covenant not to compete where the employee’s relationship with the customers is such that there is a substantial risk that the employee may be able to divert all or part of the business.

B. Temporal and Geographic Restrictions

New York courts have repeatedly held that temporal restrictions of six months or less are reasonable. See Ticor Title Ins. Co. v. Cohen, 173 F.3d at 70 (2d Cir. 1999); Natsource LLC, 151 F.Supp.2d at 470-71 (three-month non-compete). However, courts have also enforced non-competes of three years or more, usually where geography is limited. In Novendstern v. Mount Kisco Med. Grp., 177 A.D.2d 623, 576 N.Y.S.2d 329 (1991), the court found that a covenant restricting a physician from competing with his previous employer was enforceable because the prohibition on the physician’s practicing in his specialties for three years was in a limited geographic area.

To determine whether a non-compete provision is reasonable in geographic scope, courts in New York examine the particular facts and circumstances of each case. For example, in Natsource LLC v. Paribello, 151 F.Supp.2d 465, 471-72 (S.D.N.Y.2001), the court was willing to enforce very broad geographic restrictions on employees where the “nature of the business requires that the restriction be unlimited in geographic scope,” so long as the duration of those restrictions was short. (Emphasis added). However, in Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 813 F. Supp. 2d 489 (S.D.N.Y. 2011), the court held that the non-compete provision in a fitness center operator’s employment agreement with prior employees, which prohibited employees from working at a competitor center anywhere in world for ten years following employment at center, was unenforceable since it was unreasonable in terms of duration and geographic scope.

C. Consideration

New York courts have also examined whether there was sufficient consideration, whether the agreement was incidental to the sale of a business, and whether an employee was preparing to compete to determine if a non-compete was reasonable. Such courts have found that future employment constitutes sufficient consideration to support a covenant not to compete. See Poller v. BioScrip, Inc., 974 F. Supp. 2d 204 (S.D.N.Y. 2013) (holding that “the fact that a restrictive covenant agreement is a condition of future employment does not automatically render such an agreement coercive and unenforceable”). Similarly, in Ikon Office Solutions v. Leichtnam, 2003 U.S. Dist. LEXIS 1469, *1, 2003 WL 251954 (W.D.N.Y. Jan. 3, 2003), the court found that the non-compete covenant was enforceable because the employee was an at-will employee who received continued employment as consideration. Moreover, financial benefits and an employee’s receipt of intangibles such as knowledge, skill, or professional status, are also sufficient consideration to support a non-compete provision under New York law. See Arthur Young & Co. v. Galasso, 142 Misc. 2d 738, 741 (Sup. Ct. N.Y. County 1989).

D. Selling a Business and Preparing to Compete

New York courts are most likely to enforce non-compete agreements that are incidental to the sale of business. See Mohawk Maint. Co. v. Kessler, 52 N.Y.2d 276 (1981) (stating that courts give covenants not to compete made in connection with the sale of a business and its accompanying goodwill “full effect when they are not unduly burdensome”).

New York courts have held that an employee preparing to compete violates a non-compete provision where affirmative steps have been taken that would give the individual a head start on competing once the restricted period ends. For example, in World Auto Parts, Inc. v. Labenski, 217 A.D.2d 940 (4th Dep’t 1995), the court found that conduct such as making personal loans to the principal owners of competitors and divulging to competitors price information acquired while working with the former employer constituted preparatory behavior that violated the non-compete agreement. However, in some instances, employees may prepare to compete prior to their departure provided that they do not use their employers’ time, facilities or proprietary secrets to do so. See Stork H & E Turbo Blading, Inc. v. Berry, 932 N.Y.S.2d 763 (2011).

Of course, we are available to assist in drafting, negotiating, and, if necessary, litigating non-compete and other restrictive covenant agreements. Some of the negotiated and litigated employment-related matters that our lawyers have handled in recent years have involved fiduciary duty claims, allegations of possible officer and/or employee misconduct, the faithless servant doctrine, wrongful discharge claims, confidentiality provisions in employment and severance agreements, trade secrets, and related matters.  One of Richard Friedman’s most noteworthy trial victories in the New York County Commercial Division, on whose Advisory Committee he serves with the nine judges of that court as one of about fifteen judicially appointed private practitioners, is the subject of a feature American Lawyer article that is available upon request via email at rfriedman@richardfriedmanlaw.com.

Richard B. Friedman
Richard Friedman PLLC
830 Third Avenue, 5th Floor
New York, New York 10022
TEL: 212-600-9539
FAX: 212-840-8560
rfriedman@richardfriedmanlaw.com
www.richardfriedmanlaw.com
www.richardfriedmanlaw.com/blog
Connect with me on Linkedin